America Online 2009 Annual Report Download - page 75

Table of Contents
not intend to or is unable to terminate the operating lease, AOL records a liability for the present value of the remaining lease payments, net of estimated
sublease income that could be reasonably obtained for the property (even if the Company does not intend to sublease the facility for the remaining term of the
lease). Costs associated with exit or disposal activities are reflected as restructuring costs in the consolidated statement of operations. See "Note 9:
Restructuring Costs" for additional information about the Company's restructuring activities.
Equity-Based Compensation
Prior to the spin-off from Time Warner, AOL participated in Time Warner's equity-based compensation plans and recorded compensation expense
based on the equity awards granted to AOL employees. Subsequent to the spin-off, AOL has established an equity-based compensation incentive plan and
AOL employees are no longer eligible to participate in Time Warner's equity-based compensation plans. AOL records compensation expense under the AOL
plans based on the equity awards granted to employees.
In accounting for equity-based compensation awards, the Company follows the accounting guidance for equity-based compensation, which requires that
a company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.
The cost associated with stock options is estimated using the Black-Scholes option-pricing model and recognized in the consolidated statement of operations
on a straight-line basis over the period during which an employee is required to provide service in exchange for the award. This accounting guidance also
requires that excess tax benefits, as defined, realized from the exercise of stock options be reported as a financing cash inflow rather than as a reduction of
taxes paid in cash flows from operations. See "Note 8: Equity-Based Compensation and Employee Benefit Plans" for additional information on equity-based
compensation.
In connection with the legal and structural separation of the Company from Time Warner, AOL employees ceased participating in the Time Warner
equity plans once the spin-off was completed. Employees holding Time Warner equity awards at the time of the separation were treated as if their
employment with Time Warner was terminated without cause. For most AOL employees, this treatment resulted in the forfeiture of unvested stock options,
shortened exercise periods for vested stock options and pro rata vesting of the next installment of (and forfeiture of the remainder of) restricted stock unit
grants.
Asset Impairments
GOODWILL
Goodwill is tested annually for impairment during the fourth quarter or earlier in the year upon the occurrence of certain events or substantive changes
in circumstances that indicate goodwill is more likely than not impaired. The testing of goodwill for impairment is required to be performed at the level
referred to as the reporting unit. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component." For
purposes of AOL's goodwill impairment test, AOL operates as a single reporting unit.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its
carrying amount, including goodwill. In performing the first step, the Company determines the fair value of its reporting unit using a combination of an
income approach by preparing a discounted cash flow ("DCF") analysis and a market-based approach based on the Company's market capitalization. If the
estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test
is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be
performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying amount to
measure the amount of impairment loss, if any. The implied fair value
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