America Online 2010 Annual Report Download - page 66

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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." The level at which the impairment test is performed requires judgment as to whether
there exist any components below the operating segment that constitute one or more self-sustaining businesses with discrete results reviewed by management.
If the operations below the operating segment level are determined to be one or more self-sustaining businesses with discrete results reviewed by
management, testing is generally required to be performed at this level; however, if multiple self-sustaining business units exist within an operating segment,
an evaluation would be performed to determine if the multiple business units share resources that support the overall goodwill balance and should be
combined for purposes of this test. For purposes of our goodwill impairment test, we operate as a single reporting unit, as management does not regularly
review discrete financial information below the consolidated unit level.
There is considerable judgment involved in determining our operating segments, which impacts our reporting unit conclusion. We have concluded that
we have one operating segment based on the fact that our Chief Executive Officer, who is also our chief operating decision maker, continues to evaluate
performance and make operating decisions based on consolidated financial data. Additionally, there are no managers who are held accountable by our chief
operating decision maker, or anyone else, for an operating measure of profit or loss for any operating unit below the consolidated unit level. Based in part on
our single operating segment conclusion, we concluded for purposes of our impairment analysis that AOL consists of a single reporting unit. This conclusion
is also based on the shared infrastructure and interdependency of our revenue streams. Different judgments relating to the determination of reporting units
could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of our reporting unit to its
carrying amount, including goodwill. If the estimated fair value of our 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 our reporting unit exceeds its estimated fair value, then the
second step of the goodwill impairment test must be performed. To measure the amount of impairment loss, if any, we determine the implied fair value of
goodwill in the same manner as the amount of goodwill recognized in a business combination. Specifically, the estimated fair value of the reporting unit is
allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of fair value of the reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of goodwill. Determining the fair value of assets and liabilities of a reporting unit
involves significant judgment and impacts the implied fair value of goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
During the second quarter of 2010, we entered into an agreement to sell our ICQ operations and we completed the sale of substantially all of our assets
of Bebo. In addition, we experienced a significant decline in our stock price in the second quarter of 2010. Based on these events, we determined that it was
more likely than not that the fair value of our single reporting unit was less than its carrying amount and accordingly, we performed an interim goodwill
impairment test as of June 30, 2010.
The estimated fair value of our reporting unit was determined utilizing a market-based approach, as the primary input in this approach was a quoted
market price in an active market. To determine the estimated fair value of our reporting unit, we calculated our market capitalization based on our stock price
and adjusted it by a control premium of 25%. The premium used to arrive at a controlling interest equity value was determined based
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