America Online 2010 Annual Report Download - page 80

Table of Contents
AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. The cost of equity instruments is recognized in the consolidated statement of operations on a straight-line basis (net of
estimated forfeitures) 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. Excess tax benefits attributable to equity-based compensation are recorded as an increase to additional-paid-in-
capital and a reduction to taxes payable when the benefit reduces AOL's current tax liability. See "Note 8" for additional information on equity-based
compensation.
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 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 of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination. In other words, 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. 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.
The Company determined that certain events occurring in the second quarter of 2010 constituted substantive changes in circumstances that would more
likely than not reduce the fair value of the Company's single reporting unit below its carrying amount. Accordingly, the Company tested its goodwill for
impairment as of June 30, 2010 (the "interim testing date"), which resulted in the Company recording a goodwill impairment charge of $1,414.4 million
during the second quarter of 2010. See "Note 3" for further information.
Long-lived Assets
Long-lived assets, including finite-lived intangible assets (e.g., acquired technology and customer relationships), do not require that an annual
impairment test be performed; instead, long-lived assets are tested for impairment upon the occurrence of an indicator of impairment. Once an indicator of
impairment has occurred, the impairment test is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to
hold the asset for continued use, the impairment test first requires a comparison of estimated undiscounted future cash flows generated by the asset group
against the carrying value of the asset
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