America Online 2011 Annual Report Download - page 81

Table of Contents
AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Impairment Testing of Goodwill
Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in
circumstances that indicate goodwill is more likely than not impaired.
Third Quarter 2011 Goodwill Impairment Analysis
The Company experienced a significant decline in its stock price leading up to and subsequent to the announcement on August 9, 2011 of its financial
results for the three months ended June 30, 2011. The Company determined that the magnitude of this stock price decline along with the weakness in the
overall equity markets constituted a substantive change in circumstances in August that could potentially reduce the fair value of the Company's single
reporting unit below its carrying amount. Accordingly, the Company tested goodwill for impairment as of August 31, 2011 (the "interim testing date"). No
events or circumstances were identified during the first and second quarters of 2011 that indicated goodwill is more likely than not impaired, and accordingly,
no goodwill impairment analysis was performed during the first or second quarters of 2011.
In performing the first step of the goodwill impairment test, the Company used a market-based approach. The primary input in this approach was a
quoted market price in an active market. To determine the estimated fair value of the Company's sole reporting unit, the Company calculated its market
capitalization based on its stock price and adjusted it by a control premium of 50%, which resulted in an estimated fair value of $2,455.8 million. The
premium used to arrive at a controlling interest equity value was determined based in part on values observed in recent market transactions, and based in part
on other assets that a marketplace participant could benefit from in acquiring a controlling interest in the Company's reporting unit. These other assets include
the values of certain intellectual property and tax benefits that a marketplace participant could potentially monetize in obtaining a controlling interest in our
reporting unit, which overall causes the determination of the estimated fair value of the Company's sole reporting unit to fall within level three of the GAAP
fair value hierarchy.
The reasonableness of the determined fair value was assessed by reference to a discounted cash flow ("DCF") measure as another fair value indicator.
The cash flows employed in the DCF analysis are based on the Company's most recent budgets, forecasts and business plans as well as various growth rate
assumptions for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future revenue
streams and cash flows of the reporting unit. The company also concluded that it was appropriate to factor into the analysis certain other assets that would be
of value to a marketplace participant, including certain intellectual property and tax benefits. The estimated fair value determined using the DCF approach
was consistent with, but also slightly in excess of, the estimated fair value determined using the market-based approach. The results of the DCF approach
provided significant additional support for management's conclusion that the control premium used to arrive at a controlling interest equity value was
reasonable.
Based on the interim impairment analysis as of the interim testing date, the estimated fair value of the Company's sole reporting unit exceeded its book
value and therefore the second step of the goodwill impairment test did not need to be performed. As such, no impairment charge was recorded for the three
months ended September 30, 2011. Subsequent to the interim testing date, the Company's stock price experienced additional declines during September;
however, the Company concluded that such declines were temporary due to the recovery of its stock price during the month of October as well as the results
of its discounted cash flow approach.
Fourth Quarter 2011 Annual Goodwill Impairment Analysis
The Company performed its annual goodwill impairment test as of December 1, 2011. As discussed above, the Company determined that the estimated
fair value of its sole reporting unit as of the interim testing date was $2,455.8 million. From the interim testing date to the date of the annual goodwill
impairment test, while the
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