America Online 2014 Annual Report Download - page 74

AOL INC.
PART II—ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Impairment 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.
These indicators include a sustained, significant decline in our stock price; a decline in our expected future cash
flows; significant disposition activity; a significant adverse change in the economic or business environment; and
the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could
have a significant impact on the recoverability of goodwill and could have a material impact on our
accompanying consolidated financial statements.
The testing of goodwill for impairment is required to be performed at the level referred to as the reporting
unit. Based on how management evaluates the business, we concluded that as of our December 1, 2014 annual
impairment testing date we have three reporting units for purposes of the goodwill impairment test; the Brand
Group, the Membership Group and AOL Platforms. There are no components below these three reporting units
for which discrete financial information is available and regularly reviewed by segment management. 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 a reporting unit to its carrying amount, including goodwill. If the estimated fair value of a
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. 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. 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.
We performed our annual goodwill impairment test for the Brand Group, Membership Group and AOL
Platforms reporting units as of December 1, 2014. We determined the fair value for each of the reporting units
using an income approach, or discounted cash flow (“DCF”) method. The reasonableness of the DCF approach
was assessed by reference to a market-based approach based on analysis of comparable multiples for each of the
reporting units, which reconciled to the fair value of the consolidated business determined based on a market-
capitalization approach.
Based on the goodwill impairment tests performed at December 1, 2014, the estimated fair value exceeded
the carrying value for each reporting unit, and therefore, the second step of the goodwill impairment test was not
required for any of our reporting units. For each of the Brand Group, Membership Group and AOL Platforms
reporting units, the estimated fair value of the reporting unit exceeded its respective book value by in excess of
15%.
Determining the fair value of our reporting units requires the exercise of significant judgment, including
judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the
amount and timing of expected future cash flows. The cash flows employed in the DCF analysis are based on our
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
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