America Online 2014 Annual Report Download - page 97

AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The increase in goodwill for the year ended December 31, 2014 was due primarily to the acquisitions of
Project Rover, Inc., dba Gravity (“Gravity”), Convertro, Inc. (“Convertro”) and Vidible, Inc. (“Vidible”) in 2014.
See “Note 4” for additional information on these transactions.
Impairment Testing of Goodwill
As discussed in more detail in “Note 1”, 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.
The Company performed its annual goodwill impairment test for the Brand Group, Membership Group and
AOL Platforms reporting units as of December 1, 2014. The Company determined the fair value for each of its
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
by reporting unit, and the fair value determined under the market-based approach corroborated the fair values
determined by the DCF 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 the Company’s three 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 an amount in excess of 15%.
Determining the fair value of a reporting unit 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 judgments used in determining the fair value of the
Company’s reporting units are based on significant unobservable inputs which causes the determination of the
implied fair value of goodwill to fall within level three of the GAAP fair value hierarchy. The cash flows
employed in the DCF analysis are based on the 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 discount rates utilized in the 2014 analysis ranged from 9% to 22% and a constant terminal growth rate was
used in the DCF analysis of 3%. Failure to execute against AOL’s business plan for any of its reporting units
could have a negative effect on the fair value of such reporting unit, and increase the risk of a goodwill
impairment in the future.
2013 Goodwill Impairment Analysis
As part of the Company’s continuing effort to reduce its expenses and invest in areas of strategic focus, on
August 15, 2013, the Company approved a restructuring plan for its Patch operations. The Company determined
that the restructuring of its Patch operations constituted a substantive change in circumstances that could
potentially reduce the fair value of the Patch reporting unit below its carrying amount. Accordingly, the
Company tested the Patch reporting unit goodwill for impairment as of the interim testing date.
Based on the goodwill impairment analysis as of the interim testing date, the carrying value of the Patch
reporting unit exceeded its fair value. Accordingly, step two of the goodwill impairment test was performed,
where the Company determined the estimated fair value of Patch’s assets and liabilities. As a result of the step
two evaluation, the Company recorded a goodwill impairment charge of $17.5 million during the third quarter of
2013, fully impairing the goodwill related to Patch.
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