Verizon Wireless 2010 Annual Report Download - page 36

34
Management’sDiscussionandAnalysis
ofFinancialConditionandResultsofOperations – As Adjusted continued
CRITICAL ACCOUNTING ESTIMATES AND RECENT ACCOUNTING STANDARDS
Goodwill
At December 31, 2010, the balance of our goodwill was approximately
$22.0 billion, of which $17.9 billion was in our Wireless segment and $4.1
billion was in our Wireline segment. Determining whether an impair-
ment has occurred requires the determination of fair value of each
respective reporting unit. Our operating segments, Domestic Wireless
and Wireline, are deemed to be our reporting units for purposes of
goodwill impairment testing. The fair value of Domestic Wireless signif-
icantly exceeded its carrying value. The fair value of Wireline exceeded
its carrying value. Accordingly, our annual impairment tests for 2010,
2009 and 2008 did not result in an impairment.
The fair value of the reporting unit is calculated using a market
approach and a discounted cash flow method. The market approach
includes the use of comparative multiples to corroborate discounted
cash flow results. The discounted cash flow method is based on the
present value of two components – projected cash flows and a ter-
minal value. The terminal value represents the expected normalized
future cash flows of the reporting unit beyond the cash flows from
the discrete projection period. The fair value of the reporting unit is
calculated based on the sum of the present value of the cash flows
from the discrete period and the present value of the terminal value.
The estimated cash flows are discounted using a rate that represents
our WACC.
With regards to the Wireline goodwill valuation, a critical assumption
includes the development of the WACC for use in our estimate of fair
value. The WACC is based on current market conditions, including the
equity-risk premium and risk-free interest rate. The projected WACC
used in the estimate of fair value in future periods may be impacted
by adverse changes in market and economic conditions, including
risk-free interest rates, and are subject to change based on the facts
and circumstances that exist at the time of the valuation, which may
increase the likelihood of a potential future impairment charge related
toWirelinegoodwill.ReducingthecalculatedfairvalueofWireline’snet
assets by more than 20 percent would not have resulted in a potential
goodwill impairment.
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements is as follows:
• WirelesslicensesandGoodwillareasignificantcomponentofourcon-
solidated assets. Both our wireless licenses and goodwill are treated as
indefinite-lived intangible assets and, therefore are not amortized, but
rather are tested for impairment annually in the fourth fiscal quarter,
unless there are events or changes in circumstances during an interim
period that indicates these assets may not be recoverable. We believe
our estimates and assumptions are reasonable and represent appro-
priate marketplace considerations as of the valuation date. We do not
believe that reasonably likely adverse changes in our assumptions and
estimates would result in an impairment charge as of our latest impair-
ment testing date. However, if there is a substantial and sustained
adverse decline in our operating profitability, we may have impairment
charges in future years. Any such impairment charge could be material
to our results of operations and financial condition.
Wireless Licenses
The carrying value of our wireless licenses was approximately $73.0
billion as of December 31, 2010. We aggregate our wireless licenses
into one single unit of accounting, as we utilize our wireless licenses
on an integrated basis as part of our nationwide wireless network. Our
wireless licenses provide us with the exclusive right to utilize certain
radio frequency spectrum to provide wireless communication services.
There are currently no legal, regulatory, contractual, competitive, eco-
nomic or other factors that limit the useful life of our wireless licenses.
Our impairment test consists of comparing the estimated fair value of
our wireless licenses to the aggregated carrying amount as of the test
date. If the estimated fair value of our wireless licenses is less than the
aggregated carrying amount of the wireless licenses then an impair-
ment charge is recognized. Our annual impairment tests for 2010, 2009
and 2008 indicated that the fair value significantly exceeded the car-
rying value and, therefore, did not result in an impairment.
We estimate the fair value of our wireless licenses using a direct income
based valuation approach. This approach uses a discounted cash flow
analysis to estimate what a marketplace participant would be willing
to pay to purchase the aggregated wireless licenses as of the valuation
date. As a result we are required to make significant estimates about
future cash flows specifically associated with our wireless licenses, an
appropriate discount rate based on the risk associated with those esti-
mated cash flows and assumed terminal value and growth rates. We
consider current and expected future economic conditions, current
and expected availability of wireless network technology and infra-
structure and related equipment and the costs thereof as well as other
relevant factors in estimating future cash flows. The discount rate repre-
sents our estimate of the weighted average cost of capital (or expected
return,“WACC”)thatamarketplaceparticipantwouldrequireasofthe
valuation date. We develop the discount rate based on our consider-
ation of the cost of debt and equity of a group of guideline companies
as of the valuation date. Accordingly, our discount rate incorporates
our estimate of the expected return a marketplace participant would
require as of the valuation date, including the risk premium associated
with the current and expected economic conditions as of the valua-
tion date. The terminal value growth rate represents our estimate of
themarketplace’slong-termgrowthrate.