Verizon Wireless 2014 Annual Report Download - page 34

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In 2012, using a quantitative assessment, we estimated the fair value of
our wireless licenses using a direct income based valuation approach.
This approach uses a discounted cash ow 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
were required to make signicant estimates about future cash ows
specically associated with our wireless licenses, an appropriate dis-
count rate based on the risk associated with those estimated cash
ows and assumed terminal value and growth rates. We consid-
ered current and expected future economic conditions, current and
expected availability of wireless network technology and infrastructure
and related equipment and the costs thereof as well as other relevant
factors in estimating future cash ows. The discount rate represented
our estimate of the weighted-average cost of capital (WACC), or
expected return, that a marketplace participant would have required
as of the valuation date. We developed the discount rate based on
our consideration of the cost of debt and equity of a group of guide-
line companies as of the valuation date. Accordingly, our discount
rate incorporated our estimate of the expected return a marketplace
participant would have required as of the valuation date, including
the risk premium associated with the current and expected economic
conditions as of the valuation date. The terminal value growth rate
representedourestimateofthemarketplace’slong-termgrowthrate.
Goodwill
At December 31, 2014, the balance of our goodwill was approximately
$24.6 billion, of which $18.4 billion was in our Wireless segment and
$6.2 billion was in our Wireline segment. Determining whether an
impairment has occurred requires the determination of fair value of
each respective reporting unit. Our operating segments, Wireless
and Wireline, are deemed to be our reporting units for purposes of
goodwill impairment testing. The fair value of Wireless signicantly
exceeded its carrying value and the fair value of Wireline exceeded
its carrying value. Accordingly, our annual impairment tests for 2014,
2013 and 2012 did not result in an impairment.
The fair value of the reporting unit is calculated using a market
approach and a discounted cash ow method. The market approach
includes the use of comparative multiples to corroborate discounted
cash ow results. The discounted cash ow method is based on the
present value of two components—projected cash ows and a ter-
minal value. The terminal value represents the expected normalized
future cash ows of the reporting unit beyond the cash ows 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 ows
from the discrete period and the present value of the terminal value.
The estimated cash ows are discounted using a rate that represents
our WACC.
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
nancial statements is as follows:
• Wireless licenses and Goodwill are a signicant component of our con-
solidated assets. Both our wireless licenses and goodwill are treated as
indenite-lived intangible assets and, therefore are not amortized, but
rather are tested for impairment annually in the fourth scal quarter,
unless there are events or changes in circumstances during an interim
period that indicate 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 protability, we may have impairment
charges in future years. Any such impairment charge could be material
to our results of operations and nancial condition.
Wireless Licenses
The carrying value of our wireless licenses was approximately $75.3
billion as of December 31, 2014. 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.
In 2014 and 2013, we performed a qualitative impairment assessment
to determine whether it is more likely than not that the fair value of
our wireless licenses was less than the carrying amount. As part of
our assessment we considered several qualitative factors including
the business enterprise value of Wireless, macroeconomic conditions
(including changes in interest rates and discount rates), industry and
market considerations (including industry revenue and EBITDA margin
projections), the projected nancial performance of Wireless, as well as
other factors. Based on our assessment in 2014 and 2013, we qualita-
tively concluded that it was more likely than not that the fair value of
our wireless licenses signicantly exceeded their carrying value and
therefore, did not result in an impairment.
In 2012, our quantitative impairment test consisted 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 was less than the aggregated carrying amount of the wireless
licenses then an impairment charge would have been recognized. Our
annual quantitative impairment test for 2012 indicated that the fair
value signicantly exceeded the carrying value and, therefore, did not
result in an impairment.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
CRITICAL ACCOUNTING ESTIMATES AND RECENTLY ISSUED ACCOUNTING STANDARDS