Windstream 2011 Annual Report Download - page 134

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its carrying value, a second calculation is required in which the implied fair value of goodwill is compared to its carrying value.
If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value.
We perform our impairment analysis on January 1st of each year. During 2011, 2010 and 2009, no write-downs in the carrying
values of either goodwill or indefinite-lived intangible assets were required based on their calculated fair values. Effective
January 1, 2011, we determined that we had two reporting units to test for impairment (1) the data center reporting unit
representing the Hosted Solutions business acquired on December 2, 2010 and (2) a reporting unit including the remaining
Windstream operations. Reducing our January 1, 2011 market capitalization by 90.0 percent would not have resulted in an
impairment of the carrying value of goodwill. Due to the close proximity of the Hosted Solutions business combination to our
annual impairment assessment date, we determined that the fair value of goodwill for the data center reporting unit equaled the
carrying value as of January 1, 2011 in that there were no changes in fact or circumstances between the acquisition date and
January 1, 2011 that would indicate a change in value. Changes in the key assumptions used in the impairment analysis due to
changes in market conditions could adversely affect the calculated fair values of goodwill and other indefinite-lived intangible
assets, materially affecting the carrying value of these assets and our future consolidated operating results.
See Notes 2 and 4 for additional information on our goodwill and other indefinite-lived intangibles.
Derivative Instruments
We account for our derivative instruments using authoritative guidance for disclosures about derivative instruments and
hedging activities, including when a derivative or other financial instrument can be designated as a hedge and requires
recognition of all derivative instruments at fair value. Accounting for the changes in fair value depends on whether the
derivative has been designated as, qualifies as and is effective as a hedge. Changes in fair value of the effective portions of
hedges should be recorded as a component of other comprehensive income in the current period. Changes in fair values of the
derivative instruments not qualifying as hedges, or of any ineffective portion of hedges, should be recognized in earnings in the
current period.
While authoritative guidance permits designating existing derivatives with non-zero fair values in a new cash flow hedge, we
will be unable to assume perfect effectiveness and will need to establish that the new hedge relationship is expected to be
“highly effective” as the non-zero fair value element to the new hedge relationship introduces a source of ineffectiveness that
we must assess and measure. Due to the presence of the off-market, or financing element in the newly designated hedge, it is
not appropriate to apply the short-cut method or the critical-terms-match method (qualitative assessment techniques), but
instead the long-haul method must be used. The effectiveness of our cash flow hedges is assessed each quarter using the
“Perfect Hypothetical Interest Rate Swap Method”. This method measures hedge ineffectiveness based on a comparison of the
fair value of the actual interest rate swap and the fair value of a hypothetical interest rate swap with terms that identically match
the critical terms of the debt being hedged.
Changes in the fair value of the designated portion of our derivative instruments are reported as a component of other
comprehensive income (loss) in the current period and will be reclassified into earnings as the hedged transaction affects
earnings. Changes in the fair value of the de-designated portions are recognized in other income (expense), net. We settle
interest payments on our swaps based on the LIBOR rate. We do not expect any changes in the effectiveness of its swaps due to
counterparty risk or further prepayment of hedged items, but any such changes could increase the ineffective portion of the
swaps. An increase in the value of the ineffective portion of its swaps either through further de-designation of existing swaps or
through further decreases in the LIBOR rate could have an adverse impact on our future earnings .See Notes 2, 5 and 6 for
additional information on our derivative instruments.
Income Taxes
Our estimates of income taxes and the significant items resulting in the recognition of deferred tax assets and liabilities are
disclosed in Note 12 and reflect our assessment of future tax consequences of transactions that have been reflected in our
financial statements or tax returns for each taxing jurisdiction in which we operate. Actual income taxes to be paid could vary
from these estimates due to future changes in income tax law or the outcome of audits completed by federal and state taxing
authorities. Included in the calculation of our annual income tax expense are the effects of changes, if any, to our income tax
reserves for uncertain tax positions. We maintain income tax reserves for potential assessments from the IRS or other taxing
authorities. The reserves are determined in accordance with authoritative guidance and are adjusted, from time to time, based
upon changing facts and circumstances. Changes to the income tax reserves could materially affect our future consolidated
operating results in the period of change. In addition, a valuation allowance is recorded to reduce the carrying amount of
deferred tax assets unless it is more likely than not that such assets will be realized.