Kenexa (KNXA)

Goodwill

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which superseded Accounting Board Opinion No. 17, Intangible Assets. Upon adoption of SFAS 142, the Company ceased amortization of existing goodwill and is required to review the carrying value of goodwill for impairment. Prior to 2007, the Company evaluated the carrying value of its goodwill under two reporting units within its single segment. During 2007, the Company combined those two reporting units into a single reporting unit to be in alignment with its organizational and management structure which was evaluated and restructured as part of the integration of our acquired businesses. As a result of the change, the Company now evaluates goodwill at the enterprise or Company level. If goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. This comparison is performed annually or more frequently if circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has reviewed the carrying value of goodwill at the enterprise level by comparing the carrying value to the estimated fair value of the entire enterprise. The fair

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Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(All amounts in thousands, except share and per share data, unless noted otherwise)

value is based on management’s estimate of the future discounted cash flows to be generated by the business as a whole and its market capitalization. These cash flows consider factors such as future operating income, historical trends, as well as demand and competition. Changes in the underlying business could affect these estimates, which in turn could affect the recoverability of goodwill. Management determined that the carrying value of its goodwill did not exceed the fair value and as a result believes that no impairment of goodwill existed at December 31, 2007.

The changes in the carrying amount of goodwill for the years ended December 31, 2007, and 2006 and 2005 are as follows:

During 2007, Goodwill was increased by $30,131 primarily as a result of the release of escrow payments of $16,500, a reduction of acquired NOL’s and related deferred tax assets and corresponding increase to goodwill in the amount of $3,284 and excess purchase price for current year acquisitions.

Goodwill

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which superseded Accounting Board Opinion No. 17, Intangible Assets. Upon adoption of SFAS 142, the Company ceased amortization of existing goodwill and is required to review the carrying value of goodwill for impairment. Prior to 2007, the Company evaluated the carrying value of its goodwill under two reporting units within its single segment. During 2007, the Company combined those two reporting units into a single reporting unit to be in alignment with its organizational and management structure which was evaluated and restructured as part of the integration of our acquired businesses. As a result of the change, the Company now evaluates goodwill at the enterprise or Company level. If goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. This comparison is performed annually or more frequently if circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has reviewed the carrying value of goodwill at the enterprise level by comparing the carrying value to the estimated fair value of the entire enterprise. The fair

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Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(All amounts in thousands, except share and per share data, unless noted otherwise)

value is based on management’s estimate of the future discounted cash flows to be generated by the business as a whole and its market capitalization. These cash flows consider factors such as future operating income, historical trends, as well as demand and competition. Changes in the underlying business could affect these estimates, which in turn could affect the recoverability of goodwill. Management determined that the carrying value of its goodwill did not exceed the fair value and as a result believes that no impairment of goodwill existed at December 31, 2007.

The changes in the carrying amount of goodwill for the years ended December 31, 2007, and 2006 and 2005 are as follows:

During 2007, Goodwill was increased by $30,131 primarily as a result of the release of escrow payments of $16,500, a reduction of acquired NOL’s and related deferred tax assets and corresponding increase to goodwill in the amount of $3,284 and excess purchase price for current year acquisitions.

Goodwill

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which superseded Accounting Board Opinion No. 17, Intangible Assets. Upon adoption of SFAS 142, the Company ceased amortization of existing goodwill and is required to review the carrying value of goodwill for impairment. If goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. This comparison is performed annually or more frequently if circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has reviewed the carrying values of goodwill of each business component by comparing the carrying values to the estimated fair values of the business components. The fair value is based on management’s estimate of the future discounted cash flows to be generated by the respective business components and comparable company multiples. These cash flows consider factors such as future operating income, historical trends, as well as demand and competition. Comparable company multiples are based upon public companies in sectors relevant to the Company’s business based on its knowledge of the industry. Changes in the underlying business could affect these estimates, which in turn could affect the recoverability of goodwill. Management determined that the carrying values of its goodwill did not exceed the fair values and as a result believes that no impairment of goodwill existed at December 31, 2006.

The changes in the carrying amount of goodwill for the years ended December 31, 2004, and 2005 and 2006 are as follows:

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Kenexa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(All amounts in thousands, except share and per share data, unless noted otherwise)

2.   Summary of Significant Accounting Policies (Continued)

Goodwill

        On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which superseded Accounting Board Opinion No. 17, Intangible Assets. Upon adoption of SFAS 142, the Company ceased amortization of existing goodwill and is required to review the carrying value of goodwill for impairment. If goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. This comparison is performed annually or more frequently if circumstances change that would more likely than not reduce

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the fair value of the reporting unit below its carrying amount. The Company has reviewed the carrying values of goodwill of each business component by comparing the carrying values to the estimated fair values of the business components. The fair value is based on management's estimate of the future discounted cash flows to be generated by the respective business components and comparable company multiples. These cash flows consider factors such as future operating income, historical trends, as well as demand and competition. Comparable company multiples are based upon public companies in sectors relevant to the Company's business based on its knowledge of the industry. Changes in the underlying business could affect these estimates, which in turn could affect the recoverability of goodwill. Management determined that the carrying values of its goodwill did not exceed the fair values and as a result believes that no impairment of goodwill existed at December 31, 2005.

        The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2005 are as follows:

        On July 29, 2005 the Company entered into an Asset Purchase Agreement with Scottworks Solutions, Inc., a business-intelligence and management consulting firm based in Toronto, Canada. Pursuant to the agreement, the Company purchased all of Scottworks' assets and assumed selected liabilities for $425, payable as follows: $170 at closing and $9 per month, payable in 30 equal installments beginning on August 1, 2005. The amounts allocated to goodwill and identified intangibles are approximately $281 and $102, respectively. The agreement also includes contingent payments based upon the achievement of certain revenue targets which will be recorded as goodwill when earned.