RNWK » Topics » Impairment of Goodwill and Long-Lived Assets

These excerpts taken from the RNWK 10-K filed Mar 2, 2009.
Impairment of Goodwill and Long-Lived Assets
 
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill is required to be tested for impairment annually and if an event or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We perform our annual goodwill impairment test during our fiscal fourth quarter.
 
A two step process is used to test for goodwill impairment under SFAS 142. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its


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carrying value including existing goodwill. Goodwill is considered impaired if the carrying value of a reporting unit exceeds the estimated fair value. Upon an indication of impairment from the first step, a second step is performed to determine the amount of the impairment. This involves calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill. We have four reporting units; Music, Technology Products and Solutions, Games, and Media Software and Services.
 
To estimate the fair value of the reporting units for step one, we utilized a combination of income and market approaches. The income approach, specifically a discounted cash flow methodology, included assumptions for, among others, forecasted revenues, gross profit margins, operating profit margins, working capital cash flow, growth rates and long term discount rates, all of which require significant judgments by management.
 
During the quarter ended December 31, 2008, the we revised our long term operating plan. Our operating plan was a significant input in evaluating the fair value of our reporting units for the purpose of assessing goodwill for possible impairment. The expected impact resulting from the significant declines observed in the broader economy during the fiscal fourth quarter of 2008 were reflected in the plan. Additionally, in light of the uncertainty regarding the extent of future economic declines, we applied discount rates in our income approach that appropriately reflected the possibility that cash flows from future operations may not be fully realized. As a result, it was determined that the carrying value for our Games and Technology Products and Solutions reporting units exceeded their respective fair values, indicating that goodwill within each reporting unit was potentially impaired. No impairments were indicated under the first step for our Music and Media Software and Services reporting units. As required, we initiated the second step of the goodwill impairment test for our Games and Technology Products and Solutions reporting units. We determined that the implied fair value of goodwill for our Technology Products and Solutions and Games reporting units was less than the carrying value by approximately $97.0 million and $38.1 million, respectively, which was recorded as an impairment of goodwill during the quarter ended December 31, 2008. No impairments were recognized in either of the years ended December 31, 2007 or 2006.
 
In accordance with SFAS No. 144, we review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the carrying amount of an asset is not recoverable, an impairment loss is recognized based on the excess of the carrying amount of the long-lived asset over its respective fair value, which is generally determined as the present value of estimated future undiscounted cash flows. The impairment analysis is based on significant assumptions of future results made by management, including operating and cash flow projections. Our operating plan was a significant input in assessing the recoverability of our long-lived assets. In light of the uncertainty regarding the extent of future economic declines, we applied discount rates in our discounted cash flow analysis that appropriately reflected the possibility that cash flows from future operations may not be fully realized. Based on this assessment, we concluded that the net book value related to certain intangible assets exceeded the fair value attributable to such intangible assets. As a result, we recorded charges of $57.6 million as impairments of long-lived assets within our consolidated statements of operations and comprehensive income in 2008. No such impairments were recognized in either 2007 or 2006.
 
The impairment analysis for goodwill and long-lived assets is based on significant assumptions of future results made by management, including revenue and cash flow projections. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, could result in the need to perform an impairment analysis under SFAS No. 142 and 144 in future interim periods. We cannot accurately predict the amount and timing of any impairment of goodwill or long-lived assets. Should the value of our goodwill or long-lived assets become impaired, we would record the appropriate charge, which could have an adverse effect on our financial condition and results of operations.
 
Impairment
of Goodwill and Long-Lived Assets



 



In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets
(SFAS 142), goodwill is required to
be tested for impairment annually and if an event or conditions
change that would more likely than not reduce the fair value of
a reporting unit below its carrying value. We perform our annual
goodwill impairment test during our fiscal fourth quarter.


 



A two step process is used to test for goodwill impairment under
SFAS 142. The first step is to determine if there is an
indication of impairment by comparing the estimated fair value
of each reporting unit to its





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carrying value including existing goodwill. Goodwill is
considered impaired if the carrying value of a reporting unit
exceeds the estimated fair value. Upon an indication of
impairment from the first step, a second step is performed to
determine the amount of the impairment. This involves
calculating the implied fair value of goodwill by allocating the
fair value of the reporting unit to all assets and liabilities
other than goodwill and comparing it to the carrying amount of
goodwill. We have four reporting units; Music, Technology
Products and Solutions, Games, and Media Software and Services.


 



To estimate the fair value of the reporting units for step one,
we utilized a combination of income and market approaches. The
income approach, specifically a discounted cash flow
methodology, included assumptions for, among others, forecasted
revenues, gross profit margins, operating profit margins,
working capital cash flow, growth rates and long term discount
rates, all of which require significant judgments by management.


 



During the quarter ended December 31, 2008, the we revised
our long term operating plan. Our operating plan was a
significant input in evaluating the fair value of our reporting
units for the purpose of assessing goodwill for possible
impairment. The expected impact resulting from the significant
declines observed in the broader economy during the fiscal
fourth quarter of 2008 were reflected in the plan. Additionally,
in light of the uncertainty regarding the extent of future
economic declines, we applied discount rates in our income
approach that appropriately reflected the possibility that cash
flows from future operations may not be fully realized. As a
result, it was determined that the carrying value for our Games
and Technology Products and Solutions reporting units exceeded
their respective fair values, indicating that goodwill within
each reporting unit was potentially impaired. No impairments
were indicated under the first step for our Music and Media
Software and Services reporting units. As required, we initiated
the second step of the goodwill impairment test for our Games
and Technology Products and Solutions reporting units. We
determined that the implied fair value of goodwill for our
Technology Products and Solutions and Games reporting units was
less than the carrying value by approximately $97.0 million
and $38.1 million, respectively, which was recorded as an
impairment of goodwill during the quarter ended
December 31, 2008. No impairments were recognized in either
of the years ended December 31, 2007 or 2006.


 



In accordance with SFAS No. 144, we review long-lived
assets for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may
not be recoverable. If the carrying amount of an asset is not
recoverable, an impairment loss is recognized based on the
excess of the carrying amount of the long-lived asset over its
respective fair value, which is generally determined as the
present value of estimated future undiscounted cash flows. The
impairment analysis is based on significant assumptions of
future results made by management, including operating and cash
flow projections. Our operating plan was a significant input in
assessing the recoverability of our long-lived assets. In light
of the uncertainty regarding the extent of future economic
declines, we applied discount rates in our discounted cash flow
analysis that appropriately reflected the possibility that cash
flows from future operations may not be fully realized. Based on
this assessment, we concluded that the net book value related to
certain intangible assets exceeded the fair value attributable
to such intangible assets. As a result, we recorded charges of
$57.6 million as impairments of long-lived assets within
our consolidated statements of operations and comprehensive
income in 2008. No such impairments were recognized in either
2007 or 2006.


 



The impairment analysis for goodwill and long-lived assets is
based on significant assumptions of future results made by
management, including revenue and cash flow projections.
Significant or sustained declines in future revenue or cash
flows, or adverse changes in our business climate, among other
factors, could result in the need to perform an impairment
analysis under SFAS No. 142 and 144 in future interim
periods. We cannot accurately predict the amount and timing of
any impairment of goodwill or long-lived assets. Should the
value of our goodwill or long-lived assets become impaired, we
would record the appropriate charge, which could have an adverse
effect on our financial condition and results of operations.


 




EXCERPTS ON THIS PAGE:

10-K (2 sections)
Mar 2, 2009
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