AES » Topics » Goodwill

These excerpts taken from the AES 10-K filed Feb 26, 2010.

Goodwill

Effective January 1, 2009, the Company adopted the new accounting guidance on fair value measurement of nonfinancial assets and liabilities measured on a nonrecurring basis. We test goodwill at the reporting unit level for impairment annually on October 1 and whenever events or circumstances indicate it is more likely than not that impairment may have occurred. Such indicators could include a significant adverse change in the business climate or a decision to sell or dispose of all or a portion of a reporting unit. As discussed in detail in Note 1—General and Summary of Significant Accounting Policies, Goodwill and Other Intangibles included in Item 8 of this Form 10-K goodwill impairment is evaluated using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying value. Determining whether potential impairment exists requires us to estimate the fair value of the respective reporting unit. The new accounting guidance recommends three approaches to measure fair value: 1) Cost approach; 2) Market approach; and 3) Income approach. Historically, an internally developed discounted cash flow model based on the income approach was used to estimate the fair value of reporting units. The Company incorporated several changes in its internal valuation model to align its valuation approach with the new accounting guidance. In the revised valuation model, the fair value of a reporting unit is estimated using internal budgets and forecasts, adjusted for any market participants’ assumptions, discounted at the Weighted Average Cost of Capital (“WACC”). If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered to be impaired and no further analysis is required. In determining the fair value, management relies primarily on the results of the income-based approach as most of the valuation assumptions used to derive the discount rate are market observable, directly or indirectly.

 

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Under the income approach, the fair value is the result of the application of a significant number of assumptions related to the discount rate and cash flow forecasts. Many of discount rate-related assumptions are market observable; however, the assumptions underlying our cash flow forecasts involve considerable judgment by management. These include growth rate, terminal value, asset retirement obligations, and macro economic factors such as industry demand, inflation, exchange rates and commodity prices. The fair value of a reporting unit could be sensitive to one or more assumption and different reporting units could be sensitive to different assumptions. Management uses a market-based approach to corroborate the fair value estimated under the income approach and to determine the reasonableness of the fair value derived using the discounted cash flow analysis. As part of the impairment evaluation process, we analyze the sensitivity of a reporting unit’s fair value to underlying assumptions. The level of scrutiny increases as the gap between a reporting unit’s fair value and carrying value decreases. Changes in any of these assumptions could result in management reaching a different conclusion regarding the potential impairment of a reporting unit, which could be material. Our impairment analysis inherently involves uncertainties from uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.

If the carrying value exceeds the reporting unit’s fair value, this could indicate potential impairment and step two of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. In determining the implied fair value of goodwill for impairment measurement, the fair value measurement accounting guidance requires measuring all assets and liabilities at fair value. This includes determining the fair value of unrecognized assets and liabilities not recognized on the books as would be done in a business combination. When a step two analysis must be completed, the fair value of individual assets and liabilities is determined using valuations (which in some cases may be based in part on the reports of external valuation specialists), or other observable sources of fair value, as appropriate.

In 2009, the Company recognized goodwill impairment of $122 million. This was a result of impairment at certain of our businesses in the United Kingdom and Ukraine. The most significant impairment was at Kilroot, our coal-fired generation business in the United Kingdom. Factors contributing to the recognition of impairment included: reduced profit expectations based on the latest estimates of future commodity prices and reduced expectations regarding the recovery of cash flows on the existing plant following the Company’s decision to forgo capital expenditures to meet emission allowance requirements taking effect in 2024.

Goodwill:

The Company evaluates goodwill impairment at the reporting unit level, which is an operating segment, as defined in the segment reporting accounting guidance, or one level below an operating segment, a component. In determining its reporting units, the Company starts with its segment reporting structure. Operating segments are identified and then analyzed to identify components (usually businesses) which make up these operating segments. Assets and liabilities are allocated to a reporting unit if assets will be employed by or a liability relates to the operations of a reporting unit or would be considered in determining its fair value. Two or more components are combined into a single reporting unit if they share the economic similarity criteria prescribed by the accounting guidance. The goodwill impairment evaluation is performed in two steps. In step 1, the carrying value of a reporting unit is compared to its fair value and if the fair value exceeds the carrying value, step 2 is unnecessary. When the carrying value of a reporting unit exceeds its fair value, step 2 is performed to determine the implied fair value of goodwill. To estimate the implied fair value of goodwill, the fair values of individual assets and liabilities of the reporting unit are determined as if it were a business combination. An impairment loss is recognized if the carrying amount of goodwill exceeds its implied fair value.

Most of the Company’s reporting units are not publicly traded and the Company has estimated the fair value of its reporting units using internal valuation models based on discounted cash flow principles. Effective January 1, 2009, the Company adopted the fair value measurement guidance for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. The adoption resulted in the introduction of several modifications to the Company’s internal valuation model to align it with the new accounting guidance. Most notably, the new accounting guidance requires making assumptions that a market participant would make in a hypothetical sale transaction at the testing date. The fair value of a reporting unit was estimated using internal budgets and forecasts, adjusted for any market participants’ assumptions and discounted at the rate of return

 

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THE AES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2009, 2008, AND 2007

 

required by a market participant. When estimating the fair value of its reporting units, the Company considers both market and income-based approaches to determine a range of fair value, but typically concludes that the value derived using an income-based approach is more representative of fair value due to the lack of direct market comparables. The Company does use market data to corroborate and determine the reasonableness of the fair value derived from the income-based discounted cash flow analysis. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

This excerpt taken from the AES 8-K filed Sep 15, 2009.

Goodwill

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred. Such indicators could include a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a reporting unit. Goodwill impairment is evaluated using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying value. Determining whether an impairment has occurred requires the valuation of the respective reporting unit. The Company uses a discounted cash flow method to estimate the fair value. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered to be impaired and no further analysis is required. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data. Assumptions about operating results and growth rates are based on forecasts, future business plans, economic projections and anticipated future cash flows, among other things. Changes in any of these assumptions could result in management reaching a different conclusion regarding the potential impairment of a reporting unit. Our impairment analysis contains uncertainties from uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.

If the carrying value exceeds the reporting unit’s fair value, this could indicate potential impairment and step two of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The measurement of impairment requires a fair value estimate of each identified tangible and intangible asset in the same manner the fair value would be determined in a business combination. In this case, we supplement the cash flow approach discussed above with appraisals, or other observable sources of fair value, as appropriate.

This excerpt taken from the AES 10-K filed Feb 26, 2009.

Goodwill

        We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred. Such indicators could include a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a reporting unit. Goodwill impairment is evaluated using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying value. Determining whether an impairment has occurred requires the valuation of the respective reporting unit. The Company uses a discounted cash flow method to estimate the fair value. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered to be impaired and no further analysis is required. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data. Assumptions about operating results and growth rates are based on forecasts, future business plans, economic projections and anticipated future cash flows, among other things. Changes in any of these assumptions could result in management reaching a different conclusion regarding the potential impairment of a reporting unit. Our impairment analysis contains uncertainties from uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions.

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        If the carrying value exceeds the reporting unit's fair value, this could indicate potential impairment and step two of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The measurement of impairment requires a fair value estimate of each identified tangible and intangible asset in the same manner the fair value would be determined in a business combination. In this case, we supplement the cash flow approach discussed above with appraisals, or other observable sources of fair value, as appropriate.

This excerpt taken from the AES 10-K filed Mar 17, 2008.

Goodwill

        We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a business unit. Determining whether an impairment has occurred requires valuation of the respective business unit, which we estimate using a discounted cash flow method. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.

        If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case, we supplement the cash flow approach discussed above with appraisals, as appropriate.

This excerpt taken from the AES 10-K filed Aug 7, 2007.

Goodwill

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a business unit. Determining whether an impairment has occurred requires valuation of the respective business unit, which we estimate using a discounted cash flow

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method. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.

If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case, we supplement the cash flow approach discussed above with independent appraisals, as appropriate.

This excerpt taken from the AES 10-K filed May 23, 2007.

Goodwill

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a business unit. Determining whether an impairment has occurred requires valuation of the respective business unit, which we estimate using a discounted cash flow method. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.

If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case, we supplement the cash flow approach discussed above with independent appraisals, as appropriate.

This excerpt taken from the AES 10-K filed Apr 4, 2006.
GOODWILL—In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company recognizes goodwill for the excess of the cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. The Company evaluates goodwill for impairment on an annual basis and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company’s annual impairment testing date is October 1st.

This excerpt taken from the AES 10-K filed Jan 19, 2006.
GOODWILL—In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company recognizes goodwill for the excess of the cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. The Company evaluates goodwill for impairment on an annual basis and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company’s annual impairment testing date is October 1st.

This excerpt taken from the AES 10-K filed Mar 30, 2005.
GOODWILL—In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company recognizes goodwill for the excess of the cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. The Company evaluates goodwill for impairment on an annual basis and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company’s annual impairment testing date is October 1st.

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