EFTA01378026.pdf

Recoverability of goodwill and Indefinite-lived Intangible assets Goodwill and indefinite-lived intangible assets, which consist of our acquired trade names and trademarks. are assessed annually for impairment as of October 1 or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or the fair value of an indefinite -lived intangible asset below its carrying value. The 2O12. 2013 and 2014 annual assessments identified no material impairments. The value of goodwill and indefinite-lived intangible assets that is subject to annual assessment for impairment is $793.8 million and $180.6 million. respectively, at December 31, 2014. We have the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we elect to perform a qualitative assessment and conclude it is not more likely than not that the fair value of the reporting unit is less than its carrying value. no further assessment of that reporting unit's goodwill is necessary: otherwise goodwill must be tested for impairment using a two-step process. The first step involves a comparison of the estimated fair value of each of our reporting units to its carrying value, including goodwill. In performing the first step, we determine the fair value of a reporting unit using both an income approach based on discounted cash flows. or DCF, and a market approach based on multiples of earnings. Determining fair value requires the exercise of significant judgment with respect to several items. including judgment about the amount and timing of expected future cash flows and appropriate discount rates. The expected cash flows used in the DCF analyses are based on our most recent budget and, for years beyond the budget, our estimates, which are based, in part, on forecasted growth rates. The discount rate used in the DCF analysis are intended to reflect the risks inherent in the expected future cash flows of the respective reporting units. Assumptions used in the DCF analyses, including the discount rate. are assessed annually based on the reporting units current results and forecast, as well as macroeconomic and industry specific factors. The discount rate used in our annual goodwil impairment assessment was approximately 16%. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying value of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying value to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodvnll recognized In a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess. Any impairment charge that might result in the future would be determined based upon the excess of the carrying value of goodwill over its implied fair value using the second step of the impairment analysis that is described above but, in any event, would not be expected to be lower than the excess of the carrying value of the reporting unit over its fair value. A primary driver in the DCF valuation analyses and the determination of the fair values of our reporting units is the estimate of future revenue and profitability. Generally, we would expect an impairment if forecasted revenue and profitability are no longer expected to be achieved and as a result, the carrying value of a reporting units) exceeds its fair value. This assessment would be based, in part, upon the performance of its businesses relative to budget, our assessment of macroeconomic factors, industry and competitive dynamics and the strategies of its businesses in response to these factors. 94 Table of Contents We also have the option to qualitatively assess whether it is more likely than not that the fair value of an indefinite -lived intangible asset is less than its carrying value. If we elect to perform a qualitative assessment and conclude it is not more fikehi than not that the fair value of an indefinite -lived intangible asset is less than its carrying value, the fair value of the asset does not need to be determined; otherwise the fair value of the indefinite -lived intangible asset must be determined and compared to its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite -lived intangible assets are determined using an avoided royalty DCF valuation analysis. Significant judgments inherent in this analysis include the selection of appropriate royalty and discount rates and estimating the amount and timing of expected future cash flows. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. The royalty rates used in the DCF analyses are based upon an estimate of the royalty rates that a market participant would pay to license our trade names and trademarks. Assumptions used in the avoided royalty DCF analyses, including the discount rate and royalty rate, are assessed annually based on the actual and projected cash flows related to the asset, as well as macroeconomic and industry specific factors. 'The discount rates used in our annual indefinite-lived impairment assessment ranged from 10% to 18% in 2013 and 10% to 20% in 2014, and the royalty rates used ranged from 3% to 7% in both 2013 and 2014 Recoverability of long-lived assets We review the carrying value of all long-lived assets. comprising property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is deemed not to be recoverable, an impairment loss is recorded equal to the amount by which the carrying value of the long-lived asset exceeds its fair value. The carrying value of property and equipment and definite-lived intangible assets is $70.1 million at December 31, 2014. Income taxes We recognize liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit. including resolution of related appeals or litigation processes. if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. At December 31. 2014. we had unrecognized tax benefits of $12.1 million, including interest. Changes to reserves from period to period and differences between amounts paid, if any. upon resolution of issues raised in audits and amounts previously provided may be material. Differences between the reserves for income tax contingencies and the amounts owed by us are recorded in the period they become known. We account for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities v.inv. tec.gov An:laves eds.,' daW1575189,00010,47469150031B,112226453"-13.100011 9,70139:27:17 AM] CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0075186 CONFIDENTIAL SONY GM_00221370 EFTA01378026