Intangible Assets

6 Months Ended

Mar. 31, 2020

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Intangible Assets

. Goodwill, net and Intangible Assets, net

Goodwill, net

The changes in the carrying amount of goodwill by segment during fiscal 2020 were as follows:

(In millions)	Products & Solutions		Services		Total
Balance as of September 30, 2019
Cost	$	1,282	$	1,478	$	2,760
Accumulated impairment charges	(657)		—		(657)
	625		1,478		2,103
Impairment charges	(624)		—		(624)
Foreign currency fluctuations	(1)		(2)		(3)
Balance as of March 31, 2020
Cost	1,281		1,476		2,757
Accumulated impairment charges	(1,281)		—		(1,281)
	$	—	$	1,476	$	1,476

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level. The Company's reporting units are subject to impairment testing annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's goodwill was primarily recorded upon emergence from bankruptcy as a result of applying fresh start accounting.

During the first quarter of fiscal 2020, the Company changed its reporting units to align with changes in its organizational structure, mainly resulting from the previously disclosed strategic review process which concluded in October 2019. As a result, on October 1, 2019, the Company consolidated its Unified Communications and Contact Center reporting units into a Products & Solutions reporting unit and consolidated its Global Support Services, Avaya Professional Services and Enterprise Cloud and Managed Services reporting units into a Services reporting unit. As a result of these changes, the Company's reporting units are the same as its operating segments. Due to the consolidation of reporting units, the Company performed an interim goodwill impairment assessment immediately before and after the consolidation on October 1, 2019 by estimating and comparing the fair value of each reporting unit to its carrying value. The Company determined that the carrying amounts of each of the Company's reporting units did not exceed their estimated fair values and therefore no impairment existed as of October 1, 2019.

The Company concluded that a triggering event occurred for both of its reporting units during the three months ended March 31, 2020 due to (i) the impact of the COVID-19 pandemic on the macroeconomic environment which led to revisions to the Company's long-term forecast during the second quarter of fiscal 2020 and (ii) the sustained decrease in the Company's stock price since the advent of the pandemic which was caused by the resulting volatility in the financial markets. As a result, the Company performed an interim quantitative goodwill impairment test as of March 31, 2020 to compare the fair values of its reporting units to their respective carrying amounts, including the goodwill allocated to each reporting unit. The Company estimated the fair value of each reporting unit using a weighting of fair values derived from an income and a market approach.

Under the income approach, the fair value of a reporting unit is estimated using a discounted cash flows model. Future cash flows are based on forward-looking information regarding revenue and costs for each reporting unit and are discounted using an appropriate discount rate. The discounted cash flows model relies on assumptions regarding revenue growth rates, projected gross profit, working capital needs, selling, general and administrative expenses, research and development expenses, business restructuring costs, capital expenditures, income tax rates, discount rates and terminal growth rates. The discount rates the Company used represent the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, the Company used a terminal value approach. Under this approach, the Company applied a perpetuity growth assumption to determine the terminal value. The Company incorporated the present value of the resulting terminal value into its estimate of fair value. Forecasted cash flows for each reporting unit consider current economic conditions and trends, estimated future operating results, the Company’s view of growth rates and anticipated future economic conditions. Revenue growth rates inherent in this forecast are based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the telecommunications industry and product evolution from a technological segment basis. Macroeconomic factors such as changes in economies, product evolutions, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets.

The market approach estimates the fair value of a reporting unit by applying multiples of operating performance measures to the reporting unit's operating performance (the "Guideline Public Company Method"). These multiples were derived from comparable publicly-traded companies with similar investment characteristics to the reporting unit. The key estimates and assumptions that were used to determine the fair value under this market approach include current and forward 12-month operating performance results, as applicable, and the selection of the relevant multiples that were applied.

The results of the Company’s interim goodwill impairment test as of March 31, 2020 indicated that the estimated fair value of the Company’s Services reporting unit exceeded its carrying amount. The carrying amount of the Company's Products & Solutions reporting unit exceeded its estimated fair value primarily due to a reduction in the Company’s long-term forecast to reflect increased risk from higher market uncertainty and the accelerated reduction of product sales related to the Company’s historical on-premises perpetual licenses. The Company anticipates a continued shift and acceleration of customers upgrading and acquiring new technology innovation through the utilization of the Company’s subscription offering, which is included in the Services reporting unit. As a result, the Company recorded a goodwill impairment charge of $624 million to write down the full carrying amount of the Products & Solutions goodwill in the Impairment of goodwill line item in the Condensed Consolidated Statements of Operations. As of March 31, 2020, the estimated fair value of the Services reporting unit exceeded its carrying amount by 16%.

The Company’s long-term forecast includes significant estimates and assumptions, including management’s estimate of the potential impact of the COVID-19 pandemic on the Company’s operating results. Due to the uncertainty surrounding the impact of the COVID-19 pandemic on the macroeconomic environment and, more specifically, on the Company’s future operating results, it is reasonably possible that the pandemic could have a more adverse impact than what is currently contemplated by the Company’s long-term forecast. To the extent business conditions deteriorate or there are changes in key assumptions and estimates included in the long-term forecast, it may be necessary to record additional impairment charges in the future.

Intangible Assets, net

The Company's intangible assets consist of the following for the periods indicated:

(In millions)	Technology and Patents		Customer Relationships and Other Intangibles		Trademarks and Trade Names		Total
Balance as of March 31, 2020
Finite-lived intangible assets:
Cost	$	960	$	2,150	$	42	$	3,152
Accumulated amortization	(394)		(355)		(16)		(765)
Finite-lived intangible assets, net	566		1,795		26		2,387
Indefinite-lived intangible assets:
Cost	—		—		333		333
Accumulated impairment	—		—		—		—
Indefinite-lived intangible assets, net	—		—		333		333
Intangible assets, net	$	566	$	1,795	$	359	$	2,720
Balance as of September 30, 2019
Finite-lived intangible assets:
Cost	$	960	$	2,154	$	42	$	3,156
Accumulated amortization	(308)		(279)		(11)		(598)
Finite-lived intangible assets, net	652		1,875		31		2,558
Indefinite-lived intangible assets:
Cost	2		—		333		335
Accumulated amortization	(2)		—		—		(2)
Indefinite-lived intangible assets, net	—		—		333		333
Intangible assets, net	$	652	$	1,875	$	364	$	2,891

Intangible assets include technology and patents, customer relationships, and trademarks and trade names. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets. Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually and more frequently if events occur or circumstances change that indicate an asset may be impaired.

As a result of the goodwill triggering event described above, the Company performed a recoverability test on all of its finite-lived asset groups as of March 31, 2020 before proceeding to the goodwill impairment review and concluded that no impairment charge was necessary. The recoverability test of finite-lived assets was based on forecasts of undiscounted cash flows for each asset group.

The Company also performed an interim quantitative impairment test for its indefinite-lived intangible asset, the Avaya Trade Name, as of March 31, 2020. The fair value of the Avaya Trade Name was estimated using the relief-from-royalty model, a form of the income approach. Under this methodology, the fair value of the trade name was estimated by applying a royalty rate to forecasted net revenues which was then discounted using a risk-adjusted rate of return on capital. Revenue growth rates inherent in the forecast were based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the telecommunications industry and product evolution from a technological segment basis. The royalty rate was determined using a set of observed market royalty rates. The result of the interim impairment test of the Avaya Trade Name as of March 31, 2020 indicated no impairment existed and the level of excess fair value over carrying value was 5%. An increase in the discount rate of 50 basis points or a decrease in the long-term growth rate of 140 basis points would result in an estimated fair value below its carrying value.

To the extent that business conditions change or if changes in key assumptions and estimates differ significantly from management’s expectations, it may be necessary to record impairment charges in the future.