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Goodwill, Customer Relationships and Other Intangible Assets

9 Months Ended

Sep. 30, 2012

Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, Customer Relationships and Other Intangible Assets

(3) Goodwill, Customer Relationships and Other Intangible Assets

Our goodwill, customer relationships and other intangible assets consisted of the following:

	September 30, 2012

	(Dollars in millions)
Goodwill	$	21,732	21,732

Customer relationships, less accumulated amortization of $2,235 and $1,337	$	7,341	8,239

Indefinite-life intangible assets		268	422
Other intangible assets subject to amortization
Capitalized software, less accumulated amortization of $749 and $441		1,447	1,622
Trade names and patents, less accumulated amortization of $126 and $71		144	199

Total other intangible assets, net	$	1,859	2,243

We amortize customer relationships over estimated lives ranging from 10 years to 12.5 years, using either the sum-of-the-years-digits or straight-line methods, depending on the type of customer. We amortize capitalized software, which consists primarily of assets obtained from the Qwest acquisition, using the straight-line method over estimated lives ranging up to seven years. Approximately $237 million of our capitalized software represents costs to develop an integrated billing and customer care system and is being amortized over a 20 year period that began in 2004. We amortize trade names and patent assets predominantly using the sum-of-the-years digits method over an estimated life of four years.

The table below summarizes our amortization expense:

	Three Months Ended September 30,				Nine Months Ended September 30,

	2012		2011		2012		2011
	(Dollars in millions)
Amortization expense	$	409		459		1,268		967

During the second quarter of 2012, we reclassified $154 million related to our wireless spectrum assets from "Other intangible assets, net" to "current assets-other", see Note 1—Basis of Presentation.

Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired. For more information on our recent acquisitions and resulting fair values, see Note 2—Acquisitions.

We determined that the methodology previously used to allocate goodwill related to our April 1, 2012 segment reorganization was incorrect. As a result, we have revised our goodwill allocation methodology to properly account for the relative fair value reflective of the segment changes. As indicated in the table below, the revisions do not change the total amount of goodwill recorded on our balance sheet and would not have resulted in an impairment in prior periods. The table below shows the previous allocation and the reallocated amounts attributed to each segment:

	April 1, 2012 (as reported)

	(Dollars in millions)
Regional markets	$	13,816	15,170
Wholesale markets		3,287	3,283
Enterprise markets—network		3,320	1,788
Enterprise markets—data hosting		1,309	1,491

Total goodwill	$	21,732	21,732

For additional information on the April 1, 2012 reorganization of our segments, see Note 9—Segment Information.

We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only in periods in which the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing impairment is September 30. As of September 30, 2012, we tested for goodwill impairment on our reporting units, which are our four operating segments (regional markets, wholesale markets, enterprise markets—network and enterprise markets—data hosting) that we recognized following our internal reorganization earlier this year.

We early adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, during the third quarter of 2011, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test, which requires us (i) in step one, to identify potential impairments by comparing the estimated fair value of a reporting unit against its carrying value and (ii) in step two, to quantify any impairment identified in step one. At September 30, 2012, as a result of the recent internal reorganization of our four segments we did not have a baseline valuation to perform a qualitative assessment. Therefore, we estimated the fair value of our four segments using an equal weighting based on a market approach and a discounted cash flow method. The market approach includes the use of comparable multiples of publicly traded companies whose services are comparable to ours to corroborate discounted cash flow results. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the segments beyond the cash flows from the discrete nine-year projection period. We discounted the estimated cash flows for our regional markets, wholesale markets, and enterprise markets—network segments using a rate that represents our weighted average cost of capital, which we determined to be approximately 6.0% as of the measurement date (which was comprised of a pre-tax cost of debt of 3.2% and a cost of equity of 8.4%). We discounted the estimated cash flows of our enterprise markets—data hosting segment using a rate that represents its estimated weighted average cost of capital, which we determined to be approximately 11.0% as of the measurement date (which was comprised of a pre-tax cost of debt of 3.2% and a cost of equity of 12.0%). We also reconciled the estimated fair values of the segments to our market capitalization as of September 30, 2012 and concluded that the indicated implied control premium of approximately 14% was reasonable based on recent transactions in the market place. As a result of our segment changes and new operating structure, we have not completed our goodwill impairment test; however, we do not anticipate an impairment of our goodwill in any of our reporting units. We will finalize our analysis prior to the year ending December 31, 2012.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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