Verizon Communications Inc. (VZ) | Analysis of Goodwill and Intangible Assets

Goodwill

Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed annually in the fourth fiscal quarter. Verizon has the option to perform a qualitative assessment to determine if the fair value of the entity is less than its carrying value. However, Verizon may elect to perform an impairment test even if no indications of a potential impairment exist. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Verizon has determined that, the reporting units are operating segments since that is the lowest level at which discrete, reliable financial and cash flow information is available. Step one compares the fair value of the reporting unit (calculated using a market approach and/or a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit's goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit's assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment is recognized.

Intangible Assets Not Subject to Amortization

A significant portion of Verizon's intangible assets are wireless licenses that provide wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). Renewals of licenses have occurred routinely and at nominal cost. Moreover, Verizon has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of wireless licenses. As a result, Verizon treats the wireless licenses as an indefinite-lived intangible asset. Verizon reevaluates the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life.

Verizon tests wireless licenses for potential impairment annually. Verizon evaluates licenses on an aggregate basis using a direct value approach. The direct value approach estimates fair value using a discounted cash flow analysis to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the licenses, an impairment is recognized.

Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is discontinued or substantially complete and the license is ready for its intended use.

Intangible Assets Subject to Amortization and Long-Lived Assets

Verizon's intangible assets that do not have indefinite lives (primarily customer lists and non-network internal-use software) are amortized over their useful lives. All of Verizon's intangible assets subject to amortization and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications were present, Verizon would test for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, Verizon would perform the next step, which is to determine the fair value of the asset and record an impairment, if any. Verizon reevaluates the useful life determinations for these intangible assets each year to determine whether events and circumstances warrant a revision in their remaining useful lives.

Source: Verizon Communications Inc., Annual Report

Verizon Communications Inc., Statement of Financial Position, Goodwill and Intangible Assets

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	Customer lists
	Non-network internal-use software
	Other
	Other intangible assets, gross amount
	Accumulated amortization
	Other intangible assets, net amount
	Wireless licenses
	Goodwill
	Wireless licenses, goodwill and other intangible assets

Source: Based on data from Verizon Communications Inc. Annual Reports

Verizon Communications Inc., adjustments to financial data

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	Adjustment to Total Assets
	Total assets (as reported)
	Less: Goodwill
	Total assets (adjusted)
	Adjustment to Equity Attributable To Verizon
	Equity attributable to Verizon (as reported)
	Less: Goodwill
	Equity attributable to Verizon (adjusted)

Verizon Communications Inc., adjusted ratios

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	Total Asset Turnover
	Reported total asset turnover
	Adjusted total asset turnover
	Financial Leverage
	Reported financial leverage
	Adjusted financial leverage
	Return on Equity (ROE)
	Reported ROE	%	%	%	%	%
	Adjusted ROE	%	%	%	%	%
	Return on Assets (ROA)
	Reported ROA	%	%	%	%	%
	Adjusted ROA	%	%	%	%	%

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	As Reported
	Operating revenues (USD $ in millions)
	Total assets (USD $ in millions)
	Total asset turnover1
	Adjusted for Goodwill
	Operating revenues (USD $ in millions)
	Adjusted total assets (USD $ in millions)
	Adjusted total asset turnover2

2012 Calculations

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	As Reported
	Total assets (USD $ in millions)
	Equity attributable to Verizon (USD $ in millions)
	Financial leverage1
	Adjusted for Goodwill
	Adjusted total assets (USD $ in millions)
	Adjusted equity attributable to Verizon (USD $ in millions)
	Adjusted financial leverage2

2012 Calculations

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	As Reported
	Net income attributable to Verizon (USD $ in millions)
	Equity attributable to Verizon (USD $ in millions)
	ROE1	%	%	%	%	%
	Adjusted for Goodwill
	Net income attributable to Verizon (USD $ in millions)
	Adjusted equity attributable to Verizon (USD $ in millions)
	Adjusted ROE2	%	%	%	%	%

2012 Calculations

		Dec 31, 2012	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008
	As Reported
	Net income attributable to Verizon (USD $ in millions)
	Total assets (USD $ in millions)
	ROA1	%	%	%	%	%
	Adjusted for Goodwill
	Net income attributable to Verizon (USD $ in millions)
	Adjusted total assets (USD $ in millions)
	Adjusted ROA2	%	%	%	%	%

2012 Calculations