5. Goodwill and Intangible Assets

        Goodwill

        We have three reporting units as shown in the table below and two reportable segments (television and online) as shown in Note 15. For segment reporting purposes, the SourceEcreative reporting unit is included in the television segment. Changes in the carrying value of our goodwill by reporting unit for the years ended December 31, 2012 and 2011 are as follows (in thousands):

        We test goodwill for possible impairment each year on December 31^st and whenever events or changes in circumstances indicate the carrying value of our goodwill may not be recoverable. The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of the impairment loss. In the second step, the reporting unit's fair value is allocated to the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.

        We made two significant acquisitions in the third quarter of 2011 (MediaMind and EyeWonder) that created a significant amount of goodwill for our online reporting unit (see Note 3). In testing our goodwill for possible impairment at December 31, 2011, we determined that the fair values (using a variety of methods, including discounted cash flows) of our online reporting unit and our television reporting unit were 6% and 33%, respectively, in excess of their carrying values. Also, at December 31, 2011, our market capitalization was below our total stockholders' equity, and we noted if that circumstance continued for an extended period of time, it would likely result in us recording a goodwill impairment charge in the future. At each of March 31, 2012 and June 30, 2012, we continued to monitor our online reporting unit's goodwill and determined an interim goodwill impairment test was not required.

        During the third quarter of 2012, we determined that indicators of potential impairment existed for our online reporting unit requiring us to perform an interim goodwill impairment test. These indicators included (i) revenues and operating results sufficiently below our earlier forecasts which prompted us to revise our future forecasts, (ii) our market capitalization continuing to be valued well below the book value of our total stockholders' equity, and (iii) weaker market conditions and trends than expected.

        As a result, during the third quarter of 2012 we conducted an interim goodwill impairment test of our online reporting unit. We estimated the fair value of the online reporting unit using a weighting of fair values derived from an income approach and a market approach (both Level 3 fair value measurements). Under the income approach, we calculated the fair value of the online reporting unit based on the present value of its estimated future cash flows. Cash flow projections are based on a variety of estimates including revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used was based on our weighted average cost of capital adjusted for the risks associated with the online business and the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings of comparable publicly traded companies that have similar operating and investment characteristics as our online reporting unit.

        Upon estimating the fair value of our online reporting unit's goodwill, we determined it was less than its carrying value. As a result, we performed the second step of the impairment analysis and allocated the fair value of the online reporting unit to the estimated fair values of each of the assets and liabilities of the online reporting unit (including identifiable intangible assets) with the excess fair value being the implied goodwill. Estimating the fair value of certain assets and liabilities requires significant judgment about future cash flows. The implied fair value of the online reporting unit's goodwill was $208.2 million less than its carrying value, which we recorded as a goodwill impairment loss during the third quarter of 2012.

        At December 31, 2012, we performed our annual goodwill impairment test for all reporting units. At December 31, 2012, our estimated future cash flows for our online reporting unit decreased from those projected in the third quarter resulting in an additional goodwill impairment charge of $11.4 million. Testing of our television and SourceEcreative reporting units did not result in an impairment charge because the fair value exceeded the carrying value. At December 31, 2012, the fair values of our television and SourceEcreative reporting units exceeded their carrying values by 13% and 977%, respectively, while the fair value of our online reporting unit, after recording the impairment charge, approximated its carrying value. To the extent that actual operating results or future expected operating results fall sufficiently below our current forecasts, or other indicators of potential impairment exist, we may be required to record another goodwill impairment charge in the future. Future net cash flows are impacted by a variety of factors including revenues, our ability to achieve forecasted synergies from our acquisitions, operating margins, income tax rates, and discount rates.

        2002 Goodwill Impairment Loss

        In the first quarter of 2002, upon adoption of ASC Topic 350 Intangibles—Goodwill and other, originally issued as Financial Accounting Standards No. 142, we recorded a goodwill impairment charge of $131.3 million as the cumulative effect of a change in accounting principle. The impairment charge was recorded in what was known at the time as the services reporting unit, which was later reorganized and renamed as the television reporting unit. The television unit has not recorded any additional goodwill impairments since 2002.

        Intangible Assets

        Intangible assets were as follows at December 31, 2012 and 2011 (dollars in thousands):

 

        Intangible assets are initially stated at their estimated fair value at the date of acquisition. Subsequently, intangible assets are adjusted for amortization expense, foreign currency translation gains or losses and any impairment losses recognized. Intangible assets are amortized using the straight-line method. Net intangible assets decreased during the year ended December 31, 2012 as a result of amortization expense, partially offset by our acquisitions of Peer 39 and North Country (see Note 3). Amortization expense related to intangible assets totaled $29.7 million, $20.3 million and $12.1 million during the years ended December 31, 2012, 2011 and 2010, respectively. The estimated future amortization of our intangible assets as of December 31, 2012 is as follows (in thousands):