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10-K
INTERPUBLIC GROUP OF COMPANIES, INC. filed this Form 10-K on 02/21/2017
Entire Document
 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)



that for each of our reporting units subject to the qualitative assessment, it is not “more likely than not” that its fair value was less than its carrying value; therefore, no additional testing was required.
The 2016 and 2015 fair values of reporting units for which we performed quantitative impairment tests were estimated using a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. We generally applied an equal weighting to the income and market approaches for our analysis. For the income approach, we used projections, which require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management. For the market approach, we used judgment in identifying the relevant comparable-company market multiples.
These estimates and assumptions may vary between each reporting unit depending on the facts and circumstances specific to that unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit. For the 2016 test, the discount rate we used for our reporting units tested were between 9.5% and 11.0%, and the terminal value growth rate for all four reporting units tested was 3.0%. The terminal value growth rate represents the expected long-term growth rate for the advertising and marketing services industry, incorporating the type of services the reporting unit provides, and the global economy. For the 2016 test, the revenue growth rates for our reporting units used in our analysis were generally between 3.0% and 5.0%. Factors influencing the revenue growth rates include the nature of the services the reporting unit provides for its clients, the geographic locations in which the reporting unit conducts business and the maturity of the reporting unit. We believe that the estimates and assumptions we made are reasonable, but they are susceptible to change from period to period. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our valuation, and it is possible that differences and changes could be material. A deterioration in profitability, adverse market conditions, significant client losses, changes in spending levels of our existing clients or a different economic outlook than currently estimated by management could have a significant impact on the estimated fair value of our reporting units and could result in an impairment charge in the future.
We also perform a sensitivity analysis to detail the impact that changes in assumptions may have on the outcome of the first step of the impairment test. Our sensitivity analysis provides a range of fair value for each reporting unit, where the low end of the range increases discount rates by 0.5%, and the high end of the range decreases discount rates by 0.5%. We use the average of our fair values for purposes of our comparison between carrying value and fair value for the first step of the quantitative impairment test.
The table below displays the midpoint of the fair value range for each reporting unit tested in the 2016 and 2015 annual impairment tests, indicating that the fair value exceeded the carrying value for all reporting units by greater than 20%. When factoring in a 0.5% increase in discount rate, our results of the 2016 and 2015 tests indicate that the fair value exceeded its carrying value by more than 20% for all reporting units, except for reporting unit B whose fair value exceeded its carrying value by more than 17.5% in 2016.
 
 
2016 Impairment Test
 
 
 
2015 Impairment Test
Reporting Unit
 
Goodwill
 
Fair value exceeds carrying value by:
 
Reporting Unit
 
Goodwill
 
Fair value exceeds carrying value by:
A
 
$
1,091.6

 
> 85%
 
A
 
$
25.8

 
> 135%
B
 
$
182.1

 
> 20%
 
B
 
$
4.9

 
> 275%
C
 
$
41.0

 
> 65%
 
 
 
 
 
 
D
 
$
4.9

 
> 115%
 
 
 
 
 
 
Based on the analysis described above, for the reporting units for which we performed the first step of the quantitative impairment test, we concluded that our goodwill was not impaired as of October 1, 2016, because these reporting units passed the first step of the test as the fair values of each of the reporting units were substantially in excess of their respective net book values.
We review intangible assets with definite lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Recoverability of these assets is determined by comparing the carrying value of these assets to the estimated undiscounted future cash flows expected to be generated by these assets. These assets are impaired when their carrying value exceeds their fair value. Impaired intangible assets with definite lives subject to amortization are written down to their fair value with a charge to expense in the period the impairment is identified. Intangible assets with definite lives are amortized on a straight-line basis with estimated useful lives generally between 7 and 15 years. Events or circumstances that might require impairment testing include the loss of a significant client, the identification of other impaired assets within a reporting

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