NOTE 2. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

We account for goodwill and other indefinite-lived intangible assets in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350 “Intangibles—Goodwill and Other.” We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. Approximately 70% of our total assets as of December 31, 2011, consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill and mastheads, the value of which depends significantly upon the operating results of our businesses. In the case of our radio stations, we would not be able to operate the properties without the related FCC license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal cost that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our broadcast licenses are renewed at the end of their respective periods, and we expect that all broadcast licenses will continue to be renewed in the future. Accordingly, we consider our broadcast licenses to be indefinite-lived intangible assets in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350, “Intangibles – Goodwill and Other.” Broadcast licenses account for approximately 94% of our indefinite-lived intangible assets. Goodwill and magazine mastheads account for the remaining 6%. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired.

We complete our annual impairment tests in the fourth quarter of each year. Based on deteriorating macro-economic factors, including declining radio industry revenues throughout 2009 and a weakening in prevailing radio station transaction multiples, we tested our goodwill and other indefinite-lived intangible assets for impairment in the second, third and fourth quarters of 2009. During 2010 and 2011, we did not have indications of impairment at interim dates. We performed our annual tests in the fourth quarter of 2010 and 2011 that did not result in impairment charges.

We believe that our estimate of the value of our broadcast licenses, mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our estimates incorporate variables and assumptions that are based on past experiences and judgment about future operating performance of our markets and business segments. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 8 to our Consolidated Financial Statements.

Broadcast licenses

The unit of accounting used to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographic market, sharing the same building and equipment and managed by a single general manager. The cluster level is the lowest level for which discrete financial information and cash flows are available and the level reviewed by management to analyze operating results. We apply the start-up income approach, which measures the expected future economic benefits that the broadcast licenses provide and discounts these future benefits using a discounted cash flow analysis. The discounted cash flow analysis assumes that the broadcast licenses hypothetical start-up stations and the values yielded by the discounted cash flow analysis represent the portion of the stations value attributable solely to the broadcast license. The discounted cash flow model incorporates variables such as projected revenues, operating profit margins, forecasted growth rates, estimated start-up costs, losses expected to be incurred in the early years, competition within the market, the effective tax rate, future terminal values and the risk-adjusted discount rate. Impairment losses are recognized if the carrying amount exceeds the estimated fair value as determined by the start-up income approach.

The key estimates and assumptions used in the start-up income valuation of our broadcast segment for each testing period are as follows:

The tables below present the percentage within a range by which the estimated fair value exceeded the carrying value of our broadcasting licenses for each of our clusters.

Based on our review and analysis we determined that no impairment charges were necessary as of the annual testing periods ending December 31, 2010 and 2011. For the annual testing period ending December 31, 2009, we recognized a pre-tax impairment charge of $0.2 million associated with the value of broadcast licenses in the Detroit market.

Based on then deteriorating macro-economic factors, including declining radio industry revenues throughout 2009 and a weakening in prevailing radio station transaction multiples, we tested our broadcast licenses for impairment in the second and third quarters of 2009. We recognized (1) pre-tax impairment charges during our September 30, 2009, interim review and valuation of $14.1 million associated with the value of broadcast licenses in the Cleveland, Atlanta, Detroit and Portland markets; and (2) pre-tax impairment charges recognized during our June 30, 2009 interim review and valuation of $12.1 million associated with the value of broadcast licenses in the Dallas and Portland markets. The impairments recognized during 2009 were driven in part by declining revenues at the industry and market levels, declining radio stations transaction multiples and a higher cost of capital. The impairments were indicative of a trend in the broadcast industry and were not unique to the company.

Mastheads

Mastheads consist of the graphic elements that identify our publications to readers and advertisers. These include customized typeset page headers, section headers, and column graphics as well as other name and identity stylized elements within the body of each publication. We test the value of mastheads as a single combined publishing entity as our print magazines operate from one shared facility under one general manager with operating results and cash flows reported on a combined basis for all publications. We engaged Bond & Pecaro, an independent third-party appraisal firm, to perform an income-based approach to determine the fair value of our mastheads. The income approach is based upon an estimated royalty stream that measures a cost savings to the business because it does not have to pay a royalty to use the owned trade name and content. The analysis assumes that the assets are employed by a typical market participant in their highest and best use. Under the income approach, we utilize a discounted cash flow method to calculate the fair value of our mastheads, the key estimates and assumptions to which are as follows:

Based on our review and analysis we determined that no impairment charges were necessary as of the annual testing periods ending December 31, 2009, 2010 and 2011. The estimated fair value exceeded the carrying value of our mastheads by 3.3% as of December 31, 2011.

Based on then deteriorating macro-economic factors, including declining magazine industry revenues throughout 2009, we tested our mastheads for impairment in the second quarter of 2009. For the interim testing period ended June 30, 2009, we recognized an impairment charge of $0.9 million associated with the value of mastheads in our publishing segment. The impairments recognized during 2009 were driven by negative revenue growth projections and a reduction in cash flows for magazine operations. The impairments were indicative of a trend in the publishing industry and were not unique to the company.

Goodwill - Broadcast

The unit of accounting used to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographic market, sharing the same building and equipment and managed by a single general manager. We apply a market approach and an income approach to estimate the fair value of each of our clusters when testing goodwill associated with our broadcast segment for impairment. Eight of our 30 market clusters and our networks have goodwill associated with them as of our annual testing period ending December 31, 2011. Seven of our thirty market clusters and our network had goodwill associated with them for our annual testing periods ending December 31, 2010 and 2009. The first step of our review compares the estimated fair value of each cluster to its carrying value including goodwill. Under the market approach, we apply a multiple of six to each clusters’ station operating income (“SOI”) to calculate the estimated fair value. As radio stations are typically sold on the basis of a multiple of SOI, typically in excess of eight, we believe that a benchmark of six is a conservative measure even in today’s market. Under the income approach, we utilize a discounted cash flow method to calculate the fair value of the accounting unit. The discounted cash flow analysis assumes that the broadcast licenses are hypothetical start-up stations and the values yielded by the discounted cash flow analysis represent the portion of the stations value attributable to the broadcast license.

The key estimates and assumptions used in the start-up income valuation of our broadcast units for each testing period are as follows:

If the carrying amount, including goodwill, exceeds the estimated fair value of the cluster, an indication exists that the amount of goodwill attributed to that cluster may be impaired. When we have indication of impairment, we perform a second step to determine the amount of any impairment. We engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to determine the enterprise value of five of our clusters and our networks in a manner similar to a purchase price allocation. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. The key estimates and assumptions used for our enterprise valuations are as follows:

Based on our review and analysis we determined that no impairment charges were necessary as of the annual testing periods ending December 31, 2011, 2010 and 2009. The estimated fair value of our networks exceeded the carrying value by 101.6%, 98.6% and 93.1% for each of the annual testing periods ending December 31, 2011, 2010 and 2009, respectively. The table below presents the percentage within a range by which the enterprise value exceeded the carrying value of each of our clusters, including goodwill.

Based on than deteriorating macro-economic factors, including declining radio industry revenues throughout 2009 and a weakening in prevailing radio station transaction multiples, we tested the goodwill balance in our broadcast segment for impairment in the second quarter of 2009. We recognized pre-tax impairment charges during our June 30, 2009 interim review and valuation of $0.4 million associated with the value of goodwill in the Dallas markets. The impairments recognized during 2009 were driven in part by declining revenues at the industry and market levels, declining radio stations transaction multiples and a higher cost of capital. The impairments were indicative of a trend in the broadcast industry and were not unique to the company.

Goodwill – Internet & Publishing

The units of accounting we use to test goodwill in our Internet business include Townhall.com and Salem Web Network. The operating results for Salem Web Network reflect the operating results and cash flows for all of our Internet sites exclusive of Towhnhall.com. We also separate our publishing business into two accounting units. The first publishing accounting unit is the magazine unit, which operates and produces all publications from a stand-alone facility, under one general manager, with operating results and cash flows of all publications reported on a combined basis. The second accounting unit is our book publishing division, Xulon Press, which also operates from a stand-alone facility, under one general manager who is responsible for the separately stated operating results and cash flows. Four of these accounting units have goodwill associated with them as our annual testing period.

We apply a market approach to estimate the fair value of each or our accounting units. Under the market approach, we apply a multiple of six to each accounting units’ operating income to estimate the fair value. We believe that a multiple of six is a conservative benchmark based on actual industry transactions. The first step of our review compares the estimated fair value of each accounting unit to its carrying value including goodwill. If the carrying amount, including goodwill, exceeds the estimated fair value of the unit, an indication exists that the amount of goodwill attributed to that unit may be impaired. When we have indication of impairment, we perform a second step to determine the amount of any impairment. We engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to determine the enterprise value of one of our accounting units in a manner similar to a purchase price allocation. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. The key estimates and assumptions used for our enterprise valuations are as follows:

The key assumptions in our third-party enterprise valuation varied from the testing period ending December 31, 2011 to the testing period ending December 31, 2010 due to the accounting units for which the enterprise valuations were performed. Due to the nature of the business, publishing varies greatly from our print magazines to our online print-on demand digital book publisher and our Internet businesses.

Based on our review and analysis we determined that no impairment charges were necessary as of the annual testing periods ending December 31, 2011, 2010 and 2009. The table below presents the percentage within a range by which the enterprise value exceeded the carrying value of our accounting units, including goodwill.

Based on than deteriorating macro-economic factors, including declining magazine industry revenue and a reduction in Internet company valuations throughout 2009, we tested the goodwill value in our Internet and publishing accounting units for impairment in the second quarter of 2009. For the interim testing period ended June 30, 2009, we recognized an impairment charge of $0.2 million associated with the value of goodwill in our publishing segment. The impairments recognized during 2009 were driven by negative revenue growth projections and a reduction in cash flows for magazine operations. The impairments were indicative of a trend in the publishing industry and were not unique to the company. Based on our review and analysis we determined that no impairment charges were necessary for goodwill associated with our Internet accounting units for the interim testing period ending June 30, 2009.

We believe we have made reasonable estimates and assumptions to calculate the fair value of our indefinite-lived intangible assets, however, these estimates and assumptions could be materially different from actual results. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the fair value of our indefinite-lived intangible assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.