5. INTANGIBLE ASSETS AND GOODWILL
Goodwill and indefinite-life intangible assets are not amortized, and the values of identifiable intangible assets are amortized over their useful lives, unless the assets are determined to have indefinite useful lives. Goodwill and indefinite-life intangible assets are analyzed to determine if the fair value of the assets exceeds the book value. Intangible assets subject to amortization are considered for impairment at each reporting period. If the fair value is less than the book value, Legg Mason will record an impairment charge.
The following table reflects the components of intangible assets as of:
|
| | | | | | | | |
| | March 31, 2013 | | March 31, 2012 |
Amortizable asset management contracts | | |
| | |
|
Cost | | $ | 208,651 |
| | $ | 206,411 |
|
Accumulated amortization | | (186,324 | ) | | (172,974 | ) |
Net | | 22,327 |
| | 33,437 |
|
Indefinite–life intangible assets | | |
| | |
|
U.S. domestic mutual fund management contracts | | 2,106,351 |
| | 2,502,351 |
|
Permal/Fauchier funds-of-hedge fund management contracts | | 692,133 |
| | 947,000 |
|
Other fund management contracts | | 303,951 |
| | 304,278 |
|
Trade names | | 52,800 |
| | 69,800 |
|
| | 3,155,235 |
| | 3,823,429 |
|
Intangible assets, net | | $ | 3,177,562 |
| | $ | 3,856,866 |
|
As part of Legg Mason's annual impairment testing process, and considering aspects of the modifications to Permal compensation and other related arrangements discussed in Note 1, on December 12, 2012, and as updated through December 31, 2012, the Company concluded that the carrying value of two significant indefinite-life fund management contract intangible assets and a trade name asset exceeded their respective fair values, and the assets were impaired by an aggregate amount of $734,000. The impairment charges resulted from a number of trends and factors, including (i) a decrease in near-term margin projections; (ii) an increase in the rate used to discount projected future cash flows primarily due to company specific factors including continued market and regulatory influences, continued stock price uncertainty and the search for a permanent Chief Executive Officer, which was ongoing during the impairment testing process; (iii) recent outflows and related reductions in assets under management; and (iv) a reduction in near-term projected growth rates. These changes resulted in a reduction of the projected cash flows and Legg Mason's overall assessment of fair value of the assets, such that the domestic mutual fund management contracts asset, Permal funds-of-hedge fund management contracts asset, and Permal trade name declined below their carrying values, and accordingly were impaired by $396,000, $321,000, and $17,000, respectively.
Management estimated the fair values of these assets based upon discounted cash flow analyses using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these cash flow analyses included projected cash flows and discount rates, summarized as follows:
|
| | | | | | |
| | Projected Cash Flow Growth Rates | | |
| | Range | | Weighted- Average | | Discount Rates |
Domestic mutual funds contracts asset | | 3% to 9% | | 6% | | 14.5% |
Permal funds-of-hedge funds contracts and trade name assets | | (1)% to 17% | | 8% | | 16.0% |
Projected cash flow growth rates for these assets are most dependent on product investment performance, client AUM flows, and market conditions. Discount rates are influenced by changes in market conditions, as well as interest rates and other factors. Decreases in the projected cash flow growth rates and/or increases in the discount rates could result in lower fair value measurements and potential additional impairments that could be material.
There were no impairments to other indefinite-life intangible assets, amortizable management contracts intangible assets, or goodwill, as of December 31, 2012. Legg Mason also determined that no triggering events occurred as of March 31, 2013 that would require further impairment testing.
Changes in indefinite-life intangible assets, other than the impairments noted above and the Fauchier business acquisition further discussed in Note 2, relate to the impact of foreign currency translation.
As of March 31, 2013, amortizable asset management contracts are being amortized over a weighted-average remaining life of 2.8 years.
Estimated amortization expense for each of the next five fiscal years is as follows:
|
| | | | |
2014 | | $ | 12,320 |
|
2015 | | 3,405 |
|
2016 | | 3,148 |
|
2017 | | 2,484 |
|
2018 | | 485 |
|
Thereafter | | 485 |
|
Total | | $ | 22,327 |
|
The change in the carrying value of goodwill is summarized below:
|
| | | | | | | | | | | | |
| | Gross Book Value | | Accumulated Impairment | | Net Book Value |
Balance as of March 31, 2011 | | $ | 2,473,552 |
| | $ | (1,161,900 | ) | | $ | 1,311,652 |
|
Impact of excess tax basis amortization | | (21,694 | ) | | — |
| | (21,694 | ) |
Other, including changes in foreign exchange rates | | (14,913 | ) | | — |
| | (14,913 | ) |
Balance as of March 31, 2012 | | $ | 2,436,945 |
| | $ | (1,161,900 | ) | | $ | 1,275,045 |
|
Impact of excess tax basis amortization | | (21,573 | ) | | — |
| | (21,573 | ) |
Business acquisition (see Note 2) | | 28,983 |
| | — |
| | 28,983 |
|
Other, including changes in foreign exchange rates | | (13,290 | ) | | — |
| | (13,290 | ) |
Balance as of March 31, 2013 | | $ | 2,431,065 |
| | $ | (1,161,900 | ) | | $ | 1,269,165 |
|
Legg Mason also recognizes the tax benefit of the amortization of excess tax basis related to the Citigroup Asset Management ("CAM") acquisition. In accordance with accounting guidance for income taxes, the tax benefit is recorded as a reduction of goodwill and deferred tax liabilities as the benefit is realized.
