LEGG MASON, INC. | 2013 | FY | 3


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.

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