Intangible Assets

9 Months Ended

Jun. 30, 2022

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Goodwill and Intangible Assets, net

Goodwill

The changes in the carrying amount of goodwill by segment during the nine months ended June 30, 2022 were as follows:


(In millions)	Products & Solutions		Services		Total
Balance as of September 30, 2021
Cost	$	1,281	$	1,480	$	2,761
Accumulated impairment charges	(1,281)		—		(1,281)
	—		1,480		1,480
Impairment charges	—		(1,471)		(1,471)
Foreign currency fluctuations	—		(7)		(7)
Other	—		(2)		(2)
Balance as of June 30, 2022
Cost	1,281		1,471		2,752
Accumulated impairment charges	(1,281)		(1,471)		(2,752)
	$	—	$	—	$	—

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level. The Company's goodwill is assigned to its Services reporting unit and is subject to impairment testing annually, on July 1st, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

The Company concluded that a triggering event occurred during the three months ended June 30, 2022 primarily due to (i) a sustained decrease in the market value of the Company's debt and common stock and (ii) a significant decline in revenues during the third quarter, which represented substantially lower revenues than the Company's expectations. As a result, the Company performed an interim quantitative goodwill impairment test as of June 30, 2022 to compare the fair value of the

Services reporting unit to its carrying amount, including the goodwill. The Company's accounting policy is to estimate the fair value of the reporting unit using a weighting of fair values derived from an income and a market approach.

Under the income approach, the fair value of a reporting unit is estimated using a discounted cash flows model. Future cash flows are based on forward-looking information regarding revenue and costs of the reporting unit and are discounted using an appropriate discount rate. The discounted cash flows model relies on assumptions regarding revenue growth rates, projected earnings (excluding interest and taxes), working capital needs, technology expenses, business restructuring costs and associated savings, capital expenditures, income tax rate, discount rate and terminal growth rate. The discount rate the Company used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in the reporting unit's operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, the Company used a terminal value approach. Under this approach, the Company applied a perpetuity growth assumption to determine the terminal value. The Company incorporated the present value of the resulting terminal value into its estimate of fair value. Forecasted cash flows consider current economic conditions and trends, estimated future operating results, the Company’s view of growth rates and anticipated future economic conditions. Revenue growth rates inherent in this forecast are based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional industry trends and product evolutions. Macroeconomic factors such as changes in local and/or global economic conditions, changes in interest rates, product evolutions, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets.

The market approach estimates the fair value of the reporting unit by applying multiples of operating performance measures to the reporting unit's operating performance (the "Guideline Public Company Method"). These multiples are derived from comparable publicly-traded companies with similar investment characteristics to the Services reporting unit. The key estimates and assumptions that are used to determine the fair value under this market approach include current and forward 12-month operating performance results, as applicable, and a selection of the relevant multiples. Although the Company previously used a weighting of the market approach and income approach in estimating the fair value of its reporting units, the Company did not assign a weighting to the market approach for the interim goodwill impairment assessment as of June 30, 2022 given the limited availability of publicly traded comparable companies that accurately reflect the same economic outlook and risk profile as Avaya, and instead relied solely on the income approach to estimate the fair value of the Services reporting unit as of June 30, 2022.

The result of the Company's interim goodwill impairment test as of June 30, 2022 indicated that the carrying amount of the Company's Services reporting unit exceeded its estimated fair value primarily due to a reduction in the Company's outlook to reflect the observed earnings shortfall which was caused primarily by a slowdown in the pace and trajectory of customer migration to the Company's subscription hybrid offering and an increase in the discount rate to reflect increased risk from higher market uncertainty. As a result, the Company recorded a goodwill impairment charge of $1,471 million to write down the full carrying amount of the Services goodwill within the Impairment charges line item in the Condensed Consolidated Statements of Operations.

Intangible Assets, net

The Company's intangible assets consist of the following for the periods indicated:


(In millions)	Technology and Patents		Customer Relationships and Other Intangibles		Trademarks and Trade Names		Total
Balance as of June 30, 2022
Finite-lived intangible assets:
Cost	$	968	$	2,150	$	42	$	3,160
Accumulated amortization	(765)		(704)		(24)		(1,493)
Finite-lived intangible assets, net	203		1,446		18		1,667
Indefinite-lived intangible assets:
Cost	—		—		333		333
Accumulated impairment	—		—		(114)		(114)
Indefinite-lived intangible assets, net	—		—		219		219
Intangible assets, net	$	203	$	1,446	$	237	$	1,886
Balance as of September 30, 2021
Finite-lived intangible assets:
Cost	$	971	$	2,154	$	42	$	3,167
Accumulated amortization	(656)		(588)		(21)		(1,265)
Finite-lived intangible assets, net	315		1,566		21		1,902
Indefinite-lived intangible assets	—		—		333		333
Intangible assets, net	$	315	$	1,566	$	354	$	2,235

Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets. Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are subject to impairment testing annually, on July 1st, or more frequently if events occur or circumstances change that indicate an asset may be impaired.

As a result of the goodwill triggering event described above, the Company performed a recoverability test on all of its finite-lived asset groups as of June 30, 2022 before proceeding to the goodwill impairment assessment and concluded that no impairment charge was necessary. The recoverability test of finite-lived assets was based on forecasts of undiscounted cash flows for each asset group.

The Company also performed an interim quantitative impairment test for its indefinite-lived intangible asset, the Avaya Trade Name, as of June 30, 2022 to compare the fair value of the Avaya Trade Name to its carrying amount. The fair value of the Avaya Trade Name was estimated using the relief-from-royalty model, a form of the income approach. Under this methodology, the fair value of the trade name was estimated by applying a royalty rate to forecasted net revenues which was then discounted using a risk-adjusted rate of return on capital. The model relies on assumptions regarding revenue growth rates, royalty rate, discount rate and terminal growth rate. Revenue growth rates inherent in the forecast were based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional industry trends and product evolutions. The royalty rate was determined using a set of observed market royalty rates. The discount rate the Company used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk and the rate of return an outside investor would expect to earn. To estimate royalty cash flows beyond the final year of its model, the Company used a terminal value approach. Under this approach, the Company applied a perpetuity growth assumption to determine the terminal value. The Company incorporated the present value of the resulting terminal value into its estimate of fair value. The result of the interim impairment test of the Avaya Trade Name as of June 30, 2022 indicated that the carrying amount of the Avaya Trade Name exceeded its estimated fair value primarily due to a reduction in the Company's outlook to reflect the observed revenue decline which was caused primarily by a slowdown in the pace and trajectory of customer migration to the Company's subscription hybrid offering and lower than anticipated on-premise license sales and an increase in the discount rate to reflect increased risk from higher market uncertainty. As a result, the Company recorded an indefinite-lived intangible asset impairment charge of $114 million within the Impairment charges line item in the Condensed Consolidated Statements of Operations, representing the amount by which the carrying amount of the Avaya Trade Name exceeded its fair value. As of June 30, 2022, the remaining carrying amount of the Avaya Trade Name was $219 million.

Refer to Note 19, "Subsequent Events," for additional information regarding triggering events identified subsequent to June 30, 2022

Avaya Holdings Corp. 10-Q