Sonic Automotive, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Intangible Assets and Goodwill

Intangible Assets and Goodwill

12 Months Ended

Dec. 31, 2014

Goodwill And Intangible Assets Disclosure [Abstract]

5. Intangible Assets and Goodwill

The changes in the carrying amount of franchise assets and goodwill for the years ended December 31, 2014 and 2013 were as follows:

	Franchise Assets			Net Goodwill
	(In thousands)

Balance, December 31, 2012	$	60,635		$	454,224		(1)
Additions through current year acquisitions		19,500			22,091
Reductions from impairment		(600	)		-

Balance, December 31, 2013		79,535			476,315		(1)
Additions through current year acquisitions		7,500			10,176
Prior year acquisition allocations		-			(3	)
Reductions from dispositions		(7,735	)		(10,559	)
Reductions from impairment		(2,200	)		-
Balance, December 31, 2014	$	77,100		$	475,929		(1)

(1) Balances are net of accumulated impairment losses of $796,725.

Goodwill

Pursuant to applicable accounting pronouncements, Sonic tests goodwill for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If Sonic determines that the amount of its goodwill is impaired at any point in time, Sonic is required to reduce goodwill on its balance sheet. In completing step one of the impairment analyses, Sonic uses a discounted cash flow model in order to estimate its reporting unit’s fair value. The result from this model is then analyzed to determine if an indicator of impairment exists.

Based on the results of Sonic’s step-one test as of October 1, 2014, Sonic was not required to complete step two of the impairment evaluation. See the discussion under the heading “Goodwill” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” for further information about management’s assessment. As a result of Sonic’s impairment testing for the years ended December 31, 2014, 2013, and 2012, no goodwill impairment was required.

Intangible Assets

Franchise asset impairment charges of $2.2 and $0.6 million were recorded in continuing operations for the years ended December 31, 2014 and 2013, respectively, to reduce the carrying value of the franchise asset to its estimated fair value based on the impairment evaluations performed as of October 1, 2014 and 2013, respectively. As a result of Sonic’s impairment testing for the year ended December 31, 2012, no franchise asset impairment was required.

Definite life intangible assets consist of the following:

	December 31, 2014			December 31, 2013
	(In thousands)

Favorable lease agreements	$	17,318		$	19,918
Less accumulated amortization		(10,698	)		(11,587	)
Definite life intangibles, net	$	6,620		$	8,331

Franchise assets and definite life intangible assets are classified as other intangible assets, net, on the accompanying Consolidated Balance Sheets.

Amortization expense for definite life intangible assets was approximately $1.2 million, $1.6 million and $1.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The initial weighted-average amortization period for lease agreements and definite life intangible assets outstanding at December 31, 2014 is 17 years.

Future amortization expense is as follows:


Year Ending December 31,	(In thousands)

2015	$	644
2016		644
2017		644
2018		644
2019		644
Thereafter		3,400
Total	$	6,620

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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