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Goodwill and Intangibles, including DAC and VOBA | 3 Months Ended
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Dec. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract] |
Goodwill and Intangibles, including DAC and VOBA | Goodwill and Intangibles, including deferred acquisition costs and value of business acquired, net A summary of the changes in the carrying amounts of goodwill and intangible assets, including FGL’s DAC and VOBA balances, are as follows:
|  |  | Intangible Assets
| Goodwill |  | Indefinite Lived |  | Definite Lived |  | VOBA |  | DAC |  | Total
Balance at September 30, 2014 | $ | 1,524.8 |  |  | $ | 1,215.9 |  |  | $ | 917.2 |  |  | $ | 86.8 |  |  | $ | 463.8 |  |  | $ | 2,683.7 |
Acquisitions | 7.1 |  |  | 4.0 |  |  | 9.4 |  |  | — |  |  | — |  |  | 13.4 |
Impairments | (28.3 | ) |  | (31.9 | ) |  | — |  |  | — |  |  | — |  |  | (31.9 | )
Deferrals | — |  |  | — |  |  | — |  |  | — |  |  | 95.5 |  |  | 95.5 |
Less: Components of amortization |  |  |  |  |  |  |  |  |  |  |
Periodic amortization | — |  |  | — |  |  | (20.5 | ) |  | (7.6 | ) |  | (10.5 | ) |  | (38.6 | )
Interest | — |  |  | — |  |  | — |  |  | 3.0 |  |  | 5.3 |  |  | 8.3 |
Unlocking | — |  |  | — |  |  | — |  |  | 0.6 |  |  | (2.1 | ) |  | (1.5 | )
Adjustment for unrealized investment (gains), net | — |  |  | — |  |  | — |  |  | 6.9 |  |  | (6.0 | ) |  | 0.9 |
Effect of translation | (11.7 | ) |  | (9.4 | ) |  | (8.1 | ) |  | — |  |  | — |  |  | (17.5 | )
Balance at December 31, 2014 | $ | 1,491.9 |  |  | $ | 1,178.6 |  |  | $ | 898.0 |  |  | $ | 89.7 |  |  | $ | 546.0 |  |  | $ | 2,712.3 |
Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination. Definite lived intangible assets include customer relationships, proprietary technology intangibles and certain trade names that are amortized using the straight-line method over their estimated useful lives of ranging from one to twenty years. Goodwill and indefinite lived trade name intangibles are not amortized and are tested for impairment at least annually at the Company’s August financial period end, or more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests. During the three months ended December 31, 2014, the Company concluded that an interim impairment test of goodwill and indefinite-lived intangible assets for its Fredrick’s of Hollywood (“FOH”) reporting unit was necessary. This conclusion was based on certain indicators of impairment, primarily related to the resignation of the Company’s CEO in December of 2014 and subsequent change in strategic direction of FOH. The revised plan changes the focus from expansion to rationalization of the existing business and is expected to result in lower revenues and profitability with a reduced level of investment from levels originally contemplated under prior management at the time of the acquisition in May of 2014. There were no other indicators of impairment for the Company's other reporting units. Intangibles Impairment Test Prior to conducting the goodwill impairment test for the FOH reporting unit, the Company first evaluated the recoverability of FOH's intangible assets. The Company valued indefinite lived trade names and trademarks using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the FOH business, related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. Management estimated the fair value of the trade name and trademarks at $9.9 under this approach, which resulted in an impairment of $31.9. Goodwill Impairment Test As noted above, during the three months ended December 31, 2014, the Company determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the FOH reporting unit. The Company estimated the fair value of the FOH reporting unit using a combination of the income and market multiple approaches. Under the income approach, the Company calculates the fair value of the FOH reporting unit based on the present value of estimated future cash flows. The Company's estimate of discounted cash flows for each reporting unit required significant judgment. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions, projected costs of closures, including the costs of exiting leases. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the FOH's ability to execute on the projected cash flows. The market data utilized included publicly-traded prices and transaction values of comparable companies with operations considered to be similar to those of the Company’s reporting units. Collectively, these evaluations were management’s best estimate of projected fair values. Management's estimate of implied fair value of goodwill of $16.2 was below the carrying value for the FOH reporting unit and, consequently, resulted in a goodwill impairment charge of $28.3. While the Company believes the assumptions used in the interim impairment analysis are reasonable, its analysis is sensitive to adverse changes in the assumptions used in the valuations. In particular, changes in the projected cash flows, the discount rate, the terminal year growth rate and market multiple assumptions could produce significantly different results for the impairment analyses. Changes in these assumptions against actual results could result in future impairment tests and charges. The Company will continue to monitor any changes in circumstances for indicators of impairment and closely monitor its actual results against these assumptions. Both the goodwill impairment charge and the intangible assets impairment charge, totaling $60.2, were reflected in “Impairments” on the accompanying unaudited Condensed Consolidated Statements of Operations. Definite Lived Intangible Assets Definite lived intangible assets are summarized as follows:
| December 31, 2014 |  | September 30, 2014 |  |
| Cost |  | Accumulated Amortization |  | Net |  | Cost |  | Accumulated Amortization |  | Net |  | Amortizable Life
Customer relationships | $ | 876.3 |  |  | $ | (213.9 | ) |  | $ | 662.4 |  |  | $ | 877.1 |  |  | $ | (204.6 | ) |  | $ | 672.5 |  |  | 15 to 20 years
Trade names | 170.7 |  |  | (65.0 | ) |  | 105.7 |  |  | 171.1 |  |  | (61.0 | ) |  | 110.1 |  |  | 1 to 12 years
Technology assets | 192.2 |  |  | (62.3 | ) |  | 129.9 |  |  | 192.2 |  |  | (57.6 | ) |  | 134.6 |  |  | 4 to 17 years
| $ | 1,239.2 |  |  | $ | (341.2 | ) |  | $ | 898.0 |  |  | $ | 1,240.4 |  |  | $ | (323.2 | ) |  | $ | 917.2 |  |  |
Amortization expense for definite lived intangible assets is as follows:
| Three months ended December 31,
| 2014 |  | 2013
Customer relationships | $ | 11.7 |  |  | $ | 11.7 |
Trade names | 4.1 |  |  | 4.1 |
Technology assets | 4.7 |  |  | 4.4 |
| $ | 20.5 |  |  | $ | 20.2 |
The Company estimates annual amortization expense of amortizable intangible assets for the next five fiscal years will approximate $77.5 per year. Amortization of DAC and VOBA Amortization of DAC and VOBA is based on the amount of gross margins or profits recognized, including investment gains and losses. The interest accrual rate utilized to calculate the accretion of interest on VOBA ranged from 4.0% to 5.0%. The adjustment for unrealized net investment gains represents the amount of VOBA and DAC that would have been amortized if such unrealized gains and losses had been recognized. This is referred to as the “shadow adjustments” as the additional amortization is reflected in AOCI rather than the statement of operations. As of December 31, 2014 and September 30, 2014, the VOBA balance included cumulative adjustments for net unrealized investment (gains) of $(157.2) and $(164.2), respectively, and the DAC balances included cumulative adjustments for net unrealized investment (gains) of $(61.5) and $(55.5), respectively. Amortization of VOBA and DAC for the three months ended December 31, 2014 and December 31, 2013 was $4.0 and $13.2, and $7.3 and $10.0, respectively. Accumulated amortization of VOBA for three months ended December 31, 2014 and December 31, 2013 was $342.4 and $283.7, respectively. The above DAC balances include $35.8 and $32.7 of deferred sales inducements (“DSI”), net of shadow adjustments, as of December 31, 2014 and September 30, 2014, respectively. The weighted average amortization period for VOBA is approximately 4.9 years. Estimated amortization expense for VOBA in future fiscal periods is as follows:
|  | Estimated Amortization Expense
Fiscal Year |  | VOBA
2015 |  | $ | 32.9 |
2016 |  | 40.4 |
2017 |  | 32.9 |
2018 |  | 26.4 |
2019 |  | 21.3 |
Thereafter |  | 93.0 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=26713463&loc=d3e16323-109275 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35741047&loc=d3e13816-109267 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=26713463&loc=d3e16265-109275 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=26713463&loc=d3e16373-109275 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35741047&loc=d3e13854-109267 + Details
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