Arrow Electronics 2010 Annual Report Download - page 41

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Employee Benefit Plans
The costs and obligations of the company's defined benefit pension plans are dependent on actuarial
assumptions. The two critical assumptions used, which impact the net periodic pension cost (income) and
the benefit obligation, are the discount rate and expected return on plan assets. The discount rate
represents the market rate for a high quality corporate bond, and the expected return on plan assets is
based on current and expected asset allocations, historical trends, and expected returns on plan assets.
These key assumptions are evaluated annually. Changes in these assumptions can result in different
expense and liability amounts.
Costs in Excess of Net Assets of Companies Acquired
Goodwill represents the excess of the cost of an acquisition over the fair value of the assets acquired.
The company tests goodwill for impairment annually as of the first day of the fourth quarter, and when an
event occurs or circumstances change such that it is more likely than not that an impairment may exist,
such as (i) a significant adverse change in legal factors or in business climate, (ii) an adverse action or
assessment by a regulator, (iii) unanticipated competition, (iv) a loss of key personnel, (v) a more-likely-
than-not sale or disposal of all or a significant portion of a reporting unit, (vi) the testing for recoverability
of a significant asset group within a reporting unit, or (vii) the recognition of a goodwill impairment loss of
a subsidiary that is a component of the reporting unit. In addition, goodwill is required to be tested for
impairment after a portion of the goodwill is allocated to a business targeted for disposal.
Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test
requires the identification of the reporting units and comparison of the fair value of each of these reporting
units to the respective carrying value. The company's reporting units are defined as each of the three
regional businesses within the global components business segment, which are the Americas, EMEA,
and Asia/Pacific and each of the two regional businesses within the global ECS business segment, which
are North America and EMEA. Prior to 2009, the North America and EMEA reporting units within the
global ECS business segment were evaluated as a single reporting unit. If the carrying value of the
reporting unit is less than its fair value, no impairment exists and the second step is not performed. If the
carrying value of the reporting unit is higher than its fair value, the second step must be performed to
compute the amount of the goodwill impairment, if any. In the second step, the impairment is computed
by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized for the excess.
The company generally estimates the fair value of a reporting unit using a three-year weighted average
multiple of earnings before interest and taxes from comparable companies, which utilizes a look-back
approach. The assumptions utilized in the evaluation of the impairment of goodwill under this approach
include the identification of reporting units and the selection of comparable companies, which are critical
accounting estimates subject to change. Beginning in 2008, as a result of significant declines in
macroeconomic conditions, the company determined that it was prudent to also supplement its historical
goodwill impairment testing methodology with a forward-looking discounted cash flow methodology. The
assumptions included in the discounted cash flow methodology included forecasted revenues, gross profit
margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term
discount rates, among others, all of which require significant judgments by management. The company
also reconciles its discounted cash flow analysis to its current market capitalization allowing for a
reasonable control premium. As of the first day of the fourth quarters of 2010, 2009, and 2008, the
company's annual impairment testing did not indicate impairment at any of the company's reporting units.
During the fourth quarter of 2008, as a result of significant declines in macroeconomic conditions, global
equity valuations depreciated. Both factors impacted the company's market capitalization, and the
company determined it was necessary to perform an interim goodwill impairment test as of December 31,
2008. Based upon the results of the discounted cash flow approach as of December 31, 2008, the
carrying value of the global ECS reporting unit and the EMEA and Asia/Pacific reporting units within the
global components business segment were higher than their fair value and, accordingly, the company