CDW 2014 Annual Report Download - page 61

Table of Contents
to reflect only what has been received by the customer. Changes in delivery patterns may result in a different number of business days used in
making this adjustment and could have a material impact on our revenue recognition for the period.
Inventory Valuation
Inventory is valued at the lower of cost or market value. Cost is determined using a weighted-average cost method. Price protection is
recorded when earned as a reduction to the cost of inventory. We decrease the value of inventory for estimated obsolescence equal to the
difference between the cost of inventory and the estimated market value, based upon an aging analysis of the inventory on hand, specifically
known inventory-related risks, and assumptions about future demand and market conditions. If future demand or actual market conditions are
less favorable than those projected by management, additional inventory write-downs may be required.
Vendor Programs
We receive incentives from certain of our vendors related to cooperative advertising allowances, volume rebates, bid programs, price
protection and other programs. These incentives generally relate to written agreements with specified performance requirements with the
vendors and are recorded as adjustments to cost of sales or inventory, depending on the nature of the incentive. Vendors may change the terms of
some or all of these programs, which could have an impact on our results of operations.
We record receivables from vendors related to these programs when the amounts are probable and reasonably estimable. Some
programs are based on the achievement of specific targets, and we base our estimates on information provided by our vendors and internal
information to assess our progress toward achieving those targets. If actual performance does not match our estimates, we may be required to
adjust our receivables. We record reserves for vendor receivables for estimated losses due to vendors’
inability to pay or rejections by vendors of
claims; however, if actual collections differ from our estimates, we may incur additional losses that could have a material impact on gross
margin and operating income.
Goodwill and Other Intangible Assets
Goodwill is not amortized but is subject to periodic testing for impairment at the reporting unit level. Our reporting units used to assess
potential goodwill impairment are the same as our operating segments. We are required to perform an evaluation of goodwill on an annual basis
or more frequently if circumstances indicate a potential impairment. The annual test for impairment is conducted as of December 1. We have the
option of performing a qualitative assessment of a reporting unit's fair value from the last quantitative assessment to determine if it is more likely
than not that the reporting unit's goodwill is impaired or performing a quantitative assessment by comparing a reporting unit's estimated fair
value to its carrying amount. Under the quantitative assessment, testing for impairment of goodwill is a two-
step process. The first step compares
the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value,
the second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill to determine the amount of
impairment loss. Fair value of a reporting unit is determined by using a weighted combination of an income approach and a market approach, as
this combination is considered the most indicative of the reporting units’ fair value in an orderly transaction between market participants. Under
the income approach, we determine fair value based on estimated future cash flows of a reporting unit, discounted by an estimated weighted-
average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect
to earn. Under the market approach, we utilize valuation multiples derived from publicly available information for peer group companies to
provide an indication of how much a knowledgeable investor in the marketplace would be willing to pay for a company. We have weighted the
income approach and the market approach at 75% and 25%, respectively.
Determining the fair value of a reporting unit (and the allocation of that fair value to individual assets and liabilities within the reporting
unit to determine the implied fair value of goodwill in the event a step two analysis is required) is judgmental in nature and requires the use of
significant estimates and assumptions. These estimates and assumptions include primarily, but are not limited to, discount rate, terminal growth
rate, selection of appropriate peer group companies and control premium applied, and forecasts of revenue growth rates, gross margins, operating
margins, and working capital requirements. The allocation requires analysis to determine the fair value of assets and liabilities including, among
others, customer relationships, trade names, and property and equipment. Any changes in the judgments, estimates, or assumptions used could
produce significantly different results. Although we believe our assumptions are reasonable, actual results may vary significantly and may
expose us to material impairment charges in the future.
Intangible assets include customer relationships, trade names, internally developed software and other intangibles. Intangible assets
with determinable lives are amortized on a straight-line basis over the estimated useful lives of the assets. The cost of software developed or
obtained for internal use is capitalized and amortized on a straight-line basis over the estimated useful life of the software. These intangible
assets are reviewed for impairment whenever events or changes in circumstances
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