Dow Chemical 2013 Annual Report Download - page 80

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Goodwill
The Company assesses goodwill recoverability through business financial performance reviews, enterprise valuation
analysis and impairment tests. Annual goodwill impairment tests are completed by the Company during the fourth
quarter of the year in accordance with the measurement provisions of the accounting guidance for goodwill. The tests
are performed at the reporting unit level which is defined as one level below operating segment with the exception of
Agricultural Sciences, which is both an operating segment and a reporting unit. Reporting units are the level at which
discrete financial information is available and reviewed by business management on a regular basis. At December 31,
2013, the Company has defined six operating segments and 26 reporting units; goodwill is carried by 19 of these
reporting units at December 31, 2013 and December 31, 2012.
In addition to the annual goodwill impairment tests, the Company reviews the financial performance of its reporting
units over the course of the year to assess whether circumstances have changed that would indicate it is more likely
than not that the fair value of a reporting unit has declined below its carrying value. In cases where an indication of
impairment is determined to exist, the Company completes an interim goodwill impairment test specifically for that
reporting unit.
As part of its annual goodwill impairment testing, the Company has the option to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The
qualitative assessment is also used as a basis for determining whether it is necessary to perform the quantitative test.
Qualitative factors assessed at the Company level include, but are not limited to, GDP growth rates, long-term
hydrocarbon and energy prices, equity and credit market activity, discount rates, foreign exchange rates and overall
financial performance. Qualitative factors assessed at the reporting unit level include, but are not limited to, changes in
industry and market structure, competitive environments, planned capacity and new product launches, cost factors
such as raw material prices, and financial performance of the reporting unit. If the Company chooses to not complete a
qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than not that
the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is required.
The first step of the quantitative test requires the fair value of the reporting unit to be compared to its carrying value.
The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units. This
valuation technique has been selected by management as the most meaningful valuation method due to the limited
number of market comparables for the Company's reporting units. However, where market comparables are available,
the Company includes EBIT/EBITDA multiples as part of the reporting unit valuation analysis. The discounted cash
flow valuations are completed using the following key assumptions (including certain ranges used for the 2013
testing): projected revenue growth rates, or compounded annual growth rates, over a ten-year cash flow forecast
period, which ranged from 0 percent to 8 percent and varied by reporting unit based on underlying business
fundamentals and future expectations; discount rates, which ranged from 8.7 percent to 10.9 percent; tax rates;
terminal values, differentiated based on the cash flow projection of each reporting unit and the projected net operating
profit after tax ("NOPAT") growth rate, which ranged from 2 percent to 5 percent; currency exchange rates for 79
currencies; and, forecasted long-term hydrocarbon and energy prices, by geographic area and by year, which included
the Company's key feedstocks as well as natural gas and crude oil (due to its correlation to naphtha). Currency
exchange rates and long-term hydrocarbons and energy prices are established for the Company as a whole and applied
consistently to all reporting units, while revenue growth rates, discount rates and tax rates are established by reporting
unit to account for differences in business fundamentals and industry risk.
The second step of the quantitative test is required if the first step of the quantitative test indicates a potential
impairment. The second step requires the Company to compare the implied fair value of a reporting unit's goodwill
with the carrying amount of goodwill. If the carrying amount of goodwill is greater than its implied fair value, an
impairment loss is recorded.
The Company also monitors and evaluates its market capitalization relative to book value. When the market
capitalization of the Company falls below book value, management undertakes a process to evaluate whether a change
in circumstances has occurred that would indicate it is more likely than not that the fair value of any of its reporting
units has declined below carrying value. This evaluation process includes the use of third-party market-based
valuations and internal discounted cash flow analysis. As part of the annual goodwill impairment test, the Company
also compares market capitalization with the most recent total estimated fair value of its reporting units to ensure that
significant differences are understood. At December 31, 2013 and 2012, Dow’s market capitalization exceeded book
value.