Dow Chemical 2013 Annual Report Download - page 81

59
2013 Goodwill Impairment Test
During 2013, there were no events or changes in circumstances identified that warranted interim goodwill impairment
testing. During the fourth quarter of 2013, qualitative testing was performed for all but 5 of the Company's reporting
units that carry goodwill. The results of the qualitative testing did not indicate any reporting units where it was more
likely than not that the carrying value of the reporting unit was greater than its fair value. As a result, no additional
quantitative testing was required for those reporting units.
The Company chose to proceed directly to the first step of the quantitative testing for 5 reporting units due to change
in business structures as well as to re-evaluate the reasonableness of the differences between fair value and carrying
value under current market conditions. Quantitative testing was conducted for the following reporting units, using key
assumptions for the discounted cash flow analysis: Dow Coating Materials, Dow Plastics Additives, Epoxy,
Performance Monomers and Polyurethanes.
Changes in key assumptions can affect the results of goodwill impairment tests. The changes made to key assumptions
in 2013 did not result in a significant change in the impairment analysis conclusion. The key assumptions with the
most significant impact on reporting unit fair value calculations include the discount rate and terminal value NOPAT
growth rate. For the 2013 impairment testing, management completed sensitivity analyses on both of these key
assumptions for reporting units where a quantitative fair value analysis was completed. An increase of 100 basis points
in the discount rate would have resulted in a fair value, based on discounted cash flows, which exceeded the carrying
value for all reporting units tested. For the terminal value NOPAT growth rate, a decrease of 100 basis points would
have resulted in a fair value, based on discounted cash flows, which exceeded the carrying value for all reporting units
tested. Additional sensitivity analysis was completed on the combined impact of a 100 basis point increase in the
discount rate and a 100 basis point decrease in the terminal value NOPAT growth rate. This analysis resulted in fair
values based on discounted cash flows that exceeded carrying values for all reporting units tested except for Dow
Coating Materials and Performance Monomers. For this exception, a 100 basis point increase in the discount rate,
coupled with a 100 basis point decrease in the terminal value NOPAT growth rate resulted in a fair value that was
approximately $250 million below the carrying value for Dow Coating Materials and $20 million below the carrying
value for Performance Monomers.
In completing the fair value analysis for the 2013 impairment test, management evaluated the reasonableness of
differences noted between the fair value and carrying value of each reporting unit. All differences were determined to
be reasonable. For Performance Monomers, fair value did not exceed carrying value by a significant margin. The fair
value for Performance Monomers, which carries approximately $150 million of goodwill, exceeded the carrying value
by a margin of 11 percent.
Based on the fair value analysis completed by the Company in the fourth quarter of 2013, using the key assumptions
defined for the Company as well as the key assumptions defined specifically for each reporting unit, management
concluded that fair value exceeded carrying value for all reporting units.
2012 Goodwill Impairment Test
During 2012, there were no events or changes in circumstances identified that warranted interim goodwill impairment
testing. During the fourth quarter of 2012, qualitative testing was performed for all but 9 of the Company's reporting
units that carry goodwill. The results of the qualitative testing did not indicate any reporting units where it was more
likely than not that the carrying value of the reporting unit was greater than its fair value. As a result, no additional
quantitative testing was required for those reporting units.
The Company chose to proceed directly to the first step of the quantitative testing for 9 reporting units due to change
in business structures as well as to re-evaluate the reasonableness of the differences between fair value and carrying
value under current market conditions. Quantitative testing was conducted for the following reporting units, using key
assumptions for the discounted cash flow analysis: Dow Building and Construction, Dow Coating Materials, Dow
Electronic Materials, Functional Materials, Dow Automotive Systems, Dow Formulated Systems, Polyurethanes,
Propylene Oxide/Propylene Glycol and Dow Packaging and Specialty Plastics.
In completing the fair value analysis for the 2012 impairment test, management evaluated the reasonableness of
differences noted between the fair value and carrying value of each reporting unit. All differences were determined to
be reasonable. For Dow Coating Materials, fair value did not exceed carrying value by a significant margin. The fair
value for Dow Coating Materials, which carries approximately $2,325 million of goodwill, exceeded the carrying
value by a margin of 7 percent.