GameStop 2012 Annual Report Download - page 99

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GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill represents the excess purchase price over tangible net assets and identifiable intangible assets
acquired. The Company is required to evaluate goodwill and other intangible assets not subject to amortization
for impairment at least annually. This annual test is completed at the beginning of the fourth quarter of each
fiscal year or when circumstances indicate the carrying value of the goodwill or other intangible assets might be
impaired. Goodwill has been assigned to reporting units for the purpose of impairment testing. The Company has
four operating segments, the United States, Australia, Canada and Europe, which also define our reporting units
based upon the similar economic characteristics of operations within each segment, including the nature of
products, product distribution and the type of customer and separate management within those regions. The
Company estimates fair value of each reporting unit based on the discounted cash flows of each reporting unit.
The Company uses a two-step process to measure goodwill impairment. If the fair value of the reporting unit is
higher than its carrying value, then goodwill is not impaired. If the carrying value of the reporting unit is higher
than the fair value, then the second step of the goodwill impairment test is needed. The second step compares the
implied fair value of the reporting unit’s goodwill with its carrying amount. If the carrying amount of the
reporting unit’s goodwill exceeds the implied fair value, then an impairment loss is recognized in the amount of
the excess.
During the third quarter of fiscal 2012, the Company determined that sufficient indicators of potential
impairment existed to require an interim goodwill impairment test. These indicators included the recent trading
prices of the Company’s Class A Common Stock and the decrease in the Company’s market capitalization below
the total amount of stockholders’ equity on its consolidated balance sheet.
To perform step one of the interim goodwill impairment test, the Company utilized a discounted cash flow
method to determine the fair value of reporting units. Management was required to make significant judgments
based on the Company’s projected annual business plans, long-term business strategies, comparable store sales,
store count, gross margins, operating expenses, working capital needs, capital expenditures and long-term growth
rates, all considered in light of current and anticipated economic factors. Discount rates used in the analysis
reflect a hypothetical market participant’s weighted average cost of capital, current market rates and the risks
associated with the projected cash flows. Terminal growth rates were based on long-term growth rate potential
and a long-term inflation forecast. Given the significant decline in the Company’s market capitalization during
the second quarter of fiscal 2012, the Company increased the discount rates for each of its reporting units from
those used in step one of its fiscal 2011 annual goodwill impairment test to better reflect the market participant’s
perceived risk associated with the projected cash flows, which had the effect of decreasing the fair value of each
of the reporting units. The Company also updated its estimated cash flows from those used in step one of the
fiscal 2011 annual goodwill impairment test to reflect the most recent strategic forecast, which resulted in, among
other things, a decrease in the projected growth rates in store count and modifications to the projected growth
rates in same-store sales.
Upon completion of step one of the interim goodwill impairment test, the Company determined that the fair
values of its Australia, Canada and Europe reporting units were below their carrying values and, as a result,
conducted step two of the interim goodwill impairment test to determine the implied fair value of goodwill for
the Australia, Canada and Europe reporting units. The calculated fair value of the United States reporting unit
significantly exceeded its carrying value. Therefore, step two of the interim goodwill impairment test was not
required for the United States reporting unit.
The implied fair value of goodwill is determined in step two of the goodwill impairment test by allocating
the fair value of the reporting unit in a manner similar to a purchase price allocation used in a business
combination and the residual fair value after this allocation is the implied fair value of the reporting unit’s
goodwill. In the process of conducting the second step of the goodwill impairment test, the Company identified
intangible assets consisting of trade names in its Australia, Canada and Europe reporting units. Additionally, the
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