Graco 2007 Annual Report Download - page 35

Newell Rubbermaid Inc. 2007 Annual Report
33
Recovery of Accounts Receivable
The Company evaluates the collectibility of accounts receivable based on a combination of factors. When aware of a specific customer’s inability to meet
its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, the Company
records a specific reserve for bad debt to reduce the related receivable to the amount the Company reasonably believes is collectible. The Company also
records reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due and historical
collection experience. Accounts are reviewed for potential write-off on a case by case basis. Accounts deemed uncollectible are written off, net of expected
recoveries. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could be further adjusted.
As of December 31, 2007, the Company had allowances for doubtful accounts of $26.1 million on $1,192.5 million of accounts receivable.
Inventory Reserves
The Company reduces its inventory value for estimated obsolete and slow moving inventory in an amount equal to the difference between the cost of
inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be required.
Goodwill and Other Indefinite-Lived Intangible Assets
The Company conducts its annual test for impairment of goodwill and indefinite-lived intangible assets in the third quarter because it coincides with its
annual strategic planning process.
The Company evaluates goodwill for impairment annually at the operating segment level (herein referred to as the reporting unit). The Company
also tests for impairment if events and circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying
amount. If the carrying amount of the reporting unit is greater than the fair value, impairment may be present. The Company assesses the fair value of its
reporting units for its goodwill based on discounted cash flow models, earnings multiples or an actual sales offer received from a prospective buyer, if
available. The use of a discounted cash flow model involves several assumptions, and changes in our assumptions could materially impact our fair value
estimates. Assumptions critical to the Company’s fair value estimates under the discounted cash flow model include the discount rate, projected average
revenue growth, projected long-term growth rates in the determination of terminal values, and product costs. A one percentage point increase in the
discount rate used to determine the fair values of our reporting units, which were not deemed to be impaired based on the testing of goodwill in the third
quarter as described above, would not cause the carrying value of any reporting unit to exceed its fair value.
The Company measures the amount of any goodwill impairment based upon the estimated fair value of the underlying assets and liabilities of the
reporting unit, including any unrecognized intangible assets, and estimates the implied fair value of goodwill. An impairment charge is recognized to the
extent the recorded goodwill exceeds the implied fair value of goodwill.
The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. The Company also tests
for impairment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying
amount. Assumptions critical to the Company’s evaluation of indefinite-lived intangible assets for impairment include: the discount rate, royalty rates used in
its evaluation of trade names, projected average revenue growth, and projected long-term growth rates in the determination of terminal values. An impairment
charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
No impairment charges were recorded by the Company as a result of the annual impairment testing performed in the third quarter of 2007 and 2006.
The Company cannot predict the occurrence of events that might adversely affect the reported value of goodwill and other intangible assets. Such
events may include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic
environment on the Company’s customer base, or a material negative change in its relationships with significant customers.
Capitalized Software Costs
The Company capitalizes costs associated with internal-use software during the application development stage after both the preliminary project stage
has been completed and the Company’s management has authorized and committed to funding for further project development. Capitalized internal-use
software costs include: (i) external direct costs of materials and services consumed in developing or obtaining the software; (ii) payroll and payroll-related
costs for employees who are directly associated with and who devote time directly to the project; and (iii) interest costs incurred while developing the
software. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose.
The Company expenses as incurred research and development, general and administrative and indirect costs associated with internal-use software.
In addition, the Company expenses as incurred training, maintenance and other internal-use software costs incurred during the post-implementation
stage. Costs associated with upgrades and enhancements of internal-use software are only capitalized if such modifications result in additional
functionality of the software. Capitalized software costs were $131.4 million and $86.3 million at December 31, 2007 and 2006, respectively.
Capitalized interest costs included in capitalized software were not material as of December 31, 2007 or 2006.
The Company amortizes internal-use software costs using the straight-line method over the estimated useful life of the software. Capitalized
software costs are evaluated annually for indicators of impairment including but not limited to a significant change in available technology or the manner in
which the software is being used. Impaired items are written down to their estimated fair values at the date of evaluation.