Hormel Foods 2011 Annual Report Download - page 16

14 Hormel Foods Corporation
im
p
airment that should be recorded. In the second ste
p
, the
implied
f
air value o
f
the reporting unit’s goodwill is deter
-
mined by allocating the reporting unit’s
f
air value to all o
f
its
assets and l
i
ab
i
l
i
t
i
es other than goodw
i
ll
i
n a manner s
i
m
i
lar
to a purchase price allocation. The implied
f
air value o
f
the
g
oodwill that results
f
rom the application o
f
this second step
is then compared to the carryin
g
amount o
f
the
g
oodwill and
an impairment char
g
e is recorded
f
or the di
ff
erence.
B
ased on the qualitative assessment conducted in fiscal
20
11,
p
erformance of the
q
uantitative two-ste
p
test was not
required for any of the
C
ompany’s reporting units, and no
goodwill impairment charges were recorded
.
I
mpairment testing
f
or inde
fi
nite-lived intangible assets also
compares the
f
air value and carrying value o
f
the intangible
asset. The
f
air value o
f
inde
fi
nite-lived intan
g
ible assets is
primarily determined on the basis o
f
estimated discounted
v
alue, usin
g
the relie
f
f
rom royalty method. The assumptions
used in the estimate o
f
f
air value, includin
g
f
uture sales
projections and discount rates, require si
g
nificant jud
g
ment.
T
he
C
ompany considers historical performance and various
C
ompany and industry factors when determining the assump
-
tions to use in estimating the fair value. If the carrying value
exceeds fair value, the indefinite-lived intangible asset is
cons
i
dered
i
mpa
i
red and an
i
mpa
i
rment charge
i
s recorded
f
or the di
ff
erence. No material impairment charges were
recorded for indefinite-lived intan
g
ible assets for fiscal 2011.
Accrued Promot
i
onal Ex
p
enses: Accrued promot
i
onal
expenses are unpaid liabilities
f
or customer promotional pro
-
g
rams in process or completed as o
f
the end o
f
the
fi
scal year.
P
romotional contractual accruals are based on a
g
reements
w
ith customers for defined performance. The liability relatin
g
to these agreements is based on a review of the outstanding
contracts on which
p
erformance has taken
p
lace but for which
the promotional payments relating to such contracts remain
un
p
aid as o
f
the end o
f
the
fi
scal year. The level o
f
customer
per
f
ormance is a signi
fi
cant estimate used to determine these
l
i
ab
i
l
i
t
i
es
.
E
m
p
lo
y
ee Benefit Plans: The
C
ompany incurs expenses rela
t
-
in
g
to employee bene
fi
ts, such as noncontributory de
fi
ned
benefit pension plans and post-retirement health care ben
-
efits. In accountin
g
for these employment costs, mana
g
ement
must make a variety of assumptions and estimates including
mortality rates, discount rates, overall
C
om
p
any com
p
ens
a
-
tion increases, ex
p
ected return on
p
lan assets, and health
care cost trend rates. The Com
p
any considers historical data
as well as current
f
acts and circumstances when determining
these estimates. The Com
p
any uses third-
p
arty s
p
ecialists to
assist mana
g
ement in the determination o
f
these estimates
and the calculation o
f
certain employee bene
fi
t expenses.
The Company’s goodwill impairment test is performed at the
reporting unit level. The Company’s reporting units represent
o
perating segments
(
aggregations of business units that have
s
i
m
i
lar econom
i
c character
i
st
i
cs and share the same
p
rodu
c
-
t
ion facilities, raw materials, and labor force). In conductin
g
t
he
g
oodwill impairment test, the Company first performs
a
qual
i
tat
i
ve assessment to determ
i
ne whether
i
t
i
s more
l
ikel
y
than not (
>
50% likelihood) that the fair value of an
y
reportin
g
unit is less than its carryin
g
amount. If the
C
ompany
c
oncludes that this is the case, then a two-step quantitative
t
est for goodwill impairment is performed for the appropriate
reporting units.
O
therwise, the
C
ompany concludes that no
i
m
p
airment is indicated and does not
p
erform the two-ste
p
tes
t.
In conducting the initial qualitative assessment, the Company
a
nalyzes actual and projected
g
rowth trends
f
or net sales,
g
ross mar
g
in, and se
g
ment pro
fi
t
f
or each reportin
g
unit, as
well as historical per
f
ormance versus plan and the results o
f
prior quantitative tests per
f
ormed. Additionally, each report
-
i
n
g
unit assesses critical areas that may impact its busi
-
ness, includin
g
macroeconomic conditions and the related
i
m
p
act, market related ex
p
osures, any
p
lans to market all
o
r a portion of their business, competitive changes, new or
d
iscontinued product lines, changes in key personnel, or any
o
ther potential risks to their pro
j
ected financial results. All of
t
he assum
p
t
i
ons used
i
n the
q
ual
i
tat
i
ve assessment re
q
u
i
re
signi
fi
cant judgment.
I
f
required, the quantitative
g
oodwill impairment test is a
t
wo-step process. First, the
f
air value o
f
each reportin
g
unit is
c
ompared to its correspondin
g
carryin
g
value, includin
g
g
ood
-
will. The fair value of each reportin
g
unit is estimated usin
g
d
iscounted cash flow valuations. The assumptions used in the
e
stimate of fair value, including future growth rates, terminal
values, and discount rates, require significant judgment.
The estimates and assum
p
tions used consider historical
p
erformance and are consistent with the assum
p
tions used
i
n determining
f
uture pro
fi
t plans
f
or each reporting unit,
which are a
pp
roved by the Com
p
any’s Board of Directors.
The Company reviews product
g
rowth patterns, market share
i
n
f
ormation, industry trends, peer
g
roup statistics, chan
g
es in
di
str
i
but
i
on channels, and econom
i
c
i
nd
i
cators
i
n determ
i
n
i
n
g
t
he estimates and assumptions used to develop cash
fl
ow and
profit plan assumptions. Additionally, the
C
ompany performs
sensitivity testin
g
of the profit plan assumptions and discount
rate to assess the impact on the fair value for each reporting
u
nit
u
n
de
r v
a
ri
ous
c
ir
cu
m
s
t
a
n
ces.
I
f
the
fi
rst step results in the carrying value exceeding the
f
air value o
f
any reporting unit, then a second step must be
c
ompleted in order to determine the amount o
f
goodwill