Hormel Foods 2014 Annual Report Download - page 17

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The Company’s goodwill impairment test is performed at the
reporting unit level. The Company’s reporting units represent
operating segments (aggregations of business units that have
similar economic characteristics and share the same produc-
tion facilities, raw materials, and labor force). In conducting
the goodwill impairment test, the Company first performs a
qualitative assessment to determine whether it is more likely
than not (> 50% likelihood) that the fair value of any reporting
unit is less than its carrying amount. If the Company concludes
that this is the case, then a two-step quantitative test for good-
will impairment is performed for the appropriate reporting
units. Otherwise, the Company concludes that no impairment
is indicated and does not perform the two-step test.
In conducting the initial qualitative assessment, the Company
analyzes actual and projected growth trends for net sales,
gross margin, and segment profit for each reporting unit, as
well as historical performance versus plan and the results
of prior quantitative tests performed. Additionally, each
reporting unit assesses critical areas that may impact its
business, including macroeconomic conditions and the related
impact, market related exposures, any plans to market all
or a portion of their business, competitive changes, new or
discontinued product lines, changes in key personnel, and any
other potential risks to their projected financial results. All of
the assumptions used in the qualitative assessment require
significant judgment.
If performed, the quantitative goodwill impairment test is a
two-step process. First, the fair value of each reporting unit
is compared to its corresponding carrying value, including
goodwill. The fair value of each reporting unit is estimated
using discounted cash flow valuations. The assumptions
used in the estimate of fair value, including future growth
rates, terminal values, and discount rates, require significant
judgment. The estimates and assumptions used consider his-
torical performance and are consistent with the assumptions
used in determining future profit plans for each reporting
unit, which are approved by the Company’s Board of Directors.
The Company reviews product growth patterns, market share
information, industry trends, peer group statistics, changes in
distribution channels, and economic indicators in determining
the estimates and assumptions used to develop cash flow and
profit plan assumptions. Additionally, the Company performs
sensitivity testing of the profit plan assumptions and discount
rate to assess the impact on the fair value for each reporting
unit under various circumstances.
If the first step results in the carrying value exceeding the
fair value of any reporting unit, then a second step must be
completed in order to determine the amount of goodwill
impairment that should be recorded. In the second step, the
implied fair value of the reporting unit’s goodwill is deter-
mined by allocating the reporting unit’s fair value to all of its
assets and liabilities other than goodwill in a manner similar
to a purchase price allocation. The implied fair value of the
goodwill that results from the application of this second step is
then compared to the carrying amount of the goodwill and an
Revenue Recognition: The Company recognizes sales when
title passes upon delivery of its products to customers, net of
applicable provisions for discounts, returns, and allowances.
Products are delivered upon receipt of customer purchase
orders with acceptable terms, including price and collectabil-
ity that is reasonably assured.
The Company offers various sales incentives to customers
and consumers. Incentives that are offered off-invoice include
prompt pay allowances, will call allowances, spoilage allow-
ances, and temporary price reductions. These incentives are
recognized as reductions of revenue at the time title passes.
Coupons are used as an incentive for consumers to purchase
various products. The coupons reduce revenues at the time
they are offered, based on estimated redemption rates.
Promotional contracts are performed by customers to pro-
mote the Company’s products to consumers. These incentives
reduce revenues at the time of performance through direct
payments and accrued promotional funds. Accrued promo-
tional funds are unpaid liabilities for promotional contracts
in process or completed at the end of a quarter or fiscal year.
Promotional contractual accruals are based on agreements
with customers for defined performance. The liability relating
to these agreements is based on a review of the outstanding
contracts on which performance has taken place but for
which the promotional payments relating to such contracts
remain unpaid as of the end of the fiscal year. The level of
customer performance and the historical spend rate versus
contracted rates are significant estimates used to determine
these liabilities.
Inventory Valuation: The Company values its pork inventories
at the lower of cost or USDA market prices (primal values).
When the carcasses are disassembled and transferred from
primal processing to various manufacturing departments, the
primal values, as adjusted by the Company for product specifi-
cations and further processing, become the basis for calculat-
ing inventory values. Turkey raw materials are represented by
the deboned meat quantities. The Company values these raw
materials using a concept referred to as the “meat cost pool.”
The meat cost pool is determined by combining the cost to
grow turkeys with processing costs, less any net sales revenue
from by-products created from the processing and not used
in producing Company products. The Company has developed
a series of ratios using historical data and current market
conditions (which themselves involve estimates and judgment
determinations by the Company) to allocate the meat cost
pool to each meat component. Substantially all inventoriable
expenses, meat, packaging, and supplies are valued by the
average cost method.
Goodwill and Other Intangibles: The Company’s identifiable
intangible assets are amortized over their useful lives, unless
the useful life is determined to be indefinite. The useful life of
an identifiable intangible asset is based on an analysis of sev-
eral factors including: contractual, regulatory, or legal obliga-
tions, demand, competition, and industry trends. Goodwill and
indefinite-lived intangible assets are not amortized, but are
tested at least annually for impairment.