Hormel Foods 2014 Annual Report Download - page 18

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compensation increases, expected return on plan assets,
and health care cost trend rates. The Company considers
historical data as well as current facts and circumstances
when determining these estimates. The Company uses third-
party specialists to assist management in the determination
of these estimates and the calculation of certain employee
benefit expenses.
Income Taxes: The Company records income taxes in accor-
dance with the liability method of accounting. Deferred taxes
are recognized for the estimated taxes ultimately payable or
recoverable based on enacted tax law. Changes in enacted tax
rates are reflected in the tax provision as they occur.
The Company computes its provision for income taxes based
on the statutory tax rates and tax planning opportunities
available to it in the various jurisdictions in which it operates.
Significant judgment is required in evaluating the Company’s
tax positions and determining its annual tax provision. While
the Company considers all of its tax positions fully support-
able, the Company is occasionally challenged by various tax
authorities regarding the amount of taxes due. The Company
recognizes a tax position in its financial statements when it is
more likely than not that the position will be sustained upon
examination, based on the technical merits of the position.
That position is then measured at the largest amount of
benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. A change in judgment related to the
expected ultimate resolution of uncertain tax positions will be
recognized in earnings in the quarter of such change.
Contingent Liabilities: At any time, the Company may be
subject to investigations, legal proceedings, or claims related
to the on-going operation of its business, including claims
both by and against the Company. Such proceedings typically
involve claims related to product liability, contract disputes,
wage and hour laws, employment practices, or other actions
brought by employees, consumers, competitors, or suppliers.
The Company routinely assesses the likelihood of any adverse
outcomes related to these matters on a case by case basis, as
well as the potential ranges of losses and fees. The Company
establishes accruals for its potential exposure, as appropriate,
for claims against the Company when losses become probable
and reasonably estimable. Where the Company is able to
reasonably estimate a range of potential losses, the Company
records the amount within that range that constitutes the
Company’s best estimate. The Company also discloses the
nature of and range of loss for claims against the Company
when losses are reasonably possible and material. These
accruals and disclosures are determined based on the facts
and circumstances related to the individual cases and require
estimates and judgments regarding the interpretation of facts
and laws, as well as the effectiveness of strategies or other
factors beyond our control.
impairment charge is recorded for the difference. Even if not
required, the Company periodically elects to perform the quan-
titative test in order to confirm the qualitative assessment.
Based on the qualitative assessment conducted in fiscal
2014, performance of the quantitative two-step test was not
required for any of the Company’s reporting units. No goodwill
impairment charges were recorded.
In conducting the annual impairment test for its indefi-
nite-lived intangible assets, the Company first performs a
qualitative assessment to determine whether it is more likely
than not (> 50% likelihood) that an indefinite-lived intangible
asset is impaired. If the Company concludes that this is the
case, then a quantitative test for impairment must still be
performed. Otherwise, the Company does not need to perform
a quantitative test.
In conducting the initial qualitative assessment, the Company
analyzes growth rates for historical and projected net sales and
the results of prior quantitative tests performed. Additionally,
each reporting unit assesses critical areas that may impact
their intangible assets or the applicable royalty rates to deter-
mine if there are factors that could impair the asset.
If performed, the quantitative impairment test compares the
fair value and carrying value of the indefinite-lived intangible
asset. The fair value of indefinite-lived intangible assets is pri-
marily determined on the basis of estimated discounted value,
using the relief from royalty method. The assumptions used
in the estimate of fair value, including future sales projections
and discount rates, require significant judgment. The esti-
mates and assumptions used consider historical performance
and are consistent with the assumptions used in determining
future sales projections for each reporting unit as included in
their profit plans. The Company reviews various Company and
industry factors when determining the assumptions to use in
estimating the fair value. Additionally, the Company performs
sensitivity testing of the sales assumptions and discount rate
to assess the impact on the fair value for each intangible asset
under various circumstances. If the carrying value exceeds
fair value, the indefinite-lived intangible asset is considered
impaired and an impairment charge is recorded for the differ-
ence. Even if not required, the Company periodically elects to
perform the quantitative test in order to confirm the qualita-
tive assessment.
Based on the qualitative assessment conducted in fiscal 2014,
performance of the quantitative test was not required for any
of the Company’s indefinite-lived intangible assets. No impair-
ment charges were recorded for indefinite-lived intangible
assets for fiscal 2014.
Employee Benefit Plans: The Company incurs expenses
relating to employee benefits, such as noncontributory
defined benefit pension plans and post-retirement health care
benefits. In accounting for these employment costs, man-
agement must make a variety of assumptions and estimates
including mortality rates, discount rates, overall Company