Invacare 2013 Annual Report Download - page 91

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-17
As a result of the Dynamic Medical Systems acquisition in 2011, goodwill of $23,528,000 was recorded in 2011 and
$1,000,000 in 2012 for the Institutional Product Group segment, which is deductible for tax purposes.
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is reviewed annually for impairment. The Company
first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of each reporting
unit. A reporting unit is defined as an operating segment or one level below. The Company has determined that its reporting units
are the same as its operating segments. The Company completes its annual impairment tests in the fourth quarter of each year or
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To estimate
the fair values of the reporting units, the Company utilizes a discounted cash flow method model in which the Company forecasts
income statement and balance sheet amounts based on assumptions regarding future sales growth, profitability, inventory turns,
days' sales outstanding, etc. to forecast future cash flows. The cash flows are discounted using a weighted average cost of capital
discount rate where the cost of debt is based on quoted rates for 20-year debt of companies of similar credit risk and the cost of
equity is based upon the 20-year treasury rate for the risk free rate, a market risk premium, the industry average beta and a small
cap stock adjustment. The discount rates used have a significant impact upon the discounted cash flow methodology utilized in
the Company's annual impairment testing as higher discount rates decrease the fair value estimates. The assumptions used are
based on a market participant's point of view and yielded a discount rate of 10.00% in 2013 for the Company's initial impairment
analysis compared to 9.88% in 2012 and 9.27% in 2011.
The Company also utilizes an Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) Method to compute the fair value of its reporting units which considers potential acquirers and their EV to EBITDA
multiples adjusted by an estimated premium. While more weight is given to the discounted cash flow method, the EV to EBITDA
Method does provide corroborative evidence of the reasonableness of the discounted cash flow method results.
In 2013 and 2012, the Company performed a review for potential impairments of any other assets, including the Company's
Taylor Street facility which is subject to the FDA consent decree that limits the Company's manufacture and distribution of custom
power and manual wheelchairs, wheelchair components and wheelchair subassemblies at the Taylor Street facility. The Company
determined there was no impairment of the property, plant and equipment of the Taylor Street facility based on a comparison of
the forecasted undiscounted cash flows to the carrying value of the net assets in accordance with ASC 360. In addition, the
Company determined there was no impairment of net inventory associated with the facility.
In 2011, the results of the Company's Step I annual impairment test indicated a potential impairment in the Asia/Pacific
segment. As a result, the Company completed a Step II impairment test for this segment. Pursuant to ASC 360, the Company
compared the forecasted un-discounted cash flows of the Asia/Pacific segment to the carrying value of the net assets, which
indicated no impairment of any other long-lived assets. As part of the Step II test, the Company calculated the fair value of all
recorded and unrecorded assets and liabilities to determine the goodwill impairment amount. As a result of reduced profitability
in the Asia/Pacific segment in the fourth quarter of 2011, uncertainty associated with future market conditions, and based on the
Step II calculated results, the Company recorded an impairment charge related to goodwill in the Asia Pacific segment of
$39,729,000 in the fourth quarter of 2011, which represented the entire goodwill amount for the segment.
In December 2011, the FDA requested that the Company agree to a consent decree of injunction at the Company's corporate
facility and its wheelchair manufacturing facility in Elyria, Ohio, the then proposed terms of which would require the suspension
of certain operations at those facilities until they are certified by the Company and then determined by the FDA to be in compliance
with FDA quality system regulations. In accordance with ASC 350, a significant decline in the Company's stock price and market
capitalization, as occurred following the announcement of the consent decree, should be considered as indicators of possible
impairment that would require an interim assessment of goodwill for impairment.
As a result of the potential impact of the FDA consent decree, the Company updated the assumptions and variables in its
DCF model as of December 31, 2011 in regards to the North America/HME segment, the segment primarily affected by the consent
decree, and factored in a 230 basis point risk premium to the discount rate used to reflect the increased uncertainty with the
Company's forecasted cash flows for the reporting unit. The risk premium adjustment was calculated by the Company by considering
the decline in the Company's stock price as well as the Company's EBITDA multiple. The premium adjustment was made as the
Company was not able to produce a range of cash flows given the lack of clarity on the final terms of the consent decree. The
results of the calculation as of December 31, 2011 confirmed that the carrying value of the North America/HME reporting unit
exceeded its fair value. Pursuant to ASC 360, the Company compared the forecasted un-discounted cash flows of the North
America/HME segment to the carrying value of the net assets, which indicated no impairment of any other long-lived assets. The
Company then conducted a Step II test in which the fair values of all recorded and unrecorded assets and liabilities were calculated
to determine the impairment charge of $7,990,000, which represented the entire goodwill amount for the segment.