Johnson Controls 2014 Annual Report Download - page 41

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acquisition of a partially-owned affiliate ($9 million), higher net operating and transportation costs ($4 million), and the
unfavorable impact of foreign currency translation ($1 million).
GOODWILL, LONG-LIVED ASSETS AND OTHER INVESTMENTS
Goodwill at September 30, 2014 was $7.1 billion, $538 million higher than the prior year. The increase was primarily due to the
business acquisitions in the Building Efficiency Other and Power Solutions segments, partially offset by the reclassification of
goodwill as assets held for sale for the Building Efficiency Global Workplace Solutions segment and impairment in the Building
Efficiency Other segment, as discussed below.
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. The Company
reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate
the asset might be impaired. The Company performs impairment reviews for its reporting units, which have been determined to
be the Company’s reportable segments or one level below the reportable segments in certain instances, using a fair value method
based on management’s judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price
that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date.
In estimating the fair value, the Company uses multiples of earnings based on the average of historical, published multiples of
earnings of comparable entities with similar operations and economic characteristics. In certain instances, the Company uses
discounted cash flow analyses or estimated sales price to further support the fair value estimates. The inputs utilized in the analyses
are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." The estimated
fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. The Company is subject
to financial statement risk to the extent that the carrying amount exceeds the estimated fair value.
During fiscal 2014, as a result of recent operating results, restructuring actions and expected future profitability, the Company's
forecasted cash flow estimates used in the goodwill assessment were negatively impacted as of September 30, 2014 for the Building
Efficiency Other - Latin America reporting unit. As a result, the Company concluded that the carrying value of the Building
Efficiency Other - Latin America reporting unit exceeded its fair value as of September 30, 2014. The Company recorded a goodwill
impairment charge of $47 million in the fourth quarter of fiscal 2014, which was determined by comparing the carrying value of
the reporting unit's goodwill with the implied fair value of goodwill for the reporting unit. The Building Efficiency Other - Latin
America reporting unit has no remaining goodwill at September 30, 2014.
The Company's impairment testing in the fourth quarter of fiscal 2014 indicated that the estimated fair value of the Building
Efficiency Other - Middle East reporting unit exceeded its corresponding carrying amount including goodwill by approximately
9%. Accordingly, the Company has not recognized any impairment of goodwill associated with this reporting unit, which as of
September 30, 2014 had a goodwill balance of $85 million. The Company continuously monitors for events and circumstances
that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections,
profitability, discount rates, recent market valuations from transactions by comparable companies, volatility in the Company's
market capitalization, and general industry, market and macro-economic conditions. It is possible that future changes in such
circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of the
reporting unit, would require the Company to record a non-cash impairment charge. Except as described above, no other reporting
units were determined to be at risk of failing step one of the goodwill impairment test as the impairment testing performed indicated
that the estimated fair value of each reporting unit substantially exceeded its corresponding carrying amount including recorded
goodwill at September 30, 2014, 2013 and 2012.
During fiscal 2013, based on a combination of factors, including the recent operating results of the Automotive Experience Interiors
business, restrictions on future capital and restructuring funding, and the Company's announced intention to explore strategic
options related to this business, the Company's forecasted cash flow estimates used in the goodwill assessment were negatively
impacted as of September 30, 2013. As a result, the Company concluded that the carrying value of the Interiors reporting unit
exceeded its fair value as of September 30, 2013. The Company recorded a goodwill impairment charge of $430 million in the
fourth quarter of fiscal 2013, which was determined by comparing the carrying value of the reporting unit's goodwill with the
implied fair value of goodwill for the reporting unit.
The assumptions included in the impairment tests require judgment, and changes to these inputs could impact the results of the
calculations. Other than management's internal projections of future cash flows, the primary assumptions used in the impairment
tests were the weighted-average cost of capital and long-term growth rates. Although the Company's cash flow forecasts are based
on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using
to operate the underlying businesses, there are significant judgments in determining the expected future cash flows attributable to
a reporting unit. The impairment charges are non-cash expenses recorded within restructuring and impairment costs on the