Kodak 2013 Annual Report Download - page 28

Table of Contents
Goodwill is impaired if the fair value of a reporting unit is less than the related carrying value. Kodak may assess qualitative factors for some or
all of its reporting units to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a
reporting unit is less than its carrying amount, including goodwill. If Kodak determines that it is more likely than not that a reporting unit’s fair
value is less than its carrying amount, or if Kodak elects to bypass the qualitative assessment for any of its reporting units, then the fair value of
that reporting unit is compared to its carrying value.
If the fair value of a reporting unit is less than its carrying value, Kodak must determine the implied fair value of the goodwill associated with
that reporting unit. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of its assets and
liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying
value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment charge that must be
recognized.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. 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.
Quoted market prices in active markets are the best evidence of fair value, however the market price of an individual equity security may not be
representative of the fair value of the reporting unit as a whole and, therefore need not be the sole measurement basis of the fair value of a
reporting unit.
Kodak estimates the fair value of its reporting units using the guideline public company method and discounted cash flow method. To estimate
fair value utilizing the guideline public company method, Kodak applies valuation multiples, derived from the operating data of publicly-
traded
benchmark companies, to the same operating data of the reporting units. The valuation multiples are based on financial measures of revenue,
earnings before interest, taxes, depreciation and amortization (“EBITDA”) and earnings before interest and taxes (“EBIT”). To estimate fair
value utilizing the discounted cash flow method, Kodak establishes an estimate of future cash flows for each reporting unit and discounts those
estimated future cash flows to present value.
As part of fresh start accounting, Kodak estimated the fair value of each of its reporting units. Except for the Graphics reporting unit, Kodak
did not use the guideline public company method because reporting unit EBIT and/or EBITDA results were negative, which would have only
allowed the application of a revenue multiple in determining fair value under the guideline public company method, and/or reporting units
ranked below all the selected market participants for these financial measures. When using the guideline public company method, multiples
should be derived from companies that exhibit a high degree of comparability to the business being valued. Kodak ultimately gave 100%
weighting to the discounted cash flow method for these reporting units. For the Graphics reporting unit, Kodak selected equal weighting of the
guideline public company method and the discounted cash flow method as the valuation approaches produced comparable ranges of fair value.
To estimate fair value utilizing the discounted cash flow method, Kodak established an estimate of future cash flows for the period ranging
from September 1, 2013 to December 31, 2022 and discounted the estimated future cash flows to present value. The expected cash flows for
the period September 1, 2013 to December 31, 2017 were based on the financial projections and assumptions utilized in the disclosure
statement in support of the Plan. The expected cash flows for the period January 1, 2018 to December 31, 2022 were derived from earnings
forecasts and assumptions regarding growth and margin projections, as applicable. The discount rates are estimated based on an after-tax
weighted average cost of capital (“WACC”) for each reporting unit reflecting the rate of return that would be expected by a market participant.
The WACC also takes into consideration a company specific risk premium for each reporting unit reflecting the risk associated with the overall
uncertainty of the financial projections. Discount rates of 27% to 32% were utilized in the fresh start valuation based on Kodak’
s best estimates
of the after-tax weighted-average cost of capital of each reporting unit.
A terminal value was included for all reporting units, except for the Intellectual Property and Brand Licensing and Consumer Inkjet Systems
reporting units, at the end of the cash flow projection period to reflect the remaining value that the reporting unit is expected to generate. The
terminal value is calculated using the constant growth method (“CGM”) based on the cash flows of the final year of the discrete period.
For the 2013 annual goodwill test, Kodak elected to utilize the qualitative assessment for all reporting units with goodwill balances due to the
fresh start valuation being performed as of September 1, 2013. In performing the qualitative assessment, Kodak updated the carrying values of
each reporting unit, compared actual results to budgeted performance and considered the extent to which adverse events and circumstances
could affect the fair value of a reporting unit since the fresh start valuation. Based on the results of this assessment, no impairment of goodwill
was indicated. Impairment of goodwill could occur in the future if a reporting unit’s fair value changes significantly from the amounts
estimated as part of fresh start accounting, if market or interest rate environments deteriorate, or if a reporting unit’s carrying value changes
materially compared with changes in its fair values.
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