Kraft 2013 Annual Report Download - page 51

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Long-Lived Assets:
Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the
estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 20
years and buildings and improvements over periods up to 40 years. Capitalized software costs are included in
property, plant and equipment and amortized on a straight-line basis over the estimated useful lives of the software,
which do not exceed 7 years.
We review long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets
may not be fully recoverable. Such conditions include significant adverse changes in the business climate, current-
period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an
asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow
analyses to determine if an impairment exists. When testing for impairment of assets held for use, we group assets
and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to
exist, the loss is calculated based on estimated fair value. Impairment losses on assets to be disposed of, if any, are
based on the estimated proceeds to be received, less costs of disposal.
Goodwill and Intangible Assets:
We test goodwill and indefinite-lived intangible assets for impairment at least once a year in the fourth quarter or
when a triggering event occurs. The first step of the goodwill impairment test compares the reporting unit’s
estimated fair value with its carrying value. We estimate a reporting unit’s fair value using planned growth rates,
market-based discount rates, estimates of residual value, and estimates of market multiples. If the carrying value of
a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between
the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value,
the goodwill is considered impaired and is reduced to its implied fair value.
We test indefinite-lived intangible assets for impairment by comparing the fair value of each intangible asset with its
carrying value. Fair value of non-amortizing intangible assets is determined using planned growth rates, market-
based discount rates, and estimates of royalty rates. If the carrying value exceeds fair value, the intangible asset is
considered impaired and is reduced to fair value.
Estimating the fair value of individual reporting units or intangible assets requires us to make assumptions and
estimates regarding our future plans, as well as industry and economic conditions. These assumptions and
estimates include projected revenues and income, interest rates, cost of capital, royalty rate, and tax rates.
Insurance and Self-Insurance:
We use a combination of insurance for catastrophic events and self-insurance for a number of risks, including
workers' compensation, general liability, automobile liability, product liability, and our obligation for employee health
care benefits. We estimate the liabilities associated with these risks by considering historical claims experience and
other actuarial assumptions.
Revenue Recognition:
We recognize revenues when title and risk of loss pass to customers. We record revenues net of consumer
incentives and trade promotions and include all shipping and handling charges billed to customers. We also record
provisions for estimated product returns and customer allowances as reductions to revenues within the same period
that the revenue is recognized. We base these estimates principally on historical and current period experience.
Shipping and handling costs related to product returns are included in cost of sales and were not material in 2013,
2012 or 2011.
Marketing and Research and Development:
We promote our products with advertising, consumer incentives, and trade promotions. Consumer incentives and
trade promotions include, but are not limited to, discounts, coupons, rebates, in-store display incentives, and
volume-based incentives. Consumer incentive and trade promotion activities are recorded as a reduction to
revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base
these estimates principally on historical utilization and redemption rates. For interim reporting purposes, we charge
advertising and consumer incentive expenses to operations as a percentage of volume, based on estimated volume
and related expense for the full year. We review and adjust these estimates each quarter based on actual
experience and other information. We do not defer these costs on our year-end consolidated balance sheet and all
marketing costs are recorded as an expense in the year incurred. Advertising expense was $747 million in 2013,
$640 million in 2012, and $535 million in 2011. We record marketing expense in selling, general and administrative
expense, except for consumer incentives and trade promotions, which are recorded in net revenues.