Macy's 2008 Annual Report Download - page 32

Goodwill and Intangible Assets
The carrying value of goodwill and other intangible assets with indefinite lives are reviewed at least
annually for possible impairment in accordance with SFAS No. 142. Goodwill and other intangible assets with
indefinite lives have been assigned to reporting units for purposes of impairment testing. The reporting units are
the Company’s retail operating divisions. Goodwill and other intangible assets with indefinite lives are tested for
impairment annually at the end of the fiscal month of May. The Company estimates fair value based on
discounted cash flows. The goodwill impairment test involves a two-step process. The first step is a comparison
of each reporting unit’s fair value to its carrying value. The reporting unit’s discounted cash flows require
significant management judgment with respect to sales, gross margin and SG&A rates, capital expenditures and
the selection and use of an appropriate discount rate. The projected sales, gross margin and SG&A expense rate
assumptions and capital expenditures are based on the Company’s annual business plan or other forecasted
results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows
directly resulting from the use of those assets in operations. The estimates of fair value of reporting units are
based on the best information available as of the date of the assessment. The use of different assumptions would
increase or decrease estimated discounted future operating cash flows and could increase or decrease any
impairment charge. If the carrying value of a reporting unit exceeds its estimated fair value in the first step, a
second step is performed, in which the reporting unit’s goodwill is written down to its implied fair value. The
second step requires the Company to allocate the fair value of the reporting unit derived in the first step to the
fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to such net assets
representing the implied fair value of goodwill for that reporting unit. If the carrying value of an individual
indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is written
down by an amount equal to such excess.
The Company uses judgment in assessing whether assets may have become impaired between annual
impairment tests. The occurrence of a change in circumstances, such as continued adverse business conditions or
other economic factors, would determine the need for impairment testing between annual impairment tests. Due
to deterioration in the general economic environment in recent periods (and the impact thereof on the Company’s
most recently completed annual business plan) and the resultant decline in the Company’s market capitalization,
the Company believed that an additional goodwill impairment test was required as of January 31, 2009. The
Company initially calculated the value of its reporting units by discounting their projected future cash flows to
present value using the Company’s estimated weighted average cost of capital as the discount rate, which
produced a value of each of the Company’s Macy’s reporting units that exceeded its carrying value. However,
the reconciliation of these values of the Company’s reporting units to the Company’s market capitalization
resulted in an implied fair value substantially in excess of its market capitalization. In order to reconcile the
discounted cash flows of the Company’s reporting units to the trading value of the Company’s common stock,
the Company applied discount rates higher than the Company’s estimated weighted average cost of capital,
representing a market participant approach, to the projected cash flows of its reporting units and determined that
the carrying value of each of the Company’s reporting units exceeded its fair value at January 31, 2009, which
resulted in all of the Company’s reporting units failing the first step of the goodwill impairment test.
The second step of the impairment testing process requires, among other things, obtaining third-party
appraisals of substantially all of the Company’s tangible and intangible assets. The allocation of the fair value of
the reporting unit derived in the first step of the impairment test to the fair value of the reporting unit’s net assets
requires significant management estimates and judgments. The allocation of the fair value of the reporting units
is based on the best information available as of the date of the assessment.
The goodwill impairment testing process is subject to inherent uncertainties and subjectivity. The use of
different assumptions, estimates or judgments in either step of the process, including with respect to the projected
future cash flows of the Company’s reporting units, the discount rate used to reduce such projected future cash
flows to their net present value, the resultant implied control premium relative to the Company’s market
capitalization, and the appraised fair value of the reporting units’ tangible and intangible assets and liabilities,
26