Macy's 2009 Annual Report Download - page 32

Goodwill and Intangible Assets
The Company reviews the carrying value of its goodwill and other intangible assets with indefinite lives at
least annually for possible impairment in accordance with ASC Topic 350, “Intangibles – Goodwill and Other.”
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 goodwill impairment test involves a two-step process. The first step involves estimating the fair value of
each reporting unit based on its estimated discounted cash flows and comparing the estimated fair value of each
reporting unit to its carrying value. If this comparison indicates that a reporting unit’s estimated fair value is less
than its carrying value, a second step is required. If applicable, the second step requires the Company to allocate
the fair value of the reporting unit to the estimated 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
then-most recently completed annual business plan) and the resultant decline in the Company’s market
capitalization during 2008, the Company believed that an additional goodwill impairment test was required as of
January 31, 2009. In performing the first step of this impairment test, the Company estimated the fair value of its
reporting units by discounting their projected future cash flows to present value, and reconciling the aggregate
estimated fair value of the Company’s reporting units to the trading value of the Company’s common stock
(together with an implied control premium). The Company believes that this reconciliation process represents a
market participant approach to valuation. Based on this analysis, the Company 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 Company then undertook
the second step of the goodwill impairment test, which involved, among other things, obtaining third-party
appraisals of substantially all of the Company’s tangible and intangible assets. Based on the results of its
goodwill impairment testing as of January 31, 2009, the Company recorded a pre-tax goodwill impairment
charge of $5,382 million ($5,083 million after income taxes) in the fourth quarter of 2008. As a result of the 2008
goodwill impairment charge, the Macy’s retail operating division is the only reporting unit with goodwill.
Based on the results of the most recent annual impairment test of goodwill and indefinite-lived intangible
assets completed during the second quarter of 2009, the Company determined that goodwill and indefinite-lived
intangible assets were not impaired as of May 30, 2009 and the estimated fair value of the Macy’s retail
operating division substantially exceeded its carrying value.
The goodwill impairment testing process involves the use of significant assumptions, estimates and
judgments by management, and is subject to inherent uncertainties and subjectivity. Estimating a reporting unit’s
discounted cash flows involves the use of significant assumptions, estimates and judgments with respect to a
variety of factors, including sales, gross margin and SG&A rates, capital expenditures, cash flows and the
selection and use of an appropriate discount rate. 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 of the
reporting unit directly resulting from the use of its assets in its operations. The allocation of the estimated fair
value of the Company’s reporting units to the estimated fair value of their net assets also involves the use of
significant assumptions, estimates and judgments. Both the estimates of the fair value of the Company’s
reporting units and the allocation of the estimated fair value of the reporting units to their net assets are based on
the best information available to the Company’s management as of the date of the assessment.
26