Nike 2003 Annual Report Download - page 18

Contingent Payments under Endorsement Contracts
A significant portion of our demand creation (advertising and promotion) expense relates to payments under
endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract.
However, certain contract elements may be accounted for differently, based upon the facts and circumstances of
each individual contract.
Certain contracts provide for contingent payments to endorsers based upon specific achievements in their
sports (e.g., winning a championship). We record selling and administrative expense for these amounts when the
endorser achieves the specific goal.
Certain contracts provide for payments based upon endorsers maintaining a level of performance in their
sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts are
reported in selling and administrative expense when we determine that it is probable that the specified level of
performance will be maintained throughout the period. In these instances, to the extent that actual payments to
the endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or
decreased selling and administrative expense may be reported in a future period.
Certain contracts provide for royalty payments to endorsers based upon a predetermined percentage of sales
of particular products. We expense these payments in cost of sales as the related sales are made. In certain
contracts, we offer minimum guaranteed royalty payments. For contractual obligations for which we estimate
that we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the
amount of the guaranteed payment in excess of that earned through sales of product in selling and administrative
expense uniformly over the remaining guarantee period.
Property, Plant and Equipment
Property, plant and equipment, including buildings, equipment, and computer hardware and software is
recorded at cost (including, in some cases, the cost of internal labor) and is depreciated over its estimated useful
life. Changes in circumstances (such as technological advances or changes to our business operations) can result
in differences between the actual and estimated useful lives. In those cases where we determine that the useful
life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to
depreciate the asset’s net book value to its salvage value.
When events or circumstances indicate that the carrying value of property, plant and equipment may be
impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or
not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows,
we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair
market value. Any impairment charges are recorded as other expense. We estimate future undiscounted cash
flows using assumptions about our expected future operating performance. Our estimates of undiscounted cash
flows may change in future periods due to, among other things, technological changes, economic conditions,
changes to our business operations or inability to meet business plans. Such changes may result in impairment
charges in the period in which such changes in estimates are made.
Goodwill and Other Intangible Assets
We adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible
Assets,” (FAS 142) effective for the first quarter of fiscal 2003. In accordance with FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but instead measured for impairment at least
annually or when events indicate that an impairment exists. As required by FAS 142, in our impairment tests for
goodwill and other indefinite-lived intangible assets, we compare the estimated fair value of goodwill and other
intangible assets to the carrying value. If the carrying value exceeds our estimate of fair value, we calculate
impairment as the excess of the carrying value over our estimate of fair value. Our estimates of fair value utilized
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