Nike 2012 Annual Report Download - page 49

PART II
the divestiture process and has not yet identified potential acquirers or the
likely deal structure, these methods represent management’s best estimate
of the fair value of the Umbro business. The Company’s analysis determined
there was no impairment of intangible assets or goodwill related to Umbro. If
the sales process indicates a fair value that is below the current carrying value
of the reporting unit, an analysis would be required to determine if impairment
charges exist at that point.
Operating Leases
The Company leases retail store space, certain distribution and warehouse
facilities and office space under operating leases. Operating lease
agreements may contain rent escalation clauses, rent holidays or certain
landlord incentives, including tenant improvement allowances. Rent expense
for non-cancelable operating leases with scheduled rent increases or landlord
incentives are recognized on a straight-line basis over the lease term,
beginning with the effective lease commencement date, which is generally the
date in which the Company takes possession of or controls the physical use
of the property. Certain leases also provide for contingent rents, which are
determined as a percentage of sales in excess of specified levels. A
contingent rent liability is recognized together with the corresponding rent
expense when specified levels have been achieved or when the Company
determines that achieving the specified levels during the period is probable.
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a
recurring basis, including derivatives and available-for-sale securities. Fair
value is the price the Company would receive to sell an asset or pay to transfer
a liability in an orderly transaction with a market participant at the
measurement date. The Company uses a three-level hierarchy established by
the FASB that prioritizes fair value measurements based on the types of
inputs used for the various valuation techniques (market approach, income
approach, and cost approach).
The levels of hierarchy are described below:
•Level 1: Observable inputs such as quoted prices in active markets for
identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly; these include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs in which there is little or no market data
available, which require the reporting entity to develop its own assumptions.
The Company’s assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers factors
specific to the asset or liability. Financial assets and liabilities are classified in
their entirety based on the most conservative level of input that is significant to
the fair value measurement.
Pricing vendors are utilized for certain Level 1 or Level 2 investments. These
vendors either provide a quoted market price in an active market or use
observable inputs without applying significant adjustments in their pricing.
Observable inputs include broker quotes, interest rates and yield curves
observable at commonly quoted intervals, volatilities and credit risks. The
Company’s fair value processes include controls that are designed to ensure
appropriate fair values are recorded. These controls include an analysis of
period-over-period fluctuations and comparison to another independent
pricing vendor.
Refer to Note 6 — Fair Value Measurements for additional information.
Foreign Currency Translation and Foreign
Currency Transactions
Adjustments resulting from translating foreign functional currency financial
statements into U.S. Dollars are included in the foreign currency translation
adjustment, a component of accumulated other comprehensive income in
shareholders’ equity.
The Company’s global subsidiaries have various assets and liabilities,
primarily receivables and payables, which are denominated in currencies
other than their functional currency. These balance sheet items are subject to
remeasurement, the impact of which is recorded in other expense (income),
net, within the consolidated statements of income.
Accounting for Derivatives and Hedging
Activities
The Company uses derivative financial instruments to limit exposure to
changes in foreign currency exchange rates and interest rates. All derivatives
are recorded at fair value on the balance sheet and changes in the fair value of
derivative financial instruments are either recognized in other comprehensive
income (a component of shareholders’ equity), debt or net income depending
on the nature of the underlying exposure, whether the derivative is formally
designated as a hedge, and, if designated, the extent to which the hedge is
effective. The Company classifies the cash flows at settlement from
derivatives in the same category as the cash flows from the related hedged
items. For undesignated hedges and designated cash flow hedges, this is
within the cash provided by operations component of the consolidated
statements of cash flows. For designated net investment hedges, this is
generally within the cash provided or used by investing activities component
of the cash flow statement. As our fair value hedges are receive-fixed,
pay-variable interest rate swaps, the cash flows associated with these
derivative instruments are periodic interest payments while the swaps are
outstanding. These cash flows are reflected within the cash provided by
operations component of the cash flow statement.
SeeNote16—RiskManagementandDerivatives for more information on
the Company’s risk management program and derivatives.
Stock-Based Compensation
The Company estimates the fair value of options and stock appreciation rights
granted under the NIKE, Inc. 1990 Stock Incentive Plan (the “1990 Plan”) and
employees’ purchase rights under the Employee Stock Purchase Plans
(“ESPPs”) using the Black-Scholes option pricing model. The Company
recognizes this fair value, net of estimated forfeitures, as selling and
administrative expense in the consolidated statements of income over the
vesting period using the straight-line method.
See Note 11 — Common Stock and Stock-Based Compensation for more
information on the Company’s stock programs.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
This approach requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities. The Company
records a valuation allowance to reduce deferred tax assets to the amount
management believes is more likely than not to be realized. United States
income taxes are provided currently on financial statement earnings of
non-U.S. subsidiaries that are expected to be repatriated. The Company
determines annually the amount of undistributed non-U.S. earnings to invest
indefinitely in its non-U.S. operations.
The Company recognizes a tax benefit from uncertain tax positions in the
financial statements only when it is more likely than not that the position will be
sustained upon examination by relevant tax authorities. The Company
recognizes interest and penalties related to income tax matters in income tax
expense.
SeeNote9—IncomeTaxesforfurtherdiscussion.
NIKE, INC. Š2012 Form 10-K 49