Nike 2013 Annual Report Download - page 37

PART II
larger allowance might be required. In the event we determine that a smaller
or larger allowance is appropriate, we would record a credit or a charge to
selling and administrative expense in the period in which such a determination
is made.
Inventory Reserves
We also make ongoing estimates relating to the net realizable value of
inventories based upon our assumptions about future demand and market
conditions. If we estimate that the net realizable value of our inventory is less
than the cost of the inventory recorded on our books, we record a reserve
equal to the difference between the cost of the inventory and the estimated
net realizable value. This reserve is recorded as a charge to cost of sales. If
changes in market conditions result in reductions in the estimated net
realizable value of our inventory below our previous estimate, we would
increase our reserve in the period in which we made such a determination and
record a charge to cost of sales.
Contingent Payments under Endorsement
Contracts
A significant portion of our demand creation 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.
Some of the 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.
Some of the 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.
Some of the 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 occur. In certain
contracts, we offer minimum guaranteed royalty payments. For contractual
obligations for which we estimate 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 and Definite-
Lived Assets
Property, plant and equipment, including buildings, equipment, and
computer hardware and software are recorded at cost (including, in some
cases, the cost of internal labor) and are depreciated over the 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.
We review the carrying value of long-lived assets or asset groups to be used
in operations whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recoverable. Factors that would
necessitate an impairment assessment include a significant adverse change
in the extent or manner in which an asset is used, a significant adverse
change in legal factors or the business climate that could affect the value of
the asset, or a significant decline in the observable market value of an asset,
among others. If such facts indicate a potential impairment, we would assess
the recoverability of an asset group by determining if the carrying value of the
asset group exceeds the sum of the projected undiscounted cash flows
expected to result from the use and eventual disposition of the assets over the
remaining economic life of the primary asset in the asset group. If the
recoverability test indicates that the carrying value of the asset group is not
recoverable, we will estimate the fair value of the asset group using
appropriate valuation methodologies that would typically include an estimate
of discounted cash flows. Any impairment would be measured as the
difference between the asset group’s carrying amount and its estimated fair
value.
Goodwill and Indefinite-Lived Intangible Assets
We perform annual impairment tests on goodwill and intangible assets with
indefinite lives in the fourth quarter of each fiscal year, or when events occur or
circumstances change that would, more likely than not, reduce the fair value
of a reporting unit or an intangible asset with an indefinite life below its carrying
value. Events or changes in circumstances that may trigger interim
impairment reviews include significant changes in business climate, operating
results, planned investments in the reporting unit, planned divestitures or an
expectation that the carrying amount may not be recoverable, among other
factors. We may first assess qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying
amount. If, after assessing the totality of events and circumstances, we
determine that it is more likely than not that the fair value of the reporting unit is
greater than its carrying amount, the two-step impairment test is
unnecessary. The two-step impairment test requires us to estimate the fair
value of our reporting units. If the carrying value of a reporting unit exceeds its
fair value, the goodwill of that reporting unit is potentially impaired and we
proceed to step two of the impairment analysis. In step two of the analysis, we
measure and record an impairment loss equal to the excess of the carrying
value of the reporting unit’s goodwill over its implied fair value, if any.
We generally base our measurement of the fair value of a reporting unit on a
blended analysis of the present value of future discounted cash flows and the
market valuation approach. The discounted cash flows model indicates the
fair value of the reporting unit based on the present value of the cash flows
that we expect the reporting unit to generate in the future. Our significant
estimates in the discounted cash flows model include: our weighted average
cost of capital; long-term rate of growth and profitability of the reporting unit’s
business; and working capital effects. The market valuation approach
indicates the fair value of the business based on a comparison of the reporting
unit to comparable publicly traded companies in similar lines of business.
Significant estimates in the market valuation approach model include
identifying similar companies with comparable business factors such as size,
growth, profitability, risk and return on investment, and assessing comparable
revenue and operating income multiples in estimating the fair value of the
reporting unit.
Indefinite-lived intangible assets primarily consist of acquired trade names and
trademarks. We may first perform a qualitative assessment to determine
whether it is more likely than not that an indefinite-lived intangible asset is
impaired. If, after assessing the totality of events and circumstances, we
determine that it is more likely than not that the indefinite-lived intangible asset
is not impaired, no quantitative fair value measurement is necessary. If a
quantitative fair value measurement calculation is required for these intangible
assets, we utilize the relief-from-royalty method. This method assumes that
trade names and trademarks have value to the extent that their owner is
relieved of the obligation to pay royalties for the benefits received from them.
This method requires us to estimate the future revenue for the related brands,
the appropriate royalty rate and the weighted average cost of capital.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis,
fair value is the price we would receive to sell an asset or pay to transfer a
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