Nike 2013 Annual Report Download - page 51

PART II
Short-Term Investments
Short-term investments consist of highly liquid investments, including
commercial paper, U.S. treasury, U.S. agency, and corporate debt securities,
with maturities over three months from the date of purchase. Debt securities
that the Company has the ability and positive intent to hold to maturity are
carried at amortized cost. At May 31, 2013 and 2012, the Company did not
hold any short-term investments that were classified as trading or held-to-
maturity.
At May 31, 2013 and 2012, short-term investments consisted of available-
for-sale securities. Available-for-sale securities are recorded at fair value with
unrealized gains and losses reported, net of tax, in other comprehensive
income, unless unrealized losses are determined to be other than temporary.
Realized gains and losses on the sale of securities are determined by specific
identification. The Company considers all available-for-sale securities,
including those with maturity dates beyond 12 months, as available to
support current operational liquidity needs and therefore classifies all
securities with maturity dates beyond three months at the date of purchase as
current assets within short-term investments on the consolidated balance
sheets.
Refer to Note 6 — Fair Value Measurements for more information on the
Company’s short-term investments.
Allowance for Uncollectible Accounts
Receivable
Accounts receivable consists primarily of amounts receivable from
customers. The Company makes ongoing estimates relating to the
collectability of its accounts receivable and maintains an allowance for
estimated losses resulting from the inability of its customers to make required
payments. In determining the amount of the allowance, the Company
considers historical levels of credit losses and makes judgments about the
creditworthiness of significant customers based on ongoing credit
evaluations. Accounts receivable with anticipated collection dates greater
than 12 months from the balance sheet date and related allowances are
considered non-current and recorded in other assets. The allowance for
uncollectible accounts receivable was $104 million and $91 million at May 31,
2013 and 2012, respectively, of which $54 million and $45 million,
respectively, was classified as long-term and recorded in other assets.
Inventory Valuation
Inventories are stated at lower of cost or market and valued primarily on an
average cost basis. Inventory costs primarily consist of product cost from our
suppliers, as well as freight, import duties, taxes, insurance and logistics and
other handling fees.
Property, Plant and Equipment and
Depreciation
Property, plant and equipment are recorded at cost. Depreciation for financial
reporting purposes is determined on a straight-line basis for buildings and
leasehold improvements over 2 to 40 years and for machinery and equipment
over2to15years.
Depreciation and amortization of assets used in manufacturing, warehousing
and product distribution are recorded in cost of sales. Depreciation and
amortization of other assets are recorded in selling and administrative
expense.
Software Development Costs
Internal Use Software. Expenditures for major software purchases and
software developed for internal use are capitalized and amortized over a 2 to
10 year period on a straight-line basis. The Company’s policy provides for the
capitalization of external direct costs of materials and services associated with
developing or obtaining internal use computer software. In addition, the
Company also capitalizes certain payroll and payroll-related costs for
employees who are directly associated with internal use computer software
projects. The amount of capitalizable payroll costs with respect to these
employees is limited to the time directly spent on such projects. Costs
associated with preliminary project stage activities, training, maintenance and
all other post-implementation stage activities are expensed as incurred.
Computer Software to be Sold, Leased or Otherwise Marketed. Development
costs of computer software to be sold, leased, or otherwise marketed as an
integral part of a product are subject to capitalization beginning when a
product’s technological feasibility has been established and ending when a
product is available for general release to customers. In most instances, the
Company’s products are released soon after technological feasibility has
been established. Therefore, costs incurred subsequent to achievement of
technological feasibility are usually not significant, and generally most software
development costs have been expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews 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,
the Company 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, the Company will
estimate the fair value of the asset group using appropriate valuation
methodologies, which 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.
Identifiable Intangible Assets and Goodwill
The Company performs 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. The Company 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, the Company determines 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
first requires the Company to estimate the fair value of its reporting units. If the
carrying value of a reporting unit exceeds its fair value, the goodwill of that
reporting unit is potentially impaired and the Company proceeds to step two
of the impairment analysis. In step two of the analysis, the Company
measures and records an impairment loss equal to the excess of the carrying
value of the reporting unit’s goodwill over its implied fair value, if any.
The Company generally bases its 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 the Company expects the reporting unit to generate in the
future. The Company’s significant estimates in the discounted cash flows
model include: its weighted average cost of capital; long-term rate of growth
and profitability of the reporting unit’s business; and working capital effects.
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