Proctor and Gamble 2011 Annual Report Download - page 51

Management’s Discussion and AnalysisThe Procter & Gamble Company 49
expense by less than $ million. The average discount rate on the
OPEB plan of .% reflects the higher interest rates generally applicable
in the U.S., which is where a majority of the plan participants receive
benefits. A  basis point change in the discount rate would impact
annual after-tax OPEB expense by less than $35 million.
Acquisitions, Goodwill and Intangible Assets
We account for acquired businesses using the purchase method of
accounting. Under the purchase method, our Consolidated Financial
Statements reflect the operations of an acquired business starting
from the completion of the acquisition. In addition, the assets acquired
and liabilities assumed must be recorded at the date of acquisition
at their respective estimated fair values, with any excess of the pur-
chase price over the estimated fair values of the net assets acquired
recorded as goodwill.
Significant judgment is required in estimating the fair value of intan-
gible assets and in assigning their respective useful lives. Accordingly,
we typically obtain the assistance of third-party valuation specialists
for significant items. The fair value estimates are based on available
historical information and on future expectations and assumptions
deemed reasonable by management, but are inherently uncertain.
We typically use an income method to estimate the fair value of
intangible assets, which is based on forecasts of the expected future
cash flows attributable to the respective assets. Significant estimates
and assumptions inherent in the valuations reflect a consideration of
other marketplace participants, and include the amount and timing of
future cash flows (including expected growth rates and profitability),
the underlying product or technology life cycles, economic barriers to
entry, a brand’s relative market position and the discount rate applied
to the cash flows. Unanticipated market or macroeconomic events and
circumstances may occur, which could affect the accuracy or validity
of the estimates and assumptions.
Determining the useful life of an intangible asset also requires judgment.
Certain brand intangibles are expected to have indefinite lives based
on their history and our plans to continue to support and build the
acquired brands. Other acquired intangible assets (e.g., certain trade-
marks or brands, customer relationships, patents and technologies)
are expected to have determinable useful lives. Our assessment as to
brands that have an indefinite life and those that have a determinable
life is based on a number of factors including competitive environment,
market share, brand history, underlying product life cycles, operating
plans and the macroeconomic environment of the countries in which
the brands are sold. Our estimates of the useful lives of determinable-
lived intangibles are primarily based on these same factors. All of our
acquired technology and customer-related intangibles are expected
to have determinable useful lives.
The costs of determinable-lived intangibles are amortized to expense
over their estimated life. The value of indefinite-lived intangible assets
and residual goodwill is not amortized, but is tested at least annually
for impairment. Our impairment testing for goodwill is performed
separately from our impairment testing of indefinite-lived intangibles.
We test goodwill for impairment by reviewing the book value com-
pared to the fair value at the reportable unit level. We test individual
indefinite-lived intangibles by reviewing the individual book values
compared to the fair value. We determine the fair value of our report-
ing units and indefinite-lived intangible assets based on the income
approach. Under the income approach, we calculate the fair value of
our reporting units and indefinite-lived intangible assets based on the
present value of estimated future cash flows. Considerable manage-
ment judgment is necessary to evaluate the impact of operating and
macroeconomic changes and to estimate future cash flows to measure
fair value. Assumptions used in our impairment evaluations, such as
forecasted growth rates and cost of capital, are consistent with internal
projections and operating plans. We believe such assumptions and
estimates are also comparable to those that would be used by other
marketplace participants. When certain events or changes in operating
conditions occur, indefinite-lived intangible assets may be reclassified
to a determinable life asset and an additional impairment assessment
may be performed. We did not recognize any material impairment
charges for goodwill or intangible assets during the years presented.
Our annual impairment testing for both goodwill and indefinite-lived
intangible assets indicated that all reporting unit and indefinite-lived
intangible asset fair values exceeded their respective recorded values.
However, future changes in the judgments, assumptions and estimates
that are used in our impairment testing for goodwill and indefinite-
lived intangible assets, including discount and tax rates or future cash
flow projections, could result in significantly different estimates of the
fair values. A significant reduction in the estimated fair values could
result in impairment charges that could materially affect the financial
statements in any given year. The recorded value of goodwill and
intangible assets from recently acquired businesses are derived from
more recent business operating plans and macroeconomic environ-
mental conditions and therefore are more susceptible to an adverse
change that could require an impairment charge.
For example, the Gillette intangible and goodwill amounts represent
values as of a relatively more recent acquisition date, and as such,
theamounts are more susceptible to an impairment risk if business
operating results or macroeconomic conditions deteriorate. Gillette
indefinite-lived intangible assets represent approximately 88% of the
$27.8billion of indefinite-lived intangible assets at June30,2011.
Goodwill allocated to stand-alone reporting units consisting primarily
of businesses purchased as part of the Gillette acquisition represents
42% of the $57.6billion of goodwill at June30,2011. This includes
the Male Grooming and Appliance businesses, which are components
of the Grooming segment, and the Batteries business, which is part
of the Fabric Care and Home Care segment.
With the exception of our Appliances and Salon Professional businesses,
all of our other reporting units have fair values that significantly
exceed recorded values. As noted above, the Appliances business was
acquired as part of the Gillette acquisition and is a stand-alone good-
will reporting unit. The Salon Professional business, which consists
primarily of operations acquired in the Wella acquisition, became a
new stand-alone goodwill reporting unit as of July 1,2009, coinciding