Proctor and Gamble 2014 Annual Report Download - page 42

40 The Procter & Gamble Company
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 intangible assets 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
trademarks 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 intangible assets are primarily based
on these same factors. All of our acquired technology and
customer-related intangible assets are expected to have
determinable useful lives.
The costs of determinable-lived intangible assets are
amortized to expense over their estimated lives. 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 intangible
assets. We test goodwill for impairment by reviewing the
book value compared to the fair value at the reporting unit
level. We test individual indefinite-lived intangible assets by
comparing the book values of each asset to the estimated fair
value. We determine the fair value of our reporting 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 management 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.
With the exception of our Appliances, Batteries and Salon
Professional businesses, all of our reporting units have fair
values that significantly exceed 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. In
addition, any potential change in the strategic plans for these
businesses due to the refocusing of our business portfolio
could impact these judgments, assumptions, and estimates,
in turn, impacting our fair value. 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 impaired businesses and recently
acquired businesses are derived from more recent business
operating plans and macroeconomic environmental
conditions and therefore are more susceptible to an adverse
change that could require an impairment charge.
The results of our impairment testing during fiscal 2012
indicated that the estimated fair values of our Appliances and
Salon Professional reporting units were less than their
respective carrying amounts. Therefore, we recorded a non-
cash before- and after-tax impairment charge of $1.3 billion
in fiscal 2012. Additionally, our impairment testing for
indefinite-lived intangible assets during fiscal 2012 indicated
a decline in the fair value of our Koleston Perfect and Wella
trade name intangible assets below their respective carrying
values. This resulted in a non-cash, before-tax impairment
charge of $246 million ($173 million after-tax) to reduce the
carrying amounts of these assets to their estimated fair
values.
During the fourth quarter of fiscal 2013, the estimated fair
value of our Appliances reporting units declined further,
below the carrying amount resulting from the fiscal 2012
impairment. Therefore, we recorded an additional non-cash
before and after-tax impairment charge of $259 million in
fiscal 2013. Additionally, our fourth quarter 2013
impairment testing for Appliances indicated a decline in the
fair value of our Braun trade name intangible asset below its
carrying value. This resulted in a non-cash, before-tax
impairment charge of $49 million ($31 million after-tax) to
reduce the carrying amount of this asset to its estimated fair
value.
The Appliances business was acquired as part of the Gillette
acquisition in 2005 and the Salon Professional business
consists primarily of operations acquired in the Wella
acquisition in 2004. Both businesses are stand-alone
reporting units. These businesses represent some of our
more discretionary consumer spending categories. Because
of this, their operations and underlying fair values were
disproportionately impacted by the economic downturn that
began in fiscal 2009, which led to a reduction in home and
personal grooming appliance purchases and in visits to hair
salons that drove the fiscal 2012 impairment. The additional
impairment of the Appliances business in fiscal 2013 was
due to the devaluation of currency in Japan, a key country
that generates a significant portion of the earnings of the
Appliances business, relative to the currencies in which the
underlying net assets are recorded. As of June 30, 2014, the
Appliances business has remaining goodwill of $317 million
and remaining intangible assets of $875 million, while the
Salon Professional business has remaining goodwill of $436
million and remaining intangible assets of $726 million. As
a result of the impairments, the estimated fair value of our
Appliances business and the Salon Professional business
slightly exceed their respective carrying values. Our fiscal
2014 valuations of the Appliances and Salon Professional
businesses has them returning to sales and earnings growth