Rayovac 2004 Annual Report Download - page 44

Critical Accounting Policies
Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted
accounting principles and fairly present our financial position and results of operations. We believe the following
accounting policies are critical to an understanding of our financial statements. The application of these policies
requires management judgment and estimates in areas that are inherently uncertain.
Valuation of Assets and Asset Impairment
We evaluate certain long-lived assets, such as property, plant and equipment and certain intangibles for
impairment based on the expected future cash flows or earnings projections associated with such assets.
Impairment reviews are conducted at the judgment of management when it believes that a change in
circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of
a product or product line, a sudden or consistent decline in the sales forecast for a product, changes in technology
or in the way an asset is being used, a history of operating or cash flow losses, or an adverse change in legal
factors or in the business climate, among others, may trigger an impairment review. An asset’s value is deemed
impaired if the discounted cash flows or earnings projections generated do not substantiate the carrying value of
the asset. The estimation of such amounts requires management judgment with respect to revenue and expense
growth rates, changes in working capital, and selection of an appropriate discount rate, as applicable. The use of
different assumptions would increase or decrease discounted future operating cash flows or earnings projections
and could, therefore, change impairment determination.
Under SFAS 142, Goodwill and Other Intangible Assets, we test goodwill and trade name intangibles for
impairment annually. During 2004, we changed the annual impairment testing date for goodwill and trade name
intangibles from October 1 to August 31 of each year. The August 31 date is preferable as it provides us with
more time prior to the fiscal year-end to complete impairment testing and to report the impact of the impairment
tests in our annual Form 10-K filing. The fair values of our goodwill and trade name intangibles exceeded the
carrying amounts, and accordingly, no impairment is indicated as of August 31, 2004. Fair values are determined
using discounted cash flow models involving several assumptions. These include anticipated growth rates by
geographic region, the long-term anticipated growth rate, estimates of the cash flows discount rate. Changes in
our assumptions could materially impact our fair value estimates.
Assumptions critical to our fair value estimates are: i) our projected average revenue growth rates used in
the reporting unit and trade name models, which management believes are reasonable growth rates for long-term
projections, ii) our projected long-term growth rate of 4.0 percent for determining terminal value, and iii) our
discount rate of approximately 10.0 percent, representing our targeted near-term weighted average cost of capital
(WACC). These and other assumptions are impacted by economic conditions and expectations of management
and will change in the future based on period specific facts and circumstances. Factors inherent in determining
our WACC are: i) the value of our common stock, ii) the variability in the value of our common stock, iii) our
interest costs on debt and debt market conditions, and iv) the amounts and relationships of debt and equity
capital.
We evaluate net deferred tax assets based on future earnings projections. An asset’s value is deemed
impaired if the earnings projections do not substantiate the carrying value of the asset. The estimation of such
amounts requires significant management judgment with respect to revenue and expense growth rates, changes in
working capital, and other assumptions, as applicable. The use of different assumptions would increase or
decrease future earnings projections and could, therefore, change the determination of whether an asset is
realizable.
See Note 2(h), Note 2(i), Note 4, Note 5, and Note 9 to the Consolidated Financial Statements for more
information about these assets.
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