Sara Lee 2009 Annual Report Download - page 43

adverse changes in the business climate, the impact of significant
customer losses, current period operating or cash flow losses,
forecasted continuing losses or a current expectation that an asset
group will be disposed of before the end of its useful life.
Recoverability of property is evaluated by a comparison of the carrying
amount of an asset or asset group to future net undiscounted cash
flows expected to be generated by the asset or asset group. If these
comparisons indicate that an asset is not recoverable, the impair-
ment loss recognized is the amount by which the carrying amount
of the asset exceeds the estimated fair value. When an impairment
loss is recognized for assets to be held and used, the adjusted
carrying amount of those assets is depreciated over its remaining
useful life. Restoration of a previously recognized impairment loss
is not allowed.
There are inherent uncertainties associated with these judgments
and estimates and it is reasonably likely that impairment charges
can change from period to period. Note 3 to the Consolidated
Financial Statements discloses the impairment charges recognized
by the corporation and the factors which caused these charges.
It is also reasonably likely that the sale of a business can result in
the recognition of an impairment that differs from that anticipated
prior to the closing date. Given the corporation’s ongoing efforts
to improve operating efficiency, it is reasonably likely that future
restructuring actions could result in decisions to dispose of other
assets before the end of their useful life and it is reasonably likely
that the impact of these decisions would result in impairment
and other related costs including employee severance that in the
aggregate would be significant.
Trademarks and Other Identifiable Intangible Assets The primary
identifiable intangible assets of the corporation are trademarks and
customer relationships acquired in business combinations and com-
puter software. Identifiable intangibles with finite lives are amortized
and those with indefinite lives are not amortized. The estimated
useful life of an identifiable intangible asset to the corporation is
based upon a number of factors, including the effects of demand,
competition, expected changes in distribution channels and the
level of maintenance expenditures required to obtain future cash flows.
As of June 27, 2009, the net book value of trademarks and other
identifiable intangible assets was $806 million, of which $717 million
is being amortized. The anticipated amortization over the next five
years is $346 million.
Identifiable intangible assets that are subject to amortization are
evaluated for impairment using a process similar to that used to
evaluate elements of property. Identifiable intangible assets not
subject to amortization are assessed for impairment at least
annually, in the second quarter, and as triggering events may arise.
The impairment test for identifiable intangible assets not subject to
amortization consists of a comparison of the fair value of the
intangible asset with its carrying amount. An impairment loss is
recognized for the amount by which the carrying value exceeds
the fair value of the asset. The fair value of the intangible asset is
measured using the royalty savings method. In making this assess-
ment, management relies on a number of factors to discount
anticipated future cash flows including operating results, business
plans and present value techniques. Rates used to discount cash
flows are dependent upon interest rates and the cost of capital
at a point in time.
There are inherent assumptions and estimates used in developing
future cash flows requiring management's judgment in applying these
assumptions and estimates to the analysis of intangible asset
impairment including projecting revenues, interest rates, the cost
of capital, royalty rates and tax rates. Many of the factors used in
assessing fair value are outside the control of management and
it is reasonably likely that assumptions and estimates will change
in future periods. These changes can result in future impairments.
Note 3 to the Consolidated Financial Statements sets out the impact
of charges taken to recognize the impairment of intangible assets
and the factors which led to changes in estimates and assumptions.
Goodwill Goodwill is not amortized but is subject to periodic
assessments of impairment and is discussed further in Note 15.
Goodwill is assessed for impairment at least annually, in the second
quarter, and as triggering events may arise. Recoverability of goodwill
is evaluated using a two-step process. The first step involves a
comparison of the fair value of a reporting unit with its carrying
value. If the carrying value of the reporting unit exceeds its fair
value, the second step of the process involves a comparison of
the implied fair value and carrying value of the goodwill of that
reporting unit. If the carrying value of the goodwill of a reporting
unit exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to the excess. Reporting units
are business components one level below the operating segment
level for which discrete financial information is available and reviewed
by segment management. In evaluating the recoverability of goodwill,
it is necessary to estimate the fair value of the reporting units. In
making this assessment, management relies on a number of factors
to discount anticipated future cash flows including operating results,
business plans and present value techniques. Rates used to discount
cash flows are dependent upon interest rates and the cost of capital
at a point in time. In 2009, the fair value of goodwill is estimated
based on a discounted cash flow model using management’s business
plans and projections as the basis for expected future cash flows
for the first ten years and a 2% residual growth rate thereafter.
Management believes the assumptions used for the impairment
Sara Lee Corporation and Subsidiaries 41