Sara Lee 2010 Annual Report Download - page 61

Assets that are to be disposed of by sale are recognized in the
financial statements at the lower of carrying amount or fair value,
less cost to sell, and are not depreciated after being classified as
held for sale. In order for an asset to be classified as held for sale,
the asset must be actively marketed, be available for immediate
sale and meet certain other specified criteria.
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. The corporation capitalizes direct costs of materials
and services used in the development and purchase of internal-use
software. Identifiable intangibles with finite lives are amortized and
those with indefinite lives are not amortized. The estimated useful
life of a finite-lived identifiable intangible asset is based upon a
number of factors, including the effects of demand, competition,
expected changes in distribution channels and the level of mainte-
nance expenditures required to obtain future cash flows.
Identifiable intangible assets that are subject to amortization
are evaluated for impairment using a process similar to that used
in evaluating the recoverability of property, plant and equipment.
Identifiable intangible assets not subject to amortization are
assessed for impairment at least annually and as triggering events
may occur. 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 impair-
ment loss is recognized for the amount by which the carrying value
exceeds the fair value of the asset. In making this assessment,
management relies on a number of factors to discount estimated
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 judgments required
in the analysis of intangible asset impairment. It is possible that
assumptions underlying the impairment analysis will change in
such a manner that impairment in value may occur in the future.
Goodwill Goodwill is the difference between the purchase price
and the fair value of the assets acquired and liabilities assumed in
a business combination. When a business combination is completed,
the assets acquired and liabilities assumed are assigned to the
reporting unit or units of the corporation given responsibility for
managing, controlling and generating returns on these assets and
liabilities. Reporting units are business components at or one level
below the operating segment level for which discrete financial infor-
mation is available and reviewed by segment management. In many
instances, all of the acquired assets and liabilities are assigned
to a single reporting unit and in these cases all of the goodwill is
assigned to the same reporting unit. In those situations in which
the acquired assets and liabilities are allocated to more than one
reporting unit, the goodwill to be assigned to each reporting unit
is determined in a manner similar to how the amount of goodwill
recognized in the business combination is determined.
Goodwill is not amortized; however, it is assessed for
impairment at least annually and as triggering events may occur.
The corporation previously performed its annual review for impair-
ment in the second quarter of each fiscal year but moved its
testing to the fourth quarter beginning in this fiscal year in order to
better align the impairment review with the corporation’s long-range
planning process. 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 is necessary and involves a comparison of the implied fair
value and the 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.
In evaluating the recoverability of goodwill, it is necessary
to estimate the fair values 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. In 2010, the fair value of
reporting units is estimated based on a weighing of two models –
a discounted cash flow model and a market multiple model. The
discounted cash flow model uses management’s business plans
and projections as the basis for expected future cash flows for the
first three years and a 2% residual growth rate thereafter. The market
multiple approach employs market multiples of revenues and earnings
for companies comparable to the corporation’s reporting units.
Management believes the assumptions used for the impairment
test are consistent with those utilized by a market participant
performing similar valuations for our reporting units. A separate
discount rate derived from published sources was utilized for each
reporting unit and, on a weighted average basis, the discount rate
used was 10.2%. Rates used to discount cash flows are dependent
upon interest rates, market-based risk premium and the cost of
capital at a point in time. Because some of the inherent assump-
tions and estimates used in determining the fair value of these
reporting units are outside the control of management, including
interest rates, market-based risk premium, the cost of capital, and
tax rates, changes in these underlying assumptions and our credit
rating can also adversely impact the business units’ fair values.
The amount of any impairment is dependent on these factors,
which cannot be predicted with certainty.
Exit and Disposal Activities Exit and disposal activities primarily
consist of various actions to sever employees, exit certain contractual
obligations and dispose of certain assets. Charges are recognized
for these actions at their fair value in the period in which the liability
is incurred. Adjustments to previously recorded charges resulting
from a change in estimated liability are recognized in the period
in which the change is identified. Our methodology used to record
these charges is described below.
Sara Lee Corporation and Subsidiaries 59