Sears 2009 Annual Report Download - page 47

or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying
amount.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred.
Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained,
significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in
the business climate; unanticipated competition; and the testing for recoverability of a significant asset group
within a reporting unit. Any adverse change in these factors could have a significant impact on the recoverability
of these assets and could have a material impact on our consolidated financial statements.
Goodwill Impairment Assessments
Our goodwill resides in multiple reporting units. The goodwill impairment test involves a two-step process.
The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value
using the best information available, using both a market participant approach, as well as a discounted cash flow
model, commonly referred to as the income approach. The market participant approach determines the value of a
reporting unit by deriving market multiples for reporting units based on assumptions potential market participants
would use in establishing a bid price for the unit. This approach therefore assumes strategic initiatives will result
in improvements in operational performance in the event of purchase, and includes the application of a discount
rate based on market participant assumptions with respect to capital structure and access to capital markets. The
income approach uses a reporting unit’s projection of estimated operating results and cash flows that is
discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses
management’s best estimates of economic and market conditions over the projected period, including growth
rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other
significant estimates and assumptions include terminal value growth rates, future estimates of capital
expenditures and changes in future working capital requirements. Our final estimate of fair value of reporting
units is developed by equally weighting the fair values determined through both the market participant and
income approaches.
If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment
may exist and the second step must be performed to measure the amount of impairment loss. The amount of
impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of
the goodwill in the same manner as if the reporting unit was being acquired in a business combination.
Specifically, we would allocate the fair value to all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill.
If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge
for the difference. We did not record any goodwill impairment charges in fiscal 2009. See Notes 13 and 14 to the
Consolidated Financial Statements for further information regarding goodwill and related impairment charges
recorded during fiscal 2008.
The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing
process, such as the estimated future cash flows of our reporting units, the discount rate used to discount such
cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could
significantly increase or decrease the estimated fair value of a reporting unit or its net assets, and therefore,
impact the related impairment charge. At the fiscal 2009 annual impairment test date, the above-noted conclusion
that no indication of goodwill impairment existed at the test date would not have changed had the test been
conducted assuming: 1) a 100 basis point increase in the discount rate used to discount the aggregate estimated
cash flows of our reporting units to their net present value in determining their estimated fair values (without any
change in the aggregate estimated cash flows of our reporting units), or 2) a 100 basis point decrease in the
estimated sales growth rate or terminal period growth rate without a change in the discount rate of each reporting
unit.
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