Sears 2011 Annual Report Download - page 49

years may elapse before a particular matter, for which we have established a reserve, is audited and fully
resolved. Management’s estimates at the date of the financial statements reflect our best judgment, giving
consideration to all currently available facts and circumstances. As such, these estimates may require adjustment
in the future, as additional facts become known or as circumstances change. For further information, see Note 10
of Notes to Consolidated Financial Statements.
Goodwill and Intangible Asset Impairment Assessments
At January 28, 2012 and January 29, 2011, we had goodwill balances of $0.8 billion and $1.4 billion,
respectively, and intangible asset balances of $2.9 billion and $3.0 billion, respectively. Holdings evaluates the
carrying value of goodwill and intangible assets for possible impairment under accounting standards governing
goodwill and other intangible assets. The majority of our goodwill and intangible assets relate to Kmart’s
acquisition of Sears, Roebuck and Co. in March 2005. We allocated goodwill, which is defined as the total
purchase price less the fair value of all assets and liabilities acquired, to reporting units at the acquisition date. As
required by accounting standards, we perform annual goodwill and intangible impairment tests in the fourth
quarter and update the tests between annual tests if events 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 appropriate to each of
our reporting units. 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, where comparable market participant information is available.
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 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 record an impairment charge for the
difference.
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