Sears 2011 Annual Report Download - page 50

After performing the first step of the process in 2011, we determined goodwill recorded at two of the
reporting units within the Sears Domestic segment were potentially impaired. After performing the second step
of the process, we determined that the total amount of goodwill recorded at these reporting units was impaired
and recorded a charge of $551 million. The impairment charge was primarily driven by the combination of lower
sales and continued margin pressure coupled with expense increases which led to a decline in our operating
profit. We did not record any goodwill impairment charges in 2010 or 2009.
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 2011 annual impairment test date, the conclusion that no indication
of goodwill impairment existed for the remaining reporting units 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 and/or 2) a
100 basis point decrease in the estimated sales growth rate and/or terminal period growth rate.
Based on our sensitivity analysis, we do not believe that the remaining recorded goodwill balance is at risk
of impairment at any reporting unit at the end of the year because the fair value is substantially in excess of the
carrying value and not at risk of failing step one. However, goodwill impairment charges may be recognized in
future periods in one or more of the reporting units to the extent changes in factors or circumstances occur,
including deterioration in the macroeconomic environment, retail industry or in the equity markets, which
includes the market value of our common shares, deterioration in our performance or our future projections, or
changes in our plans for one or more reporting units.
Intangible Asset Impairment Assessments
We review indefinite-lived intangible assets for impairment by comparing the carrying amount of each asset
to the sum of undiscounted cash flows expected to be generated by the asset. We consider both the market
approach and income approach when testing intangible assets with indefinite lives for impairment on an annual
basis. We determined that the income approach, specifically the Relief from Royalty Method, was most
appropriate for analyzing our indefinite-lived assets. This method is based on the assumption that, in lieu of
ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class. The
Relief from Royalty Method involves two steps: (i) estimation of reasonable royalty rates for the assets and
(ii) the application of these royalty rates to a net sales stream and discounting the resulting cash flows to
determine a value. We multiplied the selected royalty rate by the forecasted net sales stream to calculate the cost
savings (relief from royalty payment) associated with the assets. The cash flows are then discounted to present
value by the selected discount rate and compared to the carrying value of the assets. We did not record any
intangible asset impairment charges in 2011, 2010 or 2009.
The use of different assumptions, estimates or judgments in our intangible asset impairment testing process,
such as the estimated future cash flows of assets and the discount rate used to discount such cash flows, could
significantly increase or decrease the estimated fair value of an asset, and therefore, impact the related
impairment charge. At the 2011 annual impairment test date, the above-noted conclusion that no indication of
intangible asset 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 assets to their net present value in determining their estimated fair values (without any change in the
aggregate estimated cash flows of our intangibles), 2) a 100 basis point decrease in the terminal period growth
rate without a change in the discount rate of each intangible, or 3) a 10 basis point decrease in the royalty rate
applied to the forecasted net sales stream of our assets.
Based on our sensitivity analysis, we do not believe that the indefinite-lived intangible balance is at risk of
impairment at the end of the year because the fair values are substantially in excess of the carrying values.
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