Sears 2011 Annual Report Download - page 61

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
current period cash flow loss combined with a history of cash flow losses, current cash flows that may be
insufficient to recover the investment in the property over the remaining useful life, or a projection that
demonstrates continuing losses associated with the use of a long-lived asset, significant changes in the manner of
use of the assets or significant changes in business strategies. An impairment loss is recognized when the
estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from
disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is
recognized, the carrying amount of the asset is reduced to its estimated fair value as determined based on quoted
market prices or through the use of other valuation techniques. See Note 13 for further information regarding
long-lived asset impairment charges recorded during 2011.
We account for costs associated with location closings in accordance with accounting standards pertaining
to accounting for costs associated with exit or disposal activities. As such, we record a liability for costs
associated with location closings, which includes employee severance, inventory markdowns and other
liquidation fees when management makes the decision to exit a location. We record a liability for future lease
costs (net of estimated sublease income) when we cease to use the location.
Goodwill, Trade Names, Other Intangible Assets and Related Impairments
Trade names acquired as part of the Merger account for the majority of our intangible assets recognized in
the Consolidated Balance Sheet. The majority of these trade name assets, such as Kenmore, Craftsman and
Lands’ End, are expected to generate cash flows indefinitely, do not have estimable or finite useful lives and,
therefore, are accounted for as indefinite-lived assets not subject to amortization. Certain intangible assets,
including favorable lease rights, contractual arrangements and customer lists, have estimable, finite useful lives,
which are used as the basis for their amortization. The estimated useful lives of such assets are determined using
a number of factors, including the demand for the asset, competition and the level of expenditure required to
maintain the cash flows associated with the asset.
As required by accounting standards, we perform annual goodwill and indefinite-lived intangible asset
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 or indefinite-lived intangible asset 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 for the
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