Supercuts 2011 Annual Report Download - page 37

Table of Contents
future cash flows also take into consideration acquisition integration and maturation. Where available and as appropriate, comparative market
multiples are used to corroborate the results of the discounted cash flow. The Company considers its various concepts to be reporting units when
testing for goodwill impairment because that is where the Company believes the goodwill resides. The Company periodically engages third-
party
valuation consultants to assist in evaluation of the Company's estimated fair value calculations.
In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be
measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the
implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative
fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets
and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its
implied fair value.
As a result of the Company's annual impairment analysis of goodwill as of February 28, 2011, a $74.1 million impairment charge was
recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade
salon concept.
Historically, goodwill was tested annually for impairment during the third quarter, as of February 28, of each fiscal year. Effective in the
fourth quarter of fiscal year 2011, the Company adopted a new accounting policy whereby the annual impairment review of goodwill will be
performed during the fourth quarter, as of April 30 instead of the third quarter of each fiscal year. The change in the annual goodwill impairment
testing date was made to better align the annual goodwill impairment test with the timing of the Company's annual budgeting process. The
change in accounting principle does not delay, accelerate or avoid an impairment charge. Accordingly, the Company believes that the accounting
change described above is preferable under the circumstances. As a result of the Company's annual impairment testing of goodwill performed
during the fourth quarter of fiscal year 2011, no impairment charges were recorded.
As it is reasonably likely that there could be additional impairment of the Promenade salon concept's goodwill in future periods along with
the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional
information related to this reporting unit.
A summary of the critical assumptions utilized during the annual impairment tests of the Promenade salon concept are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by assumed same-store sales rates of approximately negative
2.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.
Gross margin. Adjusted for anticipated salon closures, new salon construction and acquisitions estimated future gross margins
were held constant.
Fixed expense rates. Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed
expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.
Allocated corporate overhead. Corporate overhead incurred by the home office based on the number of Promenade company-
owned salons as a percent of total company-owned salons.
Long-term growth. A long-term growth rate of 2.5 percent was applied to terminal cash flow based on anticipated economic
conditions.
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