Tyson Foods 2014 Annual Report Download - page 46

Impairment of goodwill and other indefinite life intangible assets
Description: Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill
test is necessary. If it is determined, based on qualitative factors, the fair value of the reporting unit may be more likely than not less than
carrying amount or if significant changes to macro-economic factors related to the reporting unit have occurred that could materially impact
fair value, a quantitative goodwill impairment test would be required. We can elect to forgo the qualitative assessment and perform the
quantitative test.
The quantitative goodwill impairment test is performed using a two-step process. The first step is to identify if a potential impairment exists by
comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the quantitative
impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to
determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any.
The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill
exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair
value, an impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the
fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit
had been acquired in a business combination and the fair value of the reporting unit was determined as the exit price a market participant would
pay for the same business).
For other indefinite life intangible assets, a qualitative assessment can also be performed to determine whether the existence of events and
circumstances indicates it is more likely than not an intangible asset is impaired. Similar to goodwill, we can also elect to forgo the qualitative
test for indefinite life intangible assets and perform the quantitative test. Upon performing the quantitative test, if the carrying value of the
intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We elected to forgo the qualitative
assessments on our indefinite life intangible assets for the fiscal 2014 impairment test.
We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill and other indefinite life
intangible assets. However, we could be required to evaluate the recoverability of goodwill and other indefinite life intangible assets prior to
the required annual assessment if, among other things, we experience disruptions to the business, unexpected significant declines in operating
results, divestiture of a significant component of the business or a sustained decline in market capitalization.
Judgments and Uncertainties: We estimate the fair value of our reporting units, using various valuation techniques, with the primary
technique being a discounted cash flow analysis, which uses significant unobservable inputs, or Level 3 inputs, as defined by the fair value
hierarchy. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates
and discount rates.
We include assumptions about sales, operating margins and growth rates which consider our budgets, business plans and economic projections,
and are believed to reflect market participant views which would exist in an exit transaction. Assumptions are also made for varying perpetual
growth rates for periods beyond the long-term business plan period. Generally, we utilize normalized operating margin assumptions based on
future expectations and operating margins historically realized in the reporting units' industries.
Other indefinite life intangible asset fair values have been calculated for trademarks using a royalty rate method. Assumptions about royalty
rates are based on the rates at which similar brands and trademarks are licensed in the marketplace.
Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future
economic and operating conditions.
Effect if Actual Results Differ From Assumptions: We have not made any material changes in the accounting methodology used to evaluate
impairment of goodwill and other intangible assets during the last three years other than the adoption of the new guidance allowing the option
to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test.
The discount rate used in our annual goodwill impairment test decreased to an average of 7.9% in fiscal 2014 from 8.4% in fiscal 2013. There
were no significant changes in the other key estimates and assumptions.
During fiscal 2014, 2013 and 2012, all of our material reporting units that underwent a quantitative test passed the first step of the goodwill
impairment analysis and therefore, the second step was not necessary.
Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management,
including interest rates, cost of capital, tax rates and our credit ratings. While we believe we have made reasonable estimates and assumptions
to calculate the fair value of the reporting units and other indefinite life intangible assets, it is possible a material change could occur. If our
actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to perform the second step,
which could result in additional material impairments of our goodwill.
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