Tyson Foods 2014 Annual Report Download - page 58

Goodwill and Other Intangible Assets:
Goodwill and indefinite life intangible assets are initially recorded at fair value and not amortized, but
are reviewed for impairment at least annually or more frequently if impairment indicators arise. Our goodwill is allocated by reporting unit and
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. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test.
The first step of the quantitative test 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). 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.
We estimate the fair value of our reporting units using a discounted cash flow analysis, which uses significant unobservable inputs, or Level 3
inputs, as defined by the fair value hierarchy. This analysis requires us to make various judgmental estimates and assumptions about sales,
operating margins, growth rates and discount factors and is believed to reflect market participant views which would exist in an exit
transaction. Generally, we utilize normalized operating margin assumptions based on future expectations and operating margins historically
realized in the reporting units' industries. 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 credit ratings. While we believe we have made
reasonable estimates and assumptions to calculate the fair value of the reporting units, 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 of the
quantitative test in future years, which could result in material impairments of our goodwill.
During fiscal 2014, 2013 and 2012, all of our material reporting units that underwent the quantitative test passed the first step of the goodwill
impairment analysis and therefore, the second step was not necessary.
For our 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.
The fair value of our indefinite life intangible assets is calculated principally using relief-from-royalty and excess earnings valuation
approaches and is believed to reflect market participant views which would exist in an exit transaction. Under these valuation approaches, we
are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets,
business plans, economic projections, anticipated future cash flows and marketplace data.
Investments: We have investments in joint ventures and other entities. We generally use the cost method of accounting when our voting
interests are less than 20 percent. We use the equity method of accounting when our voting interests are in excess of 20 percent and we do not
have a controlling interest or a variable interest in which we are the primary beneficiary. Investments in joint ventures and other entities are
reported in the Consolidated Balance Sheets in Other Assets.
We also have investments in marketable debt securities. We have determined all of our marketable debt securities are available-for-sale
investments. These investments are reported at fair value based on quoted market prices as of the balance sheet date, with unrealized gains and
losses, net of tax, recorded in other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is recorded in interest income. The cost of securities sold is based on the specific
identification method. Realized gains and losses on the sale of debt securities and declines in value judged to be other than temporary are
recorded on a net basis in other income. Interest and dividends on securities classified as available-for-sale are recorded in interest income.
Accrued Self-Insurance: We use a combination of insurance and self-insurance mechanisms in an effort to mitigate the potential liabilities for
health and welfare, workers’ compensation, auto liability and general liability risks. Liabilities associated with our risks retained are estimated,
in part, by considering claims experience, demographic factors, severity factors and other actuarial assumptions.
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