Black & Decker 2011 Annual Report Download - page 46

34
GOODWILL AND INTANGIBLE ASSETS — The Company acquires businesses in purchase transactions that result in the
recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make
estimates and assumptions. In accordance with Accounting Standards Codification (“ASC”) 350-20 “Goodwill” acquired goodwill
and indefinite-lived intangible assets are not amortized but are subject to impairment testing at least annually and when an event
occurs or circumstances change that indicate it is more likely than not an impairment exists. Definite lived intangible assets are
amortized and are tested for impairment when appropriate. Goodwill represents costs in excess of fair values assigned to the
underlying net assets of acquired businesses. The Company reported $6.920 billion of goodwill, $1.633 billion of indefinite-lived
trade names and $1.484 billion of definite-lived intangibles at December 31, 2011.
Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment as defined in ASC 280,
“Segment Reporting,” or one level below an operating segment (component level) as determined by the availability of discrete
financial information that is regularly reviewed by operating segment management or an aggregate of component levels of a reportable
operating segment having similar economic characteristics. If the carrying value of a reporting unit (including the value of goodwill) is
greater than its fair value, an impairment may exist. An impairment charge would be recorded to the extent that the recorded value of
goodwill exceeded the implied fair value.
The Company assesses the fair value of its reporting units based on a discounted cash flow valuation model. The key assumptions
used are discount rates and perpetual growth rates applied to cash flow projections. Also inherent in the discounted cash flow
valuation are near-term revenue growth rates over the next five years. These assumptions contemplate business, market and overall
economic conditions. The fair value of indefinite-lived trade names is also assessed using a discounted cash flow valuation model. The
key assumptions used include discount rates, royalty rates, and perpetual growth rates applied to the projected sales.
As required by the Company’s policy, goodwill and indefinite-lived trade names were tested for impairment in the third quarter of
2011. Based on this testing, the Company determined that the fair value of its reporting units and indefinite-lived trade names
exceeded their carrying values. The discount rates used in testing goodwill ranged from 8.5% to 11.5%. The near term growth rates
and perpetual growth rates, which varied for each reporting unit, ranged from approximately 3% to 10% and 2% to 4%, respectively.
Management performed sensitivity analyses on the fair values resulting from the discounted cash flows valuation utilizing more
conservative assumptions that reflect reasonably likely future changes in the discount rate and perpetual growth rate in all reporting
units. The discount rate was decreased by 100 basis points with no impairment indicated. The perpetual growth rates were decreased
by 150 basis points with no impairment indicated. Based upon the Company’s 2011 annual impairment testing analysis, including the
consideration of reasonably likely adverse changes in assumptions described above, management believes it is not reasonably likely
that an impairment will occur in any of the reporting units over the next twelve months.
In the event that the Company’s operating results in the future do not meet current expectations, management, based upon conditions
at the time, would consider taking restructuring or other actions as necessary to maximize profitability. Accordingly, the above
sensitivity analysis, while a useful tool, should not be used as a sole predictor of impairment. A thorough analysis of all the facts and
circumstances existing at that time would need to be performed to determine if recording an impairment loss was appropriate.
DEFINED BENEFIT OBLIGATIONS — The valuation of pension and other postretirement benefits costs and obligations is
dependent on various assumptions. These assumptions, which are updated annually, include discount rates, expected return on plan
assets, future salary increase rates, and health care cost trend rates. The Company considers current market conditions, including
interest rates, to establish these assumptions. Discount rates are developed considering the yields available on high-quality fixed
income investments with maturities corresponding to the duration of the related benefit obligations. The Company’s weighted-average
discount rates for the United States and international pension plans were 4.25% and 5.0%, respectively at December 31, 2011.
The Company’s weighted-average discount rate for both the United States and international pension plans was 5.25% at January 1,
2011. As discussed further in Note L, Employee Benefit Plans, of the Notes to Consolidated Financial Statements, the Company
develops the expected return on plan assets considering various factors, which include its targeted asset allocation percentages,
historic returns, and expected future returns. For 2011 net periodic benefit cost the Company’s expected rate of return assumption was
7.0% for both United States and international plans. The Company will use a 6.25% expected rate of return assumption for 2012 net
periodic benefit cost reflecting a relatively higher proportion of fixed income plan assets. A 25 basis point reduction in the expected
rate of return assumption would increase 2012 net periodic benefit cost by approximately $4 million, pre-tax.
The Company believes that the assumptions used are appropriate; however, differences in actual experience or changes in the
assumptions may materially affect the Company’s financial position or results of operations. To the extent that actual (newly
measured) results differ from the actuarial assumptions, the difference is recognized in accumulated other comprehensive income, and,
if in excess of a specified corridor, amortized over future periods. The expected return on plan assets is determined using the expected
rate of return and the fair value of plan assets. Accordingly, market fluctuations in the fair value of plan assets can affect the net
periodic benefit cost in the following year. The projected benefit obligation for defined benefit plans exceeded the fair value of plan
assets by $758 million at December 31, 2011. A 25 basis point reduction in the discount rate would have increased the projected