Black & Decker 2015 Annual Report Download - page 49

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ALLOWANCE FOR DOUBTFUL ACCOUNTS — The Company’s estimate for its allowance for doubtful accounts related to
trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the
total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers
may have an inability to meet financial obligations. In these cases, management uses its judgment, based on the surrounding
facts and circumstances, to record a specific reserve for those customers against amounts due to reduce the receivable to the
amount expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received.
Second, a reserve is determined for all customers based on a range of percentages applied to receivable aging categories. These
percentages are based on historical collection and write-off experience.
If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in
a major customer’s ability to meet its financial obligation to the Company, estimates of the recoverability of receivable amounts
due could be reduced.
INVENTORIES - LOWER OF COST OR MARKET, SLOW MOVING AND OBSOLETE — Inventories in the U.S. are
predominantly valued at the lower of Last-In First-Out (“LIFO”) cost or market, while non-U.S. inventories are valued at the
lower of First-In, First-Out (“FIFO”) cost or market. The calculation of LIFO reserves, and therefore the net inventory
valuation, is affected by inflation and deflation in inventory components. The Company ensures all inventory is valued at the
lower of cost or market, and continually reviews the carrying value of discontinued product lines and stock-keeping-units
(“SKUs”) to determine that these items are properly valued. The Company also continually evaluates the composition of its
inventory and identifies obsolete and/or slow-moving inventories. Inventory items identified as obsolete and/or slow-moving
are evaluated to determine if write-downs are required. The Company assesses the ability to dispose of these inventories at a
price greater than cost. If it is determined that cost is less than market value, cost is used for inventory valuation. If market
value is less than cost, the Company writes down the related inventory to that value. If a write-down to the current market value
is necessary, the market value cannot be greater than the net realizable value, or ceiling (defined as selling price less costs to
sell and dispose), and cannot be lower than the net realizable value less a normal profit margin, also called the floor. If the
Company is not able to achieve its expectations regarding net realizable value of inventory at its current value, further write-
downs would be recorded.
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 ASC 350-20, “Goodwill,” acquired goodwill and indefinite-lived intangible
assets are not amortized but are subject to impairment testing at least annually or 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 an event occurs or circumstances change that indicate it is more-likely-than-not that an impairment
exists. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. The
Company reported $7.084 billion of goodwill, $1.578 billion of indefinite-lived trade names and $0.964 billion of definite-lived
intangibles at January 2, 2016.
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 an 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.
During the third quarter of 2015, as required by the Company’s policy, goodwill and indefinite-lived trade names were tested
for impairment. The Company assessed the fair value of its reporting units based on a discounted cash flow valuation model.
The key assumptions applied to the cash flow projections were discount rates, which ranged from 8% to 10.5%, near-term
revenue growth rates over the next five years, which ranged from 2% to 10%, and perpetual growth rates ranging from 3% to
3.5%. These assumptions contemplated business, market and overall economic conditions. Based on the results of this testing,
the Company determined that the fair values of each of its reporting units exceeded their respective carrying amounts.
Furthermore, management performed sensitivity analyses on the fair values resulting from the discounted cash flow valuation
models utilizing more conservative assumptions that reflect reasonably likely future changes in the discount rates and perpetual
growth rates in each of the reporting units. The discount rates were increased by 100 basis points with no impairment indicated.
The perpetual growth rates were decreased by 150 basis points with no impairment indicated.
The fair values of indefinite-lived trade names were also assessed using a discounted cash flow valuation model. The key
assumptions used included discount rates, royalty rates, and perpetual growth rates applied to the projected sales. Based on
these quantitative impairment tests, the Company determined that the fair values of the indefinite-lived trade names exceeded
their respective carrying amounts.