Dick's Sporting Goods 2012 Annual Report Download - page 60

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38
When evaluating goodwill for impairment, we first perform a qualitative assessment to determine if the
fair value of the reporting unit is ‘‘more likely than not’’ less than the carrying value. If so, we proceed
to step one of the two-step goodwill impairment test, in which we compare the fair value of the
reporting unit to its carrying value. If not, then performance of the two-step goodwill impairment test is
not necessary. If the carrying value of goodwill exceeds the implied estimated fair value, an impairment
charge to current operations is recorded to reduce the carrying value to the implied estimated fair
value. The Company determines the fair value of its reporting units using a combination of a
discounted cash flow and a market value approach. The Company’s estimates may differ from actual
results due to, among other things, economic conditions, changes to its business models, or changes in
operating performance. Significant differences between these estimates and actual results could result in
future impairment charges and could materially affect the Company’s future financial results. If the fair
value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit,
goodwill is not impaired and the Company is not required to perform further testing. If the carrying
value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then
the Company must determine the implied fair value of the reporting unit’s goodwill and compare it to
the carrying value of the reporting unit’s goodwill. This includes valuing the tangible and intangible
assets and liabilities of the impaired reporting unit based on their fair value and determining the fair
value of the impaired reporting unit’s goodwill based upon the residual of the aggregate identified
tangible and intangible assets and liabilities.
Intangible assets that have been determined to have indefinite lives are also not subject to amortization
and are reviewed at least annually for potential impairment, or more frequently as mentioned above.
The fair value of the Company’s intangible assets are estimated and compared to their carrying value.
The Company estimates the fair value of these intangible assets based on an income approach using
the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party
would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This
approach is dependent on a number of factors, including estimates of future growth and trends, royalty
rates in the category of intellectual property, discount rates and other variables. The Company
recognizes an impairment charge when the estimated fair value of the intangible asset is less than the
carrying value.
Impairment of Long-Lived Assets and Closed Store Reserves
The Company reviews long-lived assets whenever events and circumstances indicate that the carrying
value of these assets may not be recoverable based on estimated undiscounted future cash flows. Assets
are reviewed at the lowest level for which cash flows can be identified, which is the store level. In
determining future cash flows, significant estimates are made by the Company with respect to future
operating results of each store over its remaining lease term. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets.
Based on an analysis of current and future store performance, management periodically evaluates the
need to close underperforming stores. Reserves are established when the Company ceases to use the
location for the present value of any remaining operating lease obligations, net of estimated sublease
income. If the timing or amount of actual sublease income differs from estimated amounts, this could
result in an increase or decrease in the related reserves.
Self-Insurance
The Company is self-insured for certain losses related to health, workers’ compensation and general
liability insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability
exposure. Liabilities associated with these losses are estimated in part by considering historical claims
experience, industry factors, severity factors and other actuarial assumptions.