Dow Chemical 2009 Annual Report Download - page 96

Table of Contents
Goodwill
The Company assesses goodwill recoverability through business financial performance reviews, enterprise valuation analysis, and impairment tests.
Annual goodwill impairment tests are completed during the Company’s fourth quarter of the year in accordance with the subsequent measurement
provisions of the accounting guidance for goodwill. The tests are performed at the reporting unit level which is defined as one level below operating
segment with the exception of Health and Agricultural Sciences which is both an operating segment and a reporting unit. Reporting units are the level at
which discrete financial information is available and reviewed by business management on a regular basis. The Company has defined eight operating
segments and 29 reporting units. Goodwill is carried by 20 of the Company’s 29 reporting units.
In addition to the annual goodwill impairment tests, the Company reviews the financial performance of its reporting units over the course of the year
to assess whether circumstances have changed that would more likely than not indicate that the fair value of a reporting unit has declined below its
carrying value. In cases where an indication of impairment is determined to exist, the Company completes an interim goodwill impairment test specifically
for that reporting unit.
The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units. This valuation technique has been
selected by management as the most meaningful valuation method due to the limited number of market comparables for the Company’s reporting units.
However, where market comparables are available, the Company includes EBIT/EBITDA multiples as part of the reporting unit valuation analysis.
The discounted cash flow valuations are completed with the use of key assumptions, including projected revenue growth rate, discount rate, tax rate,
currency exchange rates, terminal value, and long-term hydrocarbons and energy prices. These key assumptions are reevaluated with each annual
impairment test and values are updated based on current facts and circumstances. The tax rate, currency exchange rates, and long-term hydrocarbons and
energy prices are established for the Company as a whole and applied consistently to all reporting units, while revenue growth rate, terminal value
(calculated using the Gordon Growth Model), and discount rate are evaluated by reporting unit to account for differences in business fundamentals and
industry risk.
For the 2009 annual impairment test, the tax rate was set at 25 percent, currency exchange rates were projected by year for 54 currencies, and long-
term hydrocarbons and energy prices were forecast by geographic area by year and included all key feedstocks as well as natural gas and crude oil (due to
the correlation to naphtha). Discount rates ranged from 9.1 percent to 11.4 percent based on an assessment of likely market participants and relative
industry risk of each reporting unit. Terminal values were differentiated based on the cash flow projections of each reporting unit and the projected Net
Operating Profit After Tax (“NOPAT”) growth rate, which ranged from negative 1.3 percent to positive 4.5 percent. Revenue growth rates or Compounded
Annual Growth Rates (“CAGR”) over a ten-year cash flow forecast period varied by reporting unit based on underlying business fundamentals and future
expectations with rates ranging from negative 0.4 percent to positive 18 percent.
Changes in key assumptions can affect the results of goodwill impairment tests. The changes made to key assumptions in 2009 did not result in a
significant change in the impairment analysis conclusion. The key assumptions with the most significant impact on reporting unit fair value calculations
include the discount rate and terminal value NOPAT growth rate. For the 2009 impairment test, management completed sensitivity analysis on both of
these key assumptions. An increase of 100 basis points in the discount rate would have resulted in a fair value, based on discounted cash flows, which
exceeded the carrying value for all but one of the Company’s reporting units. For the one exception, Electronic Materials, fair value would have fallen
below carrying value by approximately $350 million. For the terminal value NOPAT growth rate, a decrease of 100 basis points would have resulted in a
fair value, based on discounted cash flows, which exceeded the carrying value for all of the Company’s reporting units. Additional sensitivity analysis
was completed on the combined impact of a 100 basis point increase in the discount rate and a 100 basis point decrease in the terminal value NOPAT
growth rate. This analysis resulted in fair values, based on discounted cash flows, that exceeded carrying values for all reporting units except Electronic
Materials and Adhesives and Functional Polymers. For Electronic Materials, a 100 basis point increase in the discount rate coupled with a 100 basis point
decrease in the terminal value NOPAT growth rate resulted in a fair value that was approximately $540 million below the carrying value of the reporting
unit. For Adhesives and Functional Polymers, the same analysis resulted in a fair value that was approximately equal to the carrying value of the reporting
unit.
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