Dow Chemical 2009 Annual Report Download - page 97

Table of Contents
In completing the annual impairment test for 2009, management evaluated the reasonableness of differences noted between the fair value and carrying
value of each reporting unit. For certain reporting units comprised primarily of recently acquired Rohm and Haas businesses (i.e., Electronic Materials
and Adhesives and Functional Polymers), fair value did not exceed book value by a significant margin which is reasonable given that the Rohm and Haas
acquisition closed within the current year. The Automotive Systems reporting unit, which recorded a $209 million partial impairment of goodwill at the
end of 2008, continues to be closely monitored by management as fair value, while improved from a year ago, remains relatively close to book value.
Based on the fair value analysis completed by the Company in the fourth quarter, using the key assumptions defined for the Company as well as the
key assumptions defined specifically for each reporting unit, management concluded that fair value exceeded carrying value for all reporting units except
the Dow Haltermann reporting unit. As a result, the Company recorded a goodwill impairment charge of $7 million in the fourth quarter of 2009 which
represents the total amount of goodwill carried by the Dow Haltermann reporting unit. Due to the conclusion that the goodwill associated with the Dow
Haltermann reporting unit was impaired, management also initiated a review of the underlying assets of the reporting unit to assess whether or not any
additional asset impairment existed. Based on the undiscounted cash flow analysis completed in accordance with ASC Topic 360, “Property, Plant, and
Equipment,” no further impairment existed. Further impairment of the Dow Haltermann reporting unit could occur if the expected future cash flows
decline. The cash flows used in the undiscounted cash flow analysis pertaining to Dow Haltermann represented management's best estimate at the time of
the analysis.
The Company also monitors and evaluates its market capitalization relative to book value. When the market capitalization of the Company falls
below book value, management undertakes a process to evaluate whether a change in circumstances has occurred that would indicate it is more likely
than not that the fair value of any of its reporting units has declined below carrying value. This evaluation process includes the use of third-party market-
based valuations and internal discounted cash flow analysis. As part of the annual goodwill impairment tests, the Company also compares market
capitalization with the estimated fair value of its reporting units to ensure that significant differences are understood. At December 31, 2009 and
December 31, 2008, Dow’s market capitalization exceeded book value.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial
valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at
December 31, 2009, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated
annually and are disclosed in Note P to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the
assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods. The
U.S. pension plans represent approximately 71 percent of the Company’s pension plan assets and 71 percent of the pension obligations.
The following information relates to the U.S. plans only; a similar approach is used for the Company’s non-U.S. plans.
The Company determined the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on
the strategic asset allocation approved by the Board of Directors and the underlying return fundamentals of each asset class. The Company’s historical
experience with the pension fund asset performance was also considered. The expected return of each asset class is derived from a forecasted future return
confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be earned in any one particular year.
The weighted-average long-term rate of return assumption used for determining net periodic pension expense for 2009 was 8.46 percent. This assumption
was lowered to 8.14 percent for determining 2010 net periodic pension expense. Future actual pension expense will depend on future investment
performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-
quality fixed income instruments at the measurement date. Future expected actuarially determined cash flows of Dow’s major U.S. plans are matched
against the Citigroup Pension Discount Curve (Above Median) to arrive at a single discount rate by plan. The resulting discount rate decreased from
6.61 percent at December 31, 2008 to 5.97 percent at December 31, 2009.
67