Dow Chemical 2011 Annual Report Download - page 157

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The first step of the quantitative goodwill impairment test requires the fair value of the reporting unit to be compared
to its carrying value. 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, and long-term hydrocarbons and energy prices. These key
assumptions are reevaluated if quantitative testing is necessary and updated based on current facts and circumstances.
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 rates, discount rates and tax rates are established by
reporting unit to account for differences in business fundamentals and industry risk.
The second step of the quantitative goodwill impairment test is required if the first step of the quantitative testing
indicates a potential impairment. The second step requires the Company to compare the implied fair value of a reporting
unit's goodwill with the carrying amount of goodwill. If the carrying amount of goodwill is greater than its implied fair
value, an impairment loss is recorded.
During 2011, there were no events or changes in circumstances identified that warranted interim goodwill impairment
testing. For the 2011 annual impairment test, the Company performed qualitative testing for all reporting units carrying
goodwill. The qualitative testing did not indicate that the Company had any reporting units where it was more likely than
not that the carrying amount of the reporting unit was greater than its fair value. As a result, no additional quantitative
testing was required.
For the 2010 annual impairment test, the Company utilized the two-step method. As part of this testing, currency
exchange rates were projected by year for 66 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). Tax rates varied by reporting unit with the average rate being 27 percent. Discount rates ranged from 8.1 percent
to 10.5 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 2.2 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 1 percent to
15 percent.
Changes in key assumptions can affect the results of goodwill impairment tests. The changes made to key assumptions
in 2010 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 2010 impairment test, management completed sensitivity analyses 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 of the Company's reporting units that carry goodwill. 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 that carry goodwill. 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 that carry goodwill.
In completing the annual impairment test for 2010, management evaluated the reasonableness of differences noted
between the fair value and carrying value of each reporting unit. All differences were determined to be reasonable.
Based on the fair value analysis completed by the Company in the fourth quarter of 2010, 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 that carry goodwill.
The same analysis was completed by the Company in the fourth quarter of 2009 and management concluded that the
fair value exceeded carrying value for all reporting units that carry goodwill 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
represented 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