Dow Chemical 2012 Annual Report Download - page 84

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Annual goodwill impairment tests are completed by the Company during the fourth quarter of the year in accordance
with the 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 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. At December 31, 2012, the Company has defined six operating
segments and 27 reporting units; goodwill is carried by 19 of these reporting units at December 31, 2012 (20 at December
31, 2011).
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 indicate it is more likely than
not 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.
As part of its annual goodwill impairment testing and as permitted under the accounting guidance, the Company has
the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying value. The qualitative assessment is also used as a basis for determining whether it is necessary
to perform the quantitative test. Qualitative factors assessed at the Company level include, but are not limited to, GDP
growth rates, long-term hydrocarbon and energy prices, equity and credit market activity, discount rates, foreign exchange
rates and overall financial performance. Qualitative factors assessed at the reporting unit level include, but are not limited
to, changes in industry and market structure, competitive environments, planned capacity and new product launches, cost
factors such as raw material prices, and financial performance of the reporting unit. If the Company chooses to not
complete a qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than
not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is required.
The first step of the quantitative 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 rates, discount rates, tax rates, currency
exchange rates, and long-term hydrocarbons and energy prices. These key assumptions are reevaluated if quantitative
testing is performed 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 test is required if the first step of the quantitative test 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.
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 test, the Company also compares market
capitalization with the most recent total estimated fair value of its reporting units to ensure that significant differences are
understood. At December 31, 2012 and 2011, Dow’s market capitalization exceeded book value.
2012 Goodwill Impairment Test
During 2012, there were no events or changes in circumstances identified that warranted interim goodwill impairment
testing. During the fourth quarter of 2012, qualitative testing was performed for all but 9 of the Company's reporting units
that carry goodwill. The results of the qualitative testing did not indicate any reporting units where it was more likely than
not that the carrying value of the reporting unit was greater than its fair value. As a result, no additional quantitative testing
was required for those reporting units.
The Company chose to proceed directly to the first step of the quantitative testing for 9 reporting units due to change
in business structures as well as to re-evaluate the reasonableness of the differences between fair value and carrying value
under current market conditions. Quantitative testing was conducted for the following reporting units: Dow Building and