Dow Chemical 2012 Annual Report Download - page 85

59
Construction, Dow Coating Materials, Dow Electronic Materials, Functional Materials, Dow Automotive Systems, Dow
Formulated Systems, Polyurethanes, Propylene Oxide/Propylene Glycol and Dow Performance Packaging. Key
assumptions used in the discounted cash flow analysis for these 9 reporting units included: projected currency exchange
rates for 73 currencies; forecasted long-term hydrocarbon and energy prices, by geographic area and by year, which
included the Company's key feedstocks as well as natural gas and crude oil (due to its correlation to naphtha); tax rates,
which varied by reporting unit; discount rates, which ranged from 8.3 percent to 10.0 percent based on an assessment of
likely market participants and relative industry risk of each reporting unit; terminal values, differentiated based on the cash
flow projection of each reporting unit and the projected net operating profit after tax ("NOPAT") growth rate, which ranged
from 1 percent to 3 percent; and revenue growth rates, or compounded annual growth rates, over a ten-year cash flow
forecast period, which ranged from 5 percent to 14 percent and varied by reporting unit based on underlying business
fundamentals and future expectations.
Changes in key assumptions can affect the results of goodwill impairment tests. The changes made to key assumptions
in 2012 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 2012 impairment testing, management completed sensitivity analysis on both of these key assumptions for
reporting units where a fair value analysis was completed, except for Dow Formulated Systems where the goodwill was
determined to be impaired based on the initial 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 reporting units
tested except for Dow Coating Materials. For Dow Coating Materials, fair value would have fallen below carrying value
by approximately $300 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 reporting units tested.
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 tested except for Dow Coating Materials. For
this exception, 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 $450 million below the carrying value of the reporting
unit.
In completing the fair value analysis for the 2012 impairment test, 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. For Dow Coating Materials, fair value did not exceed carrying value by a significant margin. The fair value for
Dow Coating Materials, which carries approximately $2,325 million of goodwill, exceeded the carrying value by a margin
of 7 percent.
Based on the fair value analysis completed by the Company in the fourth quarter of 2012, 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 except for the Dow Formulated
Systems reporting unit. Management completed the second step of the quantitative test for Dow Formulated Systems to
compare the implied fair value of the reporting unit's goodwill to the carrying value. As a result, the Company recorded a
goodwill impairment loss of $220 million in the fourth quarter of 2012 which represents the total amount of goodwill
carried by the Dow Formulated Systems reporting unit. Due to the conclusion that the goodwill associated with the Dow
Formulated Systems 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 U.S. GAAP, no further impairment existed.
2011 Goodwill Impairment Test
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.
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 have been settled at December 31, 2012, 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 17 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ