Dow Chemical 2015 Annual Report Download - page 70

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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 with 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 using the following key assumptions (including certain ranges used for the 2015
testing): projected revenue growth rates, or compounded annual growth rates, over a ten-year cash flow forecast
period, which ranged from 4.8 percent to 7.7 percent and varied by reporting unit based on underlying business
fundamentals and future expectations; discount rates, which ranged from 9.5 percent to 11.2 percent; tax rates;
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 2 percent to 3.5 percent; currency exchange rates for
79 currencies; and 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).
Currency exchange rates and long-term hydrocarbon 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, 2015 and 2014, Dow’s market capitalization exceeded book
value.
2015 Goodwill Impairment Test
During 2015, there were no events or changes in circumstances identified that warranted interim goodwill impairment
testing. During the fourth quarter of 2015, qualitative testing was performed for all but three 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 three reporting units 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, using key assumptions for the discounted cash
flow analysis: Dow Coating Materials, Performance Monomers and Dow Electronic Materials.
Changes in key assumptions can affect the results of goodwill impairment test. The changes made to key assumptions
in 2015 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 2015 impairment testing, management completed sensitivity analysis on both of these key
assumptions using a 100 basis point increase in the discount rate and a 100 basis point decrease in the terminal value
NOPAT growth rate for reporting units where a quantitative fair value analysis was completed. In both cases the
resulting fair values, based on discounted cash flows, exceeded the carrying values 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 a fair value,
based on discounted cash flows, that exceeded the carrying value for Dow Electronic Materials. The fair value for
Dow Coating Materials, which carried approximately $2,243 million of goodwill at December 31, 2015, was
$98 million below carrying value. The fair value for Performance Monomers, which carried approximately
$237 million of goodwill at December 31, 2015, was approximately $20 million below carrying value.