E-Z-GO 2002 Annual Report Download - page 52

In 2000, Textron adopted the EITF consensus, Issue No. 99-5 “Accounting for Pre-Production Costs
Related to Long-Term Supply Arrangements.” This consensus requires that all design and development
costs for products sold under long-term supply arrangements be expensed unless there is a contractual
guarantee that provides for specific required payments for these costs. Textron reported a cumulative
effect of a change in accounting principle of $59 million, net of tax, upon the adoption.
On December 30, 2001, Textron adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, which
requires companies to stop amortizing goodwill and certain intangible assets with indefinite useful lives,
and requires an annual review for impairment. Upon adoption, Textron discontinued the amortization of
goodwill.
Under SFAS No. 142, Textron was required to test all existing goodwill for impairment as of December
30, 2001, on a “reporting unit” basis. The reporting unit represents the operating segment unless, at
businesses one level below that operating segment (a “component”), discrete financial information is
prepared and is reviewed by segment management, in which case such component is the reporting
unit. In certain instances, components of an operating segment have been aggregated and deemed a
single reporting unit based on similar economic characteristics of the components. Goodwill is consid-
ered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Fair val-
ues were primarily established using a discounted cash flow methodology. When available, comparative
market multiples were used to corroborate discounted cash flow results.
As a result of this impairment review of goodwill, Textron recorded an after-tax transitional impairment
charge of $488 million ($561 million, pre-tax), which is reported in the caption “Cumulative effect of
change in accounting principle, net of income taxes”. This after-tax charge relates to the following seg-
ments: $274 million in Industrial Products; $111 million in Industrial Components; $88 million in Fasten-
ing Systems; and $15 million in Finance. For Industrial Products, the primary factor resulting in the
impairment charge was the difficult economic environment in the telecommunication industry which has
experienced a significant decline in demand. This decline has resulted in lower sales and operating
margins than originally anticipated with the acquisitions of the InteSys and Tempo businesses. For
Industrial Components and Fastening Systems, the primary factor was the decline in demand in certain
industries in which these segments operate due to the economic slowdown. The Finance segment’s
impairment charge is in its franchise finance division and was primarily the result of decreasing loan vol-
umes and an unfavorable securitization market. No impairment charge was appropriate for these seg-
ments under the previous goodwill impairment accounting standard, which Textron applied based on
undiscounted cash flows.
Changes in goodwill are summarized below:
Fastening Industrial Industrial
(In millions) Aircraft Systems Products Components Finance Total
Balance at December 30, 2000 $ 333 $ 497 $ 798 $ 577 $ 216 $ 2,421
Acquisitions — (2) 184 10 — 192
Dispositions — — — (181) — (181)
Amortization (11) (16) (30) (21) (12) (90)
Impairment charge — (2) (306) — — (308)
Foreign currency translation — (4) — (5) — (9)
Balance at December 29, 2001 322 473 646 380 204 2,025
Reclassification of intangible assets — — 41 — 1 42
Transitional impairment charge — (100) (326) (111) (24) (561)
Foreign currency translation — 17 2 24 — 43
Balance at December 28, 2002 $ 322 $ 390 $ 363 $ 293 $ 181 $ 1,549
Textron also adopted the remaining provisions of SFAS No. 141, “Business Combinations” on December
30, 2001. For goodwill and intangible assets reported in connection with acquisitions made prior to July
1, 2001, these provisions broaden the criteria for recording intangible assets separate from goodwill and
require that certain intangible assets that do not meet the new criteria, such as assembled workforce
and customer base, be reclassified into goodwill. Upon adoption of these provisions, intangible assets
totaling $42 million, net of related deferred taxes, were reclassified into goodwill within the Industrial
Products and Finance segments.
Note 7
Goodwill and
Other Intangible
Assets
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