Foot Locker 2010 Annual Report Download - page 46

Impairment of Long-Lived Assets, Goodwill and Other Intangibles
The Company recognizes an impairment loss when circumstances indicate that the carrying value of
long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in
determining whether an impairment indicator exists, a triggering event, comprises measurable operating
performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the
occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the
Company’s three-year strategic plans, in determining the impairment amount. In the calculation of the fair value
of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash
flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated
expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the
carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by
discounting expected future cash flows at the Company’s weighted-average cost of capital. Management believes
its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if
not achieved, may result in significantly different results.
The Company performs an impairment review of its goodwill and intangible assets with indefinite lives if
impairment indicators arise and, at a minimum, annually. We consider many factors in evaluating whether the
carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in
relation to the book value of the Company and macroeconomic conditions affecting retail. The Company has
chosen to perform this review at the beginning of each fiscal year, and it is done in a two-step approach. The
initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The
second step — to evaluate goodwill of a reporting unit for impairment — is only required if the carrying value of
that reporting unit exceeds its estimated fair value. The Company used a combination of a discounted cash flow
approach and market-based approach to determine the fair value of a reporting unit. The determination of
discounted cash flows of the reporting units and assets and liabilities within the reporting units requires us to
make significant estimates and assumptions. These estimates and assumptions primarily include, but are not
limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital
expenditures forecasts. The market approach requires judgment and uses one or more methods to compare the
reporting unit with similar businesses, business ownership interests or securities that have been sold. Due to the
inherent uncertainty involved in making these estimates, actual results could differ from those estimates.
The Company evaluated the merits of each significant assumption, both individually and in the aggregate,
used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and
liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations.
Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to
amortization but are reviewed at least annually for potential impairment. The fair values of purchased intangible
assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets
based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of
ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of
assets. This approach is dependent on a number of factors, including estimates of future growth and trends,
royalty rates in the category of intellectual property, discount rates, and other variables. We base our fair value
estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain.
Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair
value of the intangible asset is less than the carrying value.
The Company’s review of goodwill did not result in any impairment charges for the years ended January 29,
2011 and January 30, 2010 as the fair value of each of the reporting units substantially exceeds its carrying
value. In 2010, the Company recorded a $10 million impairment charge related to its CCS tradename, primarily as
a result of reduced revenue projections for this business.
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