Graco 2008 Annual Report Download - page 31

Newell Rubbermaid Inc. 2008 Annual Report
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CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are more fully described in Footnote 1 of the Notes to Consolidated Financial Statements. As disclosed in that footnote,
the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
about future events that affect the amounts reported in the financial statements and accompanying footnotes. Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the Consolidated Financial Statements. The following sections describe the Company’s critical
accounting policies.
Sales Recognition
Sales of merchandise and freight billed to customers are recognized when title passes and all substantial risks of ownership change, which generally occurs
either upon shipment or upon delivery based upon contractual terms. Sales are net of provisions for cash discounts, returns, customer discounts (such as
volume or trade discounts), cooperative advertising and other sales related discounts.
Recovery of Accounts Receivable
The Company evaluates the collectibility of accounts receivable based on a combination of factors. When aware of a specific customer’s inability to meet
its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, the Company
records a specific reserve for bad debt to reduce the related receivable to the amount the Company reasonably believes is collectible. The Company also
records reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due and historical
collection experience. Accounts are reviewed for potential write-off on a case by case basis. Accounts deemed uncollectible are written off, net of expected
recoveries. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could be further adjusted.
Inventory Reserves
The Company reduces its inventory value for estimated obsolete and slow moving inventory in an amount equal to the difference between the cost of
inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be required.
Goodwill and Other Indefinite-Lived Intangible Assets
In the third quarter of 2008, the Company conducted its annual test of impairment of goodwill and indefinite-lived intangible assets (primarily trademarks
and trade names). The Company evaluates goodwill for impairment at the reporting unit level, which is one level below the operating segment level (herein
referred to as the reporting unit). The Company conducts its annual test of impairment of goodwill and indefinite-lived intangible assets in the third quarter
because it coincides with its annual strategic planning process. The Company also tests for impairment if events and circumstances indicate that it is more
likely than not that the fair value of a reporting unit or an indefinite-lived intangible asset is below its carrying amount. The impact of the macroeconomic
environment on the Company during the fourth quarter of 2008 combined with the updated outlook for certain business units during the period led the
Company to evaluate the carrying value of goodwill as of December 31, 2008. As a result, during 2008, the Company completed its annual impairment test
during the third quarter of 2008 and completed an impairment test as of December 31, 2008 based on events and circumstances that arose during the
fourth quarter of 2008.
In its goodwill impairment testing, if the carrying amount of a reporting unit is greater than the fair value, impairment may be present. The Company
assesses the fair value of its reporting units generally based on discounted cash flow models, market multiples of earnings, or an actual sales offer received
from a prospective buyer, if available. The Company assesses the fair value of its indefinite lived intangible assets using a discounted cash flow model
based on royalties estimated to be derived in the future use of the asset were the Company to license the use of the trademark or trade name. The Company’s
use of a discounted cash flow model to estimate the fair value of reporting units and intangible assets involves several assumptions, and changes in
assumptions could materially impact fair value estimates. Assumptions critical to the Company’s fair value estimates under the discounted cash flow
models include discount rates, royalty rates, and cash flow projections, and inherent in cash flow projections are estimates regarding projected revenue
growth rates, projected cost reductions and efficiencies, and projected long-term growth rates in the determination of terminal values.
The Company measures the amount of any goodwill impairment based upon the estimated fair value of the underlying assets and liabilities of the
reporting unit, including any unrecognized intangible assets, and estimates the implied fair value of goodwill. The Company identifies unrecognized intangible
assets, such as trade name and customer relationships, and uses discounted cash flow models to estimate the values of the reporting unit’s recognized
and unrecognized intangible assets. The estimated values of the reporting unit’s intangible assets and net tangible assets are deducted from the reporting
unit’s total value to determine the implied fair value of goodwill. An impairment charge is recognized to the extent the recorded goodwill exceeds the implied
fair value of goodwill. An impairment charge is also recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value
on the measurement date.
For the annual impairment testing in the third quarter of 2008, the Company determined that the fair values of the reporting units and indefinite-lived
intangible assets exceeded their carrying values. A one percentage point increase in the discount rate used to determine the fair values of the Company’s
reporting units, which were not deemed to be impaired based on the annual impairment testing in the third quarter, would not cause the carrying value of
each respective reporting unit to exceed its fair value.