Hormel Foods 2014 Annual Report Download - page 41

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If performed, the quantitative goodwill impairment test is a
two-step process performed at the reporting unit level. First,
the fair value of each reporting unit is compared to its corre-
sponding carrying value, including goodwill. The fair value of
each reporting unit is estimated using discounted cash flow
valuations (Level 3), which incorporate assumptions regarding
future growth rates, terminal values, and discount rates.
The estimates and assumptions used consider historical
performance and are consistent with the assumptions used in
determining future profit plans for each reporting unit, which
are approved by the Company’s Board of Directors. If the first
step results in the carrying value exceeding the fair value of
any reporting unit, then a second step must be completed in
order to determine the amount of goodwill impairment that
should be recorded. In the second step, the implied fair value
of the reporting unit’s goodwill is determined by allocating
the reporting unit’s fair value to all of its assets and liabilities
other than goodwill in a manner similar to a purchase price
allocation. The implied fair value of the goodwill that results
from the application of this second step is then compared
to the carrying amount of the goodwill and an impairment
charge is recorded for the difference. Even if not required, the
Company periodically elects to perform the quantitative test in
order to confirm the qualitative assessment.
Based on the qualitative assessment conducted in fiscal 2014,
performance of the quantitative two-step test was not required
for any of the Company’s reporting units. No goodwill impair-
ment charges were recorded in fiscal years 2014, 2013, or 2012.
In conducting the annual impairment test for its indefi-
nite-lived intangible assets, the Company first performs a
qualitative assessment to determine whether it is more likely
than not (> 50% likelihood) that an indefinite-lived intangible
asset is impaired. If the Company concludes that this is the
case, then a quantitative test for impairment must be per-
formed. Otherwise, the Company does not need to perform a
quantitative test.
In conducting the initial qualitative assessment, the Company
analyzes growth rates for historical and projected net
sales and the results of prior quantitative tests performed.
Additionally, each reporting unit assesses critical areas that
may impact their intangible assets or the applicable royalty
rates to determine if there are factors that could indicate
impairment of the asset.
If performed, the quantitative impairment test compares the
fair value and carrying value of the indefinite-lived intangible
asset. The fair value of indefinite-lived intangible assets is
primarily determined on the basis of estimated discounted
value, using the relief from royalty method (Level 3), which
incorporates assumptions regarding future sales projections
and discount rates. If the carrying value exceeds fair value, the
indefinite-lived intangible asset is considered impaired and an
impairment charge is recorded for the difference. Even if not
required, the Company periodically elects to perform the quan-
titative test in order to confirm the qualitative assessment.
Inventories: Inventories are stated at the lower of cost or
market. Cost is determined principally under the average
cost method. Adjustments to the Company’s lower of cost or
market inventory reserve are reflected in cost of products sold
in the Consolidated Statements of Operations.
Property, Plant and Equipment: Property, plant and equip-
ment are stated at cost. The Company uses the straight-line
method in computing depreciation. The annual provisions for
depreciation have been computed principally using the follow-
ing ranges of asset lives: buildings 20 to 40 years, machinery
and equipment 5 to 10 years.
Internal-use software development and implementation
costs are expensed until the Company has determined that
the software will result in probable future economic benefits,
and management has committed to funding the project.
Thereafter, all material development and implementation
costs, and purchased software costs, are capitalized and
amortized using the straight-line method over the remaining
estimated useful lives.
Goodwill and Other Intangibles: Goodwill and other intangible
assets are originally recorded at their estimated fair values at
date of acquisition, and are allocated to reporting units that
will receive the related sales and income. The Company’s
reporting units represent operating segments (aggregations
of business units that have similar economic characteristics
and share the same production facilities, raw materials, and
labor force). Definite-lived intangible assets are amortized
over their estimated useful lives and are evaluated for impair-
ment annually, or more frequently if impairment indicators
are present, using a process similar to that used to test
long-lived assets for impairment. Goodwill and indefinite-lived
intangible assets are tested annually for impairment, or more
frequently if impairment indicators arise.
In conducting the annual impairment test for goodwill, the
Company first performs a qualitative assessment to deter-
mine whether it is more likely than not (> 50% likelihood) that
the fair value of any reporting unit is less than its carrying
amount. If the Company concludes this is the case, then a
two-step quantitative test for goodwill impairment is per-
formed for the appropriate reporting units. Otherwise, the
Company concludes no impairment is indicated and does not
perform the two-step test.
In conducting the initial qualitative assessment, the Company
analyzes actual and projected growth trends for net sales,
gross margin, and segment profit for each reporting unit, as
well as historical performance versus plan and the results
of prior quantitative tests performed. Additionally, each
reporting unit assesses critical areas that may impact their
business, including macroeconomic conditions and the related
impact, market related exposures, any plans to market all or a
portion of their business, competitive changes, new or discon-
tinued product lines, changes in key personnel, or any other
potential risks to their projected financial results.