International Paper 2012 Annual Report Download - page 65

any time after the second anniversary of the for-
mation of Ilim, either the Company or its partners
may commence procedures specified under the
deadlock provisions. Under certain circumstances,
the Company would be required to purchase its
partners’ 50% interest in Ilim. Any such transaction
would be subject to review and approval by Russian
and other relevant anti-trust authorities. Based on
the provisions of the agreement, International Paper
estimates that the current purchase price for its
partners’ 50% interests would be approximately $350
million to $400 million , which could be satisfied by
payment of cash or International Paper common
stock, or some combination of the two, at the
Company’s option. Any such purchase by Interna-
tional Paper would result in the consolidation of
Ilim’s financial position and results of operations in
all subsequent periods. The parties have informed
each other that they have no current intention to
commence procedures specified under the deadlock
provision of the shareholders’ agreement, although
they have the right to do so.
CRITICAL ACCOUNTING POLICIES AND
SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States requires International Paper to estab-
lish accounting policies and to make estimates that
affect both the amounts and timing of the recording
of assets, liabilities, revenues and expenses. Some of
these estimates require judgments about matters
that are inherently uncertain.
Accounting policies whose application may have a
significant effect on the reported results of oper-
ations and financial position of International Paper,
and that can require judgments by management that
affect their application, include the accounting for
contingencies, impairment or disposal of long-lived
assets and goodwill, pensions and postretirement
benefit obligations, stock options and income taxes.
The Company has discussed the selection of critical
accounting policies and the effect of significant
estimates with the Audit Committee of the Compa-
ny’s Board of Directors.
Contingent Liabilities
Accruals for contingent liabilities, including legal and
environmental matters, are recorded when it is
probable that a liability has been incurred or an asset
impaired and the amount of the loss can be reason-
ably estimated. Liabilities accrued for legal matters
require judgments regarding projected outcomes
and range of loss based on historical experience and
recommendations of legal counsel. Liabilities for
environmental matters require evaluations of rele-
vant environmental regulations and estimates of
future remediation alternatives and costs. Interna-
tional Paper determines these estimates after a
detailed evaluation of each site.
Impairment of Long-Lived Assets and
Goodwill
An impairment of a long-lived asset exists when the
asset’s carrying amount exceeds its fair value, and is
recorded when the carrying amount is not recover-
able through cash flows from future operations. A
goodwill impairment exists when the carrying
amount of goodwill exceeds its fair value. Assess-
ments of possible impairments of long-lived assets
and goodwill are made when events or changes in
circumstances indicate that the carrying value of the
asset may not be recoverable through future oper-
ations. Additionally, testing for possible impairment
of goodwill and intangible asset balances is required
annually. The amount and timing of any impairment
charges based on these assessments require the
estimation of future cash flows and the fair market
value of the related assets based on management’s
best estimates of certain key factors, including future
selling prices and volumes, operating, raw material,
energy and freight costs, and various other projected
operating economic factors. As these key factors
change in future periods, the Company will update
its impairment analyses to reflect its latest estimates
and projections.
Under the provisions of Accounting Standards Codifi-
cation (ASC) 350, “Intangibles – Goodwill and
Other,” the testing of goodwill for possible impair-
ment is a two-step process. In the first step, the fair
value of the Company’s reporting units is compared
with their carrying value, including goodwill. If fair
value exceeds the carrying value, goodwill is not
considered to be impaired. If the fair value of a
reporting unit is below the carrying value, then step
two is performed to measure the amount of the
goodwill impairment loss for the reporting unit. This
analysis requires the determination of the fair value
of all of the individual assets and liabilities of the
reporting unit, including any currently unrecognized
intangible assets, as if the reporting unit had been
purchased on the analysis date. Once these fair val-
ues have been determined, the implied fair value of
the unit’s goodwill is calculated as the excess, if any,
of the fair value of the reporting unit determined in
step one over the fair value of the net assets
determined in step two. The carrying value of
goodwill is then reduced to this implied value, or to
zero if the fair value of the assets exceeds the fair
value of the reporting unit, through a goodwill
impairment charge.
The impairment analysis requires a number of
judgments by management. In calculating the esti-
mated fair value of its reporting units in step one, the
Company uses the projected future cash flows to be
generated by each unit over the estimated remaining
useful operating lives of the unit’s assets, discounted
using the estimated cost-of-capital discount rate for
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