International Paper 2015 Annual Report Download - page 52

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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 establish
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 operations
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 and Finance Committee of the
Company’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 reasonably
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 relevant
environmental regulations and estimates of future
remediation alternatives and costs.
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 recoverable
through cash flows from future operations. A goodwill
impairment exists when the carrying amount of goodwill
exceeds its fair value. Assessments 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 operations. 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
Codification (ASC) 350, “Intangibles – Goodwill and
Other,” the testing of goodwill for possible impairment
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 values 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
estimated 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
each reporting unit. These calculations require many
estimates, including discount rates, future growth rates,
and cost and pricing trends for each reporting unit.
Subsequent changes in economic and operating
conditions can affect these assumptions and could
result in additional interim testing and goodwill
impairment charges in future periods. Upon completion,
the resulting estimated fair values are then analyzed for
reasonableness by comparing them to earnings
multiples for historic industry business transactions,
and by comparing the sum of the reporting unit fair
values and other corporate assets and liabilities divided
by diluted common shares outstanding to the
Company’s market price per share on the analysis date.
In the fourth quarter of 2015, in conjunction with the
annual testing of its reporting units for possible goodwill
impairments, the Company calculated the estimated
fair value of its Brazil Packaging business using the
discounted future cash flows and determined that all of
the goodwill in the business, totaling $137 million,
should be written off. The decline in the fair value of the
Brazil Packaging business and resulting impairment
charge was due to the negative impacts on the cash