Invacare 2008 Annual Report Download - page 82

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill
The carrying amount of goodwill by operating segment is as follows (in thousands):
North
America /
HME
Invacare
Supply
Group
Institutional
Products
Group Europe
Asia/
Pacific Consolidated
Balance at January 1, 2007 ............. $ — $23,541 $18,107 $416,952 $31,829 $490,429
Acquisitions ........................ 2,822 — — — — 2,822
Foreign currency translation
adjustments ....................... — — 3,318 42,155 5,431 50,904
Purchase accounting adjustments ........ — — — (972) — (972)
Balance at December 31, 2007 .......... 2,822 23,541 21,425 458,135 37,260 543,183
Acquisitions ........................ 6,195 — — — — 6,195
Foreign currency translation
adjustments ....................... — — (3,914) (62,742) (7,240) (73,896)
Purchase accounting adjustments ........ 145 (468) — 1,239 (1,712) (796)
Balance at December 31, 2008 .......... $9,162 $23,073 $17,511 $396,632 $28,308 $474,686
As a result of the Naylor and HCS acquisitions in 2008, additional goodwill of $6,195,000 was recorded,
which is deductible for tax purposes. As a result of the RoadRunner Mobility, Inc. acquisition in 2007, additional
goodwill of $2,822,000 was recorded, which is deductible for tax purposes.
In accordance with SFAS No. 142, goodwill is subject to annual impairment testing. For purposes of Step I
of the impairment test, the fair value of each reporting unit is estimated by forecasting cash flows and
discounting those cash flows using appropriate discount rates. The fair values are then compared to the carrying
value of the net assets of each reporting unit. Step II of the impairment test requires a more detailed assessment
of the fair values associated with the net assets of a reporting unit that fails the Step I test, including a review for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(“SFAS 144”).
The company utilizes a discounted cash flow method model to analyze reporting units for impairment in
which the company forecasts income statement and balance sheet amounts based on assumptions regarding
future sales growth, profitability, inventory turns, days’ sales outstanding, etc. to forecast future cash flows. The
cash flows are discounted using a weighted average cost of capital discount rate where the cost of debt is based
on quoted rates for 20-year debt of companies of similar credit risk and the cost of equity is based upon the
20-year treasury rate for the risk free rate, a market risk premium, the industry average beta, a small cap stock
adjustment and company specific risk premiums. The assumptions used are based on a market participant’s point
of view and yielded discount rates between 8.90% and 9.90% in 2008 compared to 9.25% and 10.25% in
2007. While no impairment was indicated in 2008 for any reporting units, a future potential impairment is
possible for any of the company’s reporting units should actual results differ materially from forecasted results.
An impairment charge related to goodwill in the North America/HME segment of $294,656,000 was
recorded in the fourth quarter of 2006 as a result of reduced profitability in the NA/HME operating segment and
uncertainty associated with future market conditions. As part of the impairment analysis in 2006, the company
compared the forecasted un-discounted cash flows for each facility in the North America/HME segment to the
carrying value of the net assets associated with a given facility, which calculated no impairment of any other
long-lived assets pursuant to SFAS No. 144.
FS-16