Invacare 2009 Annual Report Download - page 107

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Financial Instruments—Continued
weakening in the commercial real estate market as well as the redemption of one of the investments for a
nominal amount and as a result, the company recognized impairment charges totaling $6,713,000 pre-tax which
is included in the All Other segment.
The following table provides a summary of the company’s assets that are measured on a non-recurring basis
(in thousands).
December 31,
2009
Basis for Fair Value Measurements at Reporting Date
Quoted
Prices in
Active
Markets for
Identical
Assets /
(Liabilities)
Significant
Other
Observable
Inputs
Significant Other
Unobservable
Inputs
Level I Level II Level III
Intangibles—net ........................... $ 85,305 $— $— $ 85,305
Goodwill ................................. 556,093 — — 556,093
Total .................................... $641,398 $— $— $641,398
Other Intangibles and Goodwill: Under Intangibles—Goodwill and Other, ASC 350, goodwill and
intangible assets deemed to have indefinite lives are subject to annual impairment tests. Furthermore, goodwill
and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The company completes its annual impairment tests
in the fourth quarter of each year. The discount rates used have a significant impact upon the discounted cash
flow methodology utilized in the company’s annual impairment testing as higher discount rates decrease the fair
value estimates.
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 a discount rate of 10.74% in 2009 compared to 8.90% to 9.90% in 2008 and 9.25% to
10.25% in 2007.
While there was no indication of impairment in 2009 related to goodwill, a future potential impairment is
possible for any of the company’s reporting units should actual results differ materially from forecasted results
used in the valuation analysis. Furthermore, the company’s annual valuation of goodwill can differ materially if
the market inputs used to determine the discount rate change significantly. For instance, higher interest rates or
greater stock price volatility would increase the discount rate and thus increase the chance of impairment. For
example, if the discount rate used were 100 basis points higher for the 2009 impairment analysis, the company
could potentially have an impairment for the Asia/Pacific reporting unit. Accordingly, the performance of the
Asia/Pacific region in particular will be closely monitored going forward to determine if the goodwill for the
region needs to be re-evaluated for potential impairment.
For purposes of testing intangibles for impairment, the fair value of each unamortized intangible is
estimated by forecasting cash flows and discounting those cash flows using appropriate discount rates and using
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