Invacare 2009 Annual Report Download - page 82

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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, 2008 ............. $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
Foreign currency translation
adjustments ....................... — — 2,756 70,753 7,509 81,018
Purchase accounting adjustments ........ 389 — — — — 389
Balance at December 31, 2009 .......... $9,551 $23,073 $20,267 $467,385 $35,817 $556,093
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. In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is
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 used in the
company’s 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 Property, Plant and Equipment, ASC 360.
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 and a small cap stock
adjustment. 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. If the discount rate used
were 100 basis points higher for the 2009 impairment analysis, the company would potentially have a potential
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.
While there was no indication of impairment in 2009 related to goodwill, impairment charges of $1,696,000
were recognized related to intangibles in Europe and NA/HME and 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.
FS-14