Invacare 2011 Annual Report Download - page 112

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Financial Instruments—Continued
Installment receivables: The carrying amount reported in the balance sheet for installment receivables
approximates its fair value. The interest rates associated with these receivables have not varied significantly since
inception. Management believes that after consideration of the credit risk, the net book value of the installment
receivables approximates market value.
Long-term debt: Fair values for the company’s senior notes and convertible debt are based on quoted market
prices as of the end of the year, while the revolving credit facility fair values are based upon the company’s
estimate of the market for similar borrowing arrangements.
Other investments: The company has made other investments in limited partnerships and non-marketable
equity securities, which are accounted for using the cost method, adjusted for any estimated declines in value. These
investments were acquired in private placements and there are no quoted market prices or stated rates of return and
the company does not have the ability to easily sell these investments. The company completed an evaluation of the
residual value related to these investments in the fourth quarter of 2011 and recognized an immaterial loss. An
immaterial loss was also recognized in the fourth quarter of 2010. In the fourth quarter 2009, the company
recognized impairment charges totaling $6,713,000 pre-tax, which is included in the All Other segment, as a result
of an evaluation of the residual value related to these investments which considered the weakening in the
commercial real estate market as well as the redemption of one of the investments for a nominal amount.
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. To review goodwill for impairment in accordance
with ASC 350, the company first estimates the fair value of each reporting unit and compares the calculated fair
value to the carrying value of the each reporting unit. A reporting unit is defined as an operating segment or one
level below. The company has determined that its reporting units are the same as its operating segments. The
company completes its annual impairment tests in the fourth quarter of each year. To estimate the fair values of
the reporting units, the company utilizes a discounted cash flow method (DCF) model 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
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 assumptions
used are based on a market participant’s point of view and yielded a discount rate of 9.27% in 2011 for the
company’s initial impairment analysis compared to 9.59% in 2010 and 10.74% in 2009.
The company also utilizes an EV (Enterprise Value) to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) Method to compute the fair value of its reporting units which considers potential
acquirers and their EV to EBITDA multiples adjusted by an estimated premium. While more weight is given to
the discounted cash flow method, the EV to EBITDA Method does provide corroborative evidence of the
reasonableness of the discounted cash flow method results.
The results of the company’s Step I annual impairment test indicated a potential impairment in the Asia Pacific
segment. As a result, the company completed a Step II impairment test for this segment. Pursuant to Property, Plant
and Equipment, ASC 360, the company compared the forecasted un-discounted cash flows of the Asia/Pacific
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