Invacare 2011 Annual Report Download - page 114

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INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Financial Instruments—Continued
flows expected to be generated by the asset are less than the carrying value. Actual impairment amounts for
definite-lived assets are then calculated using a discounted cash flow calculation. The company reviews
indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or
circumstances indicate possible impairment. Any impairment amounts for indefinite-lived assets are calculated as
the difference between the future discounted cash flows expected to be generated by the asset less than the
carrying value for the asset.
During the fourth quarter of 2011, the company recognized intangible write-down charges of $1,761,000
comprised of: customer list impairment of $625,000 in the IPG segment, customer list impairment of $508,000 in
the NA/HME segment, indefinite-lived trademark impairment of $427,000 in the European segment and an
intellectual property impairment of $201,000 in the Asia/Pacific segment. The fair value of the customer lists
were calculated using an excess earnings method, using a discounted cash flow model. Estimated cash flow
returns to the customer relationship were reduced by the cash flows required to satisfy the return requirements of
each of the assets employed with the residual cash flow then discounted to value the customer relationship. The
fair value of the trademark was calculated using a relief from royalty payment methodology which requires
applying an estimated market royalty rate to forecasted net sales and discounting the resulting cash flows to
determine fair value. The intellectual properly intangible asset was impaired as the intellectual property was
deemed no longer viable and is no longer being used.
As a result of the company’s 2010 intangible impairment review, the company calculated the fair value of
an IPG segment indefinite-lived trademark and a NA/HME segment customer list as each had indicators of
impairment, principally net sales less than forecasted. The fair value of the trademark was calculated using a
relief from royalty payment methodology which requires applying an estimated market royalty rate to forecasted
net sales and discounting the resulting cash flows to determine fair value. The calculated fair value resulted in an
impairment charge of $336,000 for the IPG segment indefinite-lived trademark. The fair value of the customer
list was calculated using an excess earnings method, using a discounted cash flow model. Estimated cash flow
returns to the customer relationship were reduced by the cash flows required to satisfy the return requirements of
each of the assets employed with the residual cash flow then discounted to value the customer relationship. The
calculated fair value resulted in an impairment charge of $248,000 for the NA/HME segment customer list.
The fair values of the company’s intangible assets were calculated using inputs that are not observable in the
market and included management’s own estimates regarding the assumptions that market participants would use
and thus these inputs are deemed Level III inputs in regards to the fair value hierarchy.
Business Segments
The company operates in five primary business segments: North America/Home Medical Equipment (NA/
HME), Invacare Supply Group (ISG), Institutional Products Group (IPG), Europe and Asia/Pacific.
The NA/HME segment sells each of three primary product lines, which includes: lifestyle, mobility and
seating and respiratory therapy products. Invacare Supply Group sells distributed product and the Institutional
Products Group sells or rents long-term care medical equipment, health care furnishings and accessory products.
Europe and Asia/Pacific sell the same product lines as NA/HME and IPG. Each business segment sells to the
home health care, retail and extended care markets.
The company evaluates performance and allocates resources based on profit or loss from operations before
income taxes for each reportable segment. The accounting policies of each segment are the same as those
described in the summary of significant accounting policies for the company’s consolidated financial statements.
Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element.
FS-42