Invacare 2015 Annual Report Download - page 116

INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-44
The company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash, cash equivalents: The carrying amount reported in the balance sheet for cash, cash equivalents equals its fair value.
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. The company does not have the ability to easily
sell these investments. The company completes an evaluation of the residual value related to these investments in the fourth quarter
of each year. No impairment was recognized in 2015, 2014 or 2013.
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 value for the company’s convertible debt is based on quoted market-based estimates 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. These fair values are deemed to be categorized as Level 2 in the fair value hierarchy.
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 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 view and yielded
a discount rate of 9.41% in 2015 for the company's impairment analysis compared to 9.89% in 2014 and 10.00% in 2013.
The company also utilizes an Enterprise Value (EV) 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.
While there was no indication of impairment in 2015 related to goodwill for the Europe or IPG segments, a future potential
impairment is possible for any of the company's segments 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. In consideration of this potential, the company reviewed the results
if the discount rate used were 100 basis points higher for the 2015 impairment analysis and determined that there still would not
be any indicator of potential impairment for the segments with goodwill, which are Europe and IPG.
During 2014, the company recognized intangible write-down charges in the IPG segment of $13,041,000 comprised of a
customer list impairment of $12,826,000 and a non-compete agreement of $215,000 all recorded in the IPG segment as the actual
and remaining cash flows associated with the intangibles were less than the cash flow originally used to value the intangibles,
primarily driven by reduced net sales. The after-tax and pre-tax impairment amounts were the same for each of the above
impairments.
In the fourth quarter of 2013, the company recognized intangible write-down charges of $1,523,000 comprised of: trademarks
with indefinite lives of $568,000, a trademark with a definite life of $123,000, a customer lists impairment of $442,000 and a
developed technology of $223,000 all recorded in the IPG segment and a customer list intangible write-down charge of $167,000
recorded in the North America/HME segment. The after-tax and pre-tax impairment amounts were the same for each of the above
impairments except for the indefinite-lived trademark impairments in the IPG segment, which were $496,000 after-tax. The fair