Invacare 2015 Annual Report Download - page 60

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The company continues to closely monitor the credit-worthiness of its customers and adhere to tight credit policies. In 2013,
the Centers for Medicare and Medicaid Services announced new Medicare prices which became effective in July 2013 for the
second round of the NCB program, which was expanded to include 91 additional MSAs. In January 2016, CMS began expanding
NCB to rural areas which would expand the program to 100% of the Medicare population. The company believes the changes
could have a significant impact on the collectability of accounts receivable for those customers which are in the rural locations
impacted and which have a portion of their revenues tied to Medicare reimbursement. As a result, this is an additional risk factor
which the company considers when assessing the collectability of accounts receivable.
The company has an agreement with DLL, a third party financing company, to provide the majority of future lease financing
to Invacare's North America customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer.
The company retains a recourse obligation for events of default under the contracts. The company monitors the collections status
of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out method. Inventories have
been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management’s review of
inventories on hand compared to estimated future usage and sales. A provision for excess and obsolete inventory is recorded as
needed based upon the discontinuation of products, redesigning of existing products, new product introductions, market changes
and safety issues. Both raw materials and finished goods are reserved for on the balance sheet.
In general, Invacare reviews inventory turns as an indicator of obsolescence or slow moving product as well as the impact
of new product introductions. Depending on the situation, the company may partially or fully reserve for the individual item. The
company continues to increase its overseas sourcing efforts, increase its emphasis on the development and introduction of new
products, and decrease the cycle time to bring new product offerings to market. These initiatives are potential sources of inventory
obsolescence for both raw material and finished goods.
Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are
based on management's estimates of the period that the assets will generate revenue. Under Intangibles-Goodwill and Other, ASC
350, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The company's
measurement date for its annual goodwill impairment test is October 1 and the analysis is completed in the fourth quarter.
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 majority of the company's goodwill and intangible assets
relate to the company's Europe and IPG segments which are profitable in 2015.
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 (DCF) method 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 9.41% in 2015 for the company's annual impairment analysis compared to 9.89% in 2014
and 10.00% in 2013.
The company also utilizes an Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) 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.
In 2015, 2014 and 2013, the company performed a review for potential impairments of any other assets, including the
company's Taylor Street facility which is subject to the FDA consent decree that limits the company's manufacture and distribution
of custom power and manual wheelchairs, wheelchair components and wheelchair subassemblies at the Taylor Street facility. The