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INVACARE CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
FS-17
Goodwill
The carrying amount of goodwill by operating segment is as follows (in thousands):
Institutional
Products
Group Europe Consolidated
Balance at January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,615 $ 425,919 $ 457,534
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,696)(34,819)(36,515)
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,919 391,100 421,019
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,763)(56,576)(59,339)
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,156 $ 334,524 $ 361,680
In accordance with Intangibles—Goodwill and Other, ASC 350, goodwill is reviewed annually for impairment. The company
first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of 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 or
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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's point of view and yielded a discount rate of 9.41% in 2015 for the company's initial 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.
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 these 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 an indicator
of potential impairment for the Europe or IPG segments.
As part of the company's review of goodwill for impairment, the company also considers the potential for impairment of any
other assets. 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 company determined there was no impairment of the property, plant and equipment of the Taylor Street facility based
on a comparison of the forecasted undiscounted cash flows to the carrying value of the net assets in accordance with ASC 360. In
addition, the company determined there was no impairment of net inventory associated with the facility.