Memorex 2014 Annual Report Download - page 44

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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our Consolidated
Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates to ensure they are consistent with
historical experience and the various assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions and could materially impact our results of operations.
We believe the following critical accounting policies are affected by significant judgments and estimates used in
the preparation of our Consolidated Financial Statements:
Uncertain Tax Positions. Our income tax returns are subject to review by various U.S. and foreign taxing
authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities.
The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must
be more-likely-than-not to be sustained by the taxing authorities based solely on the technical merits of the position.
If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit
that, in our judgment, is greater than 50 percent likely to be realized.
The total amount of unrecognized tax benefits as of December 31, 2014 was $2.1 million, excluding accrued
interest and penalties described below. If the unrecognized tax benefits were recognized in our Consolidated
Financial Statements, $1.7 million would affect income tax expense and our related effective tax rate.
Interest and penalties recorded for uncertain tax positions are included in our income tax provision. As of
December 31, 2014, $0.2 million of interest and penalties was accrued, excluding the tax benefit of deductible
interest. The reversal of accrued interest and penalties would affect income tax expense and our related effective
tax rate.
Our U.S. federal income tax returns for 2011 through 2013 are subject to examination by the Internal Revenue
Service (IRS). With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and
local tax jurisdictions for years before 2008.
The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of
any particular issue may require the use of cash and could result in increased income tax expense. Favorable
resolution could result in reduced income tax expense. It is reasonably possible that our unrecognized tax benefits
could increase or decrease significantly during the next twelve months due to the resolution of certain U.S. and
international tax uncertainties; however it is not possible to estimate the potential change at this time.
Intangibles. We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at
estimated fair value. Intangible assets with a definite life are amortized based on a pattern in which the economic
benefits of the assets are consumed, typically with useful lives ranging from one to 30 years. The initial recognition
of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analysis require
management to make subjective judgments concerning estimates of how the acquired assets will perform in the
future using certain valuation methods including discounted cash flow analysis. We evaluate assets on our balance
sheet, including such intangible assets, whenever events or changes in circumstances indicate that their carrying
value may not be recoverable. Factors such as unfavorable variances from forecasted cash flows, established
business plans or volatility inherent to external markets and industries may indicate a possible impairment that
would require an impairment test. While we believe that the current carrying value of these assets is not impaired,
materially different assumptions regarding future performance of our businesses, which in many cases require
subjective judgments concerning estimates, could result in significant impairment losses. The test for impairment
requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future
cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is
recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. See Note 6 -
Intangible Assets and Goodwill for information on our 2014 and 2013 intangible assets.
Goodwill. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value.
The initial recognition of goodwill and subsequent impairment analysis require management to make subjective
judgments concerning estimates of how the acquired assets will perform in the future using valuation methods
including discounted cash flow analysis. Goodwill is the excess of the cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. We test