Rayovac 2004 Annual Report Download - page 74

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RAYOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The Company evaluates recoverability of
assets to be held and used by comparing the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(i) Intangible Assets
Intangible assets are recorded at cost. Customer lists and proprietary technology intangibles are amortized, using
the straight-line method, over their estimated useful lives of approximately 5 to 19 years. Excess of cost over fair
value of net assets acquired (goodwill) and trade name intangibles are not amortized. Goodwill is tested for
impairment at least annually at the reporting unit level. If impairment is indicated, a write-down to fair value
(normally measured by discounting estimated future cash flows) is recorded. Trade name intangibles are tested
for impairment at least annually by comparing the fair value with the carrying value. Any excess of carrying
value over fair value is recognized as an impairment loss in income from operations.
Intangibles with Indefinite Lives
In accordance with Statement of Financial Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets, the Company performs impairment testing of goodwill at the reporting unit level. If impairment is
indicated, a write-down to fair value is recorded. The Company’s impairment tests for goodwill compare the
carrying amounts of these assets with estimated fair values. The fair value of goodwill exceeds their carrying
amount in all reporting units; therefore, the assets are not considered impaired. Had the carrying amounts of
goodwill exceeded fair values, a second step in the impairment test would have been required to measure the
amount of a goodwill impairment loss. This step would compare the implied fair values of the reporting unit’s
goodwill with the carrying amount of goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of goodwill, an impairment loss would be recognized in an amount equal to that excess. Trade
name intangibles are tested for impairment by comparing the fair value with the carrying value. Trade name fair
values are based on the respective discounted after-tax royalty cash flows. Any excess of carrying value over fair
value is recognized as an impairment loss in income from operations. There were no impairment losses
recognized in fiscal 2004, 2003 or 2002.
The fair values of the reporting units are determined using discounted cash flow models similar to those
used internally by the Company for evaluating acquisitions with comparisons to estimated market values. The
Company’s discounted cash flow models for 2004 utilize projections of cash flows for ten years, a perpetuity
valuation technique with an assumed long-term growth rate of approximately 4 percent, and discounted projected
cash flows and terminal values based on the Company’s targeted near-term weighted average cost of capital
(“WACC”) of approximately 10 percent. The fair values of trade name intangibles are determined based on
discounted royalty cash flows. The valuation models assumed royalty rates of 1.5% to 8.0%, a WACC of
approximately 10% and annual growth rates of 4% to 8%. Changes in these assumptions could materially impact
the fair value estimates.
Management uses its judgment in assessing whether assets may have become impaired between annual
impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated
technological change or competitive activities, loss of key personnel, and acts by governments and courts may
signal that an asset has become impaired.
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