Snapple 2014 Annual Report Download - page 47

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CRITICAL ACCOUNTING ESTIMATES
The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates
and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both
fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates
and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and
assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on
an ongoing basis and revised when necessary. We have not made any material changes in the accounting methodology we use to
assess or measure our critical accounting estimates. We have identified the items described below as our critical accounting
estimates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions
we use in our critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we
may be exposed to gains or losses that could be material to our consolidated financial statements. See Note 2 of the Notes to our
Audited Consolidated Financial Statements for a discussion of these and other accounting policies.
Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Goodwill and Other Indefinite Lived Intangible Assets
For goodwill and other indefinite lived intangible
assets, we conduct tests for impairment annually,
as of October 1, or more frequently if events or
circumstances indicate the carrying amount may
not be recoverable. We use present value and other
valuation techniques to make this assessment. If
the carrying amount of goodwill or an intangible
asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. For
purposes of impairment testing we assign goodwill
to the reporting unit that benefits from the synergies
arising from each business combination and also
assign indefinite lived intangible assets to our
reporting units. We define reporting units as
Beverage Concentrates, Latin America Beverages,
and Packaged Beverages' two reporting units,
DSD and WD.
The impairment test for indefinite lived intangible
assets encompasses calculating a fair value of an
indefinite lived intangible asset and comparing the
fair value to its carrying value. If the carrying value
exceeds the estimated fair value, impairment is
recorded. The impairment tests for goodwill
include comparing a fair value of the respective
reporting unit with its carrying value, including
goodwill and considering any indefinite lived
intangible asset impairment charges ("Step 1"). If
the carrying value exceeds the estimated fair value,
impairment is indicated and a second step ("Step
2") analysis must be performed.
For our detailed impairment analysis, we used an
income based approach to determine the fair value
of our assets, as well as an overall consideration of
market capitalization and our enterprise value.
These types of analyses contain uncertainties
because they require management to make
assumptions and to apply judgment to estimate
industry and economic factors and the profitability
of future business strategies. These assumptions
could be negatively impacted by various risks
discussed in "Risk Factors" in this Annual Report
on Form 10-K.
Critical assumptions include revenue growth and
profit performance, as well as an appropriate
discount rate. Discount rates are based on a
weighted average cost of equity and cost of debt,
adjusted with various risk premiums. For 2014,
such discount rates ranged from 5.10% to 11.85%.
The carrying values of goodwill and indefinite
lived intangible assets as of December 31, 2014,
were $2,990 million and $2,684 million,
respectively.
We have not identified any impairments in
goodwill or other indefinite lived intangible assets
during the past three years. The effect of a 1%
increase or decrease in the discount rate used to
determine the fair value of the reporting unit or the
indefinite lived intangible asset does not change
our conclusion regarding the identification of any
impairments in goodwill or other indefinite lived
intangible assets.
Revenue Recognition
We recognize revenue, net of the costs of our
customer incentives, at the time risk of loss has
been transferred to our customer.
Accruals for customer incentives and marketing
programs are established for the expected payout
based on contractual terms, volume-based metrics
and/or historical trends.
Our customer incentives and marketing accrual
methodology contains uncertainties because it
requires management to make assumptions and to
apply judgment to estimate our customer
participation and volume performance levels
which impact the expense recognition. Our
estimate of the amount and timing of customer
participation and volume performance levels is
based primarily on a combination of known or
historical transaction experience and forecasted
volumes. Differences between estimated expenses
and actual costs are normally insignificant and are
recognized to earnings in the period differences are
determined.
Further judgment is required to ensure the
classification of the spend is correctly recorded as
either a reduction from gross sales or advertising
and marketing expense.
A 10% change in the accrual for our customer
incentives and marketing programs as of December
31, 2014, would have affected our net sales and
SG&A expenses by $23 million and $2 million for
the year ended December 31, 2014.