Sunbeam 2010 Annual Report Download - page 20

Management’s Discussion and Analysis
Jarden Corporation Annual Report 2010
Allowance for Inventory Obsolescence
The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the
cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected, additional inventory write-downs may be required resulting in a charge to
income in the period such determination was made. Conversely, if actual market conditions are more favorable than those projected,
a reduction in the write-down may be required resulting in an increase in income in the period such determination was made.
Income Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that the Company believes is more
likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not
be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged
to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize
its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Additionally, the Company recognizes tax benefits for certain tax positions based upon judgments as to whether it is more likely
than not that a tax position will be sustained upon examination. The measurement of tax positions that meet the more-likely-
than-not recognition threshold are based in part on estimates and assumptions as to be the probability of an outcome, along with
estimated amounts to be realized upon any settlement. While the Company believes the resulting tax balances at December 31,
2010 and 2009 are fairly stated based upon these estimates, the ultimate resolution of these tax positions could result in favorable
or unfavorable adjustments to its consolidated financial statements and such adjustments could be material. See Note 12 to the
consolidated financial statements for further information regarding taxes.
Goodwill and Indefinite-Lived Intangibles
The application of the purchase method of accounting for business combinations requires the use of significant estimates and
assumptions in determining the fair value of assets acquired and liabilities assumed in order to properly allocate the purchase
price. The estimates of the fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be
reasonable using established valuation techniques that consider a number of factors and when appropriate, valuations performed
by independent third party appraisers.
As a result of acquisitions in prior years, the Company has significant intangible assets on its balance sheet that include goodwill
and indefinite-lived intangibles (primarily trademarks and tradenames). The Company’s goodwill and indefinite-lived intangibles
are tested and reviewed for impairment annually (during the fourth quarter, which coincides with the Company’s planning process),
or more frequently if facts and circumstances warrant. Goodwill impairment testing requires significant use of judgment and
assumptions including the identification of reporting units; the assignment of assets and liabilities to reporting units; and the
estimation of future cash flows, business growth rates, terminal values and discount rates. The Company uses various valuation
methods, such as the discounted cash flow and market multiple methods. The income approach used is the discounted cash flow
methodology and is based on five-year cash flow projections. The cash flows projected are analyzed on a “debt-free” basis (before
cash payments to equity and interest bearing debt investors) in order to develop an enterprise value from operations for the
reporting unit. A provision is also made, based on these projections, for the value of the reporting unit at the end of the forecast
period, or terminal value. The present value of the interim cash flows and the terminal value are determined using a selected discount
rate. The market multiple methodology involves estimating value based on the trading multiples for comparable public companies.
Multiples are determined through an analysis of certain publicly traded companies that are selected on the basis of operational and
economic similarity with the business operations. Valuation multiples are calculated for the comparable companies based on daily
trading prices. A comparative analysis between the reporting unit and the public companies forms the basis for the selection of
appropriate risk-adjusted multiples. The comparative analysis incorporates both quantitative and qualitative risk factors which relate
to, among other things, the nature of the industry in which the reporting unit and other comparable companies are engaged.
The testing of unamortizable intangibles under established guidelines for impairment also requires significant use of judgment and
assumptions (such as cash flow projections, terminal values and discount rates). For impairment testing purposes the fair value of
unamortizable intangibles is determined using the same method which was used for determining the initial value. The first method
is the relief from the royalty method, which estimates the value of a tradename by discounting the hypothetical avoided royalty
payments to their present value over the economic life of the asset. The second method is the excess earnings method, which
estimates the value of the intangible asset by quantifying the residual (or excess) cash flows generated by the asset, and discounting
those cash flows to the present. The excess earnings methodology requires the application of contributory asset charges.
Contributory asset charges typically include payments for the use of working capital, tangible assets and other intangible assets.
Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business
conditions could potentially require adjustments to these asset valuations.
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