Sunbeam 2011 Annual Report Download - page 28

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Management’s Discussion and Analysis
Jarden Corporation Annual Report 2011
Revenue Recognition and Allowance for Product Returns
The Company recognizes revenues at the time of product shipment or delivery, depending upon when title passes, to unaffiliated
customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and
collection is reasonably assured. Revenue is recognized as the net amount estimated to be received after deducting estimated
amounts for product returns, discounts and allowances. The Company estimates future product returns, discounts and allowances
based upon historical return rates and its reasonable judgment.
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 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,
2011 and 2010 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. In 2011, the Company adopted authoritative accounting guidance that allows a
company to use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether
it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the two-step goodwill impairment test. The qualitative (“Step 0”) approach, which was only applied to
a portion of the Company’s reporting units, assesses various factors including, in part, the macroeconomic environment, industry
and market specific conditions, financial performance, operating costs and cost impacts, as well as issues or events specific to the
reporting unit. If necessary, the first step (“Step 1”) in the goodwill impairment test involves comparing the fair value of each of its
reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the
reporting unit, the Company is required to proceed to the second step. In the second step, the fair value of the reporting unit would
be allocated to the assets (including unrecognized intangibles) and liabilities of the reporting unit, with any residual representing
the implied fair value of goodwill. An impairment loss would be recognized if, and to the extent that, the carrying value of goodwill
exceeded the implied value.
Both qualitative and quantitative 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.