Sunoco 2012 Annual Report Download - page 79

completed the formation of Philadelphia Energy Solutions (“PES”), a joint venture with The Carlyle Group,
which enabled the Philadelphia refinery to continue operating. Sunoco retained a non-operating minority interest
of approximately 33 percent. During the second quarter 2012, the Partnership reversed $10 million of regulatory
obligations which were no longer expected to be incurred.
The Partnership also recognized impairment charges of $9 and $3 million in 2012 and 2010, respectively.
These charges related to software and construction project cancellations and reflect costs associated with assets
that the Partnership could not deploy elsewhere within its operations.
The impairment recognized by the Partnership in 2011 was calculated using fair value assumptions,
including comparable land sale transactions and current replacement costs of similar new equipment, adjusted to
reflect the age, condition, maintenance history and estimated useful life of the assets. Since the fair value
assessment reflected both observable and unobservable inputs, it was determined to be a level 3 fair value
measurement within the fair value hierarchy under current accounting guidance.
Goodwill
Goodwill, which represents the excess of the purchase price in a business combination over the fair value of
net assets acquired, is tested for impairment annually or more often if warranted by events or changes in
circumstances indicating that the carrying value may exceed the estimated fair value. The Partnership determined
during 2012, 2011 and 2010 that goodwill was not impaired.
Management’s process of evaluating goodwill for impairment involves estimating the fair value of the
Partnership’s reporting units that contain goodwill. Inherent in estimating the fair value for each reporting unit
are certain judgments and estimates relating to market multiples for comparable businesses, including
management’s interpretation of current economic indicators and market conditions, and assumptions about the
Partnership’s strategic plans with regard to its operations. To the extent additional information arises, market
conditions change or the Partnership’s strategies change, it is possible that the conclusion regarding whether the
goodwill is impaired could change and result in future goodwill impairment charges.
Fair value is estimated using a market multiple methodology whereby multiples of business enterprise value
to earnings before interest, taxes, depreciation and amortization (“EBITDA”) of comparable companies are used
to estimate the fair value of the reporting units. Management establishes fair value by comparing the reporting
unit to other companies that are similar, from an operational or industry standpoint and considers the risk
characteristics in order to determine the risk profile relative to the comparable companies as a group. The most
significant assumptions are the market multiplies.
In September 2011, the Financial Accounting Standards Board (“FASB”) codified guidance related to the
testing of goodwill for impairment. The guidance provides entities with the option to first assess 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. If, after assessing the totality of events or circumstances, an entity determines it is more likely
than not that the fair value of a reporting unit is not less than its carrying amount, then performing the two-step
impairment test is not required. However, if an entity concludes otherwise, then it is required to perform the first
step of the two-step impairment test. Entities have the option of bypassing the qualitative analysis in any period
and proceeding directly to the two-step impairment test. The provisions of this guidance, effective for the
Partnership beginning January 1, 2012, did not have an impact on the Partnership’s consolidated financial
statements and disclosures.
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