Toro 2015 Annual Report Download - page 46

delivered to customers, product failure rates, and higher or lower assumptions regarding future performance of our businesses or a
than expected service costs for a repair. We believe that analysis different weighted-average cost of capital could result in impair-
of historical trends and knowledge of potential manufacturing or ment losses or additional amortization expense.
design problems provide sufficient information to establish a rea- In conducting the goodwill impairment test, we first perform a
sonable estimate for warranty claims at the time of sale. However, qualitative assessment to determine whether it is more likely than
since we cannot predict with certainty future warranty claims or not the fair value of any reporting unit is less than its carrying
costs associated with servicing those claims, our actual warranty amount. If we conclude that this is the case, a two-step quantita-
costs may differ from our estimates. An unexpected increase in tive test for goodwill impairment is performed. In conducting the
warranty claims or in the costs associated with servicing those initial qualitative assessment, we analyze actual and projected
claims would result in an increase in our warranty accrual and a growth trends for net sales, gross margin, and earnings for each
decrease in our net earnings. reporting unit, as well as historical versus planned performance.
Additionally, each reporting unit assesses critical areas that may
Sales Promotions and Incentives. At the time of sale to a cus- impact its business, including macroeconomic conditions, market-
tomer, we record an estimate for sales promotion and incentive related exposures, competitive changes, new or discontinued prod-
costs that are classified as a reduction from gross sales or as a ucts, changes in key personnel, or any other potential risks to pro-
component of SG&A expense. Examples of sales promotion and jected financial results. All assumptions used in the qualitative
incentive programs include off-invoice discounts, rebate programs, assessment require significant judgment.
volume discounts, retail financing support, commissions, and other If performed due to impairment indicators or the amount of time
sales discounts and promotional programs. The estimates for sales since the last analysis, the quantitative goodwill impairment test is
promotion and incentive costs are based on the terms of the a two-step process. First, we compare the carrying value of a
arrangements with customers, historical payment experience, field reporting unit, including goodwill, to its fair value. The fair value of
inventory levels, volume purchases, and expectations for changes each reporting unit is estimated using a discounted cash flow
in relevant trends in the future. Actual results may differ from these model. Where available, and as appropriate, comparable market
estimates if competitive factors dictate the need to enhance or multiples and our company’s market capitalization are also used to
reduce sales promotion and incentive accruals or if customer corroborate the results of the discounted cash flow models. If the
usage and field inventory levels vary from historical trends. Adjust- first step indicates the carrying value exceeds the fair value of the
ments to sales promotions and incentive accruals are made from reporting unit, then a second step must be completed in order to
time to time as actual usage becomes known in order to properly determine the amount of goodwill impairment that should be
estimate the amounts necessary to generate consumer demand recorded. In the second step, the implied fair value of the reporting
based on market conditions as of the balance sheet date. unit’s goodwill is determined by allocating the reporting unit’s fair
Goodwill and Other Intangibles. Identifiable intangible assets value to all of its assets and liabilities other than goodwill. The
are amortized over their useful lives, unless the useful life is deter- implied fair value of the goodwill that results from the application of
mined to be indefinite. The useful life of an identifiable intangible this second step is then compared to the carrying amount of the
asset is based on an analysis of several factors, including contrac- goodwill and an impairment charge is recorded for the difference.
tual, regulatory or legal obligations, demand, competition, and Inventory Valuation. We value our inventories at the lower of
industry trends. Goodwill and indefinite-life intangible assets are the cost of inventory or net realizable value, with cost determined
not amortized, but are tested at least annually for impairment and by either the last-in, first-out (‘‘LIFO’’) method for most U.S. inven-
whenever events or changes in circumstances indicate that impair- tories or the first-in, first-out (‘‘FIFO’’) method for all other invento-
ment may have occurred. ries. We establish reserves for excess, slow moving, and obsolete
Our impairment testing for goodwill is performed separately from inventory based on inventory levels, expected product life, and
our impairment testing of indefinite-life intangible assets, and the forecasted sales demand. Valuation of inventory can also be
income approach is utilized for both. We test goodwill for impair- affected by significant redesign of existing products or replacement
ment at the reporting unit level. Under the income approach, we of an existing product by an entirely new generation product. In
calculate the fair value of our reporting units and indefinite-life assessing the ultimate realization of inventories, we are required to
intangible assets using the present value of future cash flows. Indi- make judgments as to future demand requirements compared with
vidual indefinite-life intangible assets are tested by comparing the inventory levels. Reserve requirements are developed according to
book values of each asset to the estimated fair value. Our estimate our projected demand requirements based on historical demand,
of fair value for indefinite-life intangible assets uses projected reve- competitive factors, and technological and product life cycle
nues from our forecasting process, assumed royalty rates, and a changes. It is possible that an increase in our reserve may be
discount rate. Assumptions used in our impairment evaluations, required in the future if there is a significant decline in demand for
such as forecasted growth rates and cost of capital, are consistent
with internal projections and operating plans. Materially different
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