Coca Cola 2010 Annual Report Download - page 48

carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an
amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.
Intangible assets acquired in recent transactions are naturally more susceptible to impairment, primarily due to the fact
that they are recorded at fair value based on recent operating plans and macroeconomic conditions present at the time
of acquisition. Consequently, if operating results and/or macroeconomic conditions deteriorate shortly after an
acquisition, it could result in the impairment of the acquired assets. A deterioration of macroeconomic conditions may
not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively
impact other assumptions used in our analyses, including, but not limited to, the estimated cost of capital and/or
discount rates. Additionally, as discussed above, in accordance with accounting principles generally accepted in the
United States, we are required to ensure that assumptions used to determine fair value in our analyses are consistent
with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount
rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our
Company’s actual cost of capital has changed. Therefore, if the cost of capital and/or discount rates change, our
Company may recognize an impairment of an intangible asset or assets in spite of realizing actual cash flows that are
approximately equal to, or greater than, our previously forecasted amounts.
As of our most recent annual impairment review, the Company had no significant impairments of its intangible assets,
individually or in the aggregate. In addition, as of December 31, 2010, we did not have any reporting units with a
material amount of goodwill for which it is reasonably likely that they will fail step one of a goodwill impairment test in
the near term. However, if macroeconomic conditions worsen, it is possible that we may experience significant
impairments of some of our intangible assets, which would require us to recognize impairment charges. Management
will continue to monitor the fair value of our intangible assets in future periods.
In 2010, we acquired CCE’s North American business, which resulted in the Company recording $13,878 million of
intangible assets, including goodwill. Refer to Note 2 of Notes to Consolidated Financial Statements. The acquired
intangible assets included $5,705 million of bottler franchise rights, which consisted of $5,100 million of franchise rights
with indefinite lives and $605 million of franchise rights with definite lives. The franchise rights with indefinite lives
represent franchise rights that had previously provided CCE with exclusive and perpetual rights to manufacture and/or
distribute certain beverages in specified territories. The franchise rights with definite lives relate to franchise rights that
had previously provided CCE with exclusive rights to manufacture and/or distribute certain beverages in specified
territories for a finite period of time and, therefore, have been classified as definite-lived intangible assets.
The bottler franchise rights acquired by the Company in connection with our acquisition of CCE’s North American
business include the contractual rights previously impaired by CCE. In 2008, CCE recorded pretax impairment charges
of approximately $7.6 billion ($4.9 billion after-tax), which reduced the carrying value of CCE’s North American
franchise rights to zero. The decline in the estimated fair value of CCE’s North American franchise rights was the result
of several factors including, but not limited to, (1) challenging macroeconomic conditions which contributed to lower
than anticipated volume for higher-margin packages and certain higher-margin beverage categories; (2) increases in raw
material costs including significant increases in aluminum, HFCS and resin; (3) increased delivery costs as a result of
higher fuel costs; (4) a dramatic increase in market debt rates, which impacted the capital charge; and (5) a significant
decline in the funded status of CCE’s defined benefit pension plans. Similar factors may also potentially result in future
impairments. In 2008, the Company’s proportionate share of these impairment charges recorded by CCE was
approximately $1.6 billion, which we recorded to equity income (loss) — net. Refer to the heading ‘‘Operations
Review — Equity Income (Loss) — Net’’ and Note 17 of Notes to Consolidated Financial Statements.
The Company recorded $7,746 million of goodwill in connection with this acquisition, which is not tax deductible and
has been assigned to the North America operating segment. This goodwill is primarily related to synergistic value
created from having a unified operating system that will strategically position us to better market and distribute our
nonalcoholic beverage brands in North America. It also includes certain other intangible assets that do not qualify for
separate recognition, such as an assembled workforce.
In 2009, the Company recognized a $23 million impairment charge due to a change in the expected useful life of an
intangible asset, which was previously determined to have an indefinite life. Refer to the heading ‘‘Operations
Review — Other Operating Charges,’’ and Note 16 and Note 17 of Notes to Consolidated Financial Statements.
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