Motorola 2012 Annual Report Download - page 53

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2010
The goodwill impairment test for fiscal 2010 was performed using the two step goodwill impairment analysis. In step one,
the fair value of each reporting unit was compared to its book value. Fair value was determined using a combination of present
value techniques and quoted market prices of comparable businesses. If the fair value of the reporting unit exceeds its book
value, goodwill is not deemed to be impaired for that reporting unit, and no further testing would be necessary. If the fair value
of the reporting unit is less than its book value, we perform step two. Step two uses the calculated fair value of the reporting
unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The
difference between the fair value of the reporting unit calculated in step one and the fair value of the underlying assets and
liabilities of the reporting unit was the implied fair value of the reporting unit's goodwill. A charge is recorded in the financial
statements if the carrying value of the reporting unit's goodwill is greater than its implied fair value.
The following describes the valuation methodologies used to derive the fair value of the reporting units:
• Income Approach: To determine fair value, we discounted the expected future cash flows of the reporting units. The
discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of
inherent risk involved in our operations and the rate of return a market participant would expect to earn. To estimate
cash flows beyond the final year of our model, we used a terminal value approach. Under this approach, we used
estimated operating income before interest, taxes, depreciation and amortization in the final year of the model,
adjusted it to estimate a normalized cash flow, applied a perpetuity growth assumption and discounted it by a
perpetuity discount factor to determine the terminal value. We incorporated the present value of the resulting terminal
value into the estimate of fair value.
• Market-Based Approach: To corroborate the results of the income approach described above, we estimated the fair
value of our reporting units using several market-based approaches, including the value that is derived based on
Motorola Solutions' consolidated stock price as described above. We also used the guideline company method, which
focuses on comparing our risk profile and growth prospects to select reasonably similar/guideline publicly traded
companies.
The determination of fair value of the reporting units and assets and liabilities within the reporting units requires us to
make significant estimates and assumptions. These estimates and assumptions primarily included, the discount rate, terminal
growth rates, earnings before depreciation and amortization, and capital expenditures forecasts.
We evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair
value of each reporting unit, as well as the fair values of the corresponding assets and liabilities within the reporting unit, and
concluded they are reasonable. We weighted the valuation of our reporting units at 75% based on the income approach and 25%
based on the market-based approach, consistent with prior periods.
The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a
company's stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a
whole. Additional value may arise from the ability to take advantage of synergies and other benefits that flow from control over
another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a
controlled entity is different from measuring the fair value of that entity's individual common stock. In most industries,
including ours, an acquiring entity typically is willing to pay more for equity securities that give it a controlling interest than an
investor would pay for a number of equity securities representing less than a controlling interest.
For the purpose of determining the implied control premium calculation in the overall goodwill analysis, we applied
assumptions for determining the fair value of corporate assets. Corporate assets primarily consisted of cash and cash
equivalents, Sigma Fund balances, short-term investments, investments, deferred tax assets and corporate facilities. Judgments
about the fair value of corporate assets include, among others, an assumption that deferred tax assets should be discounted to
reflect their economic lives, that a significant portion of the corporate assets are required to pay off debt, fund our retirement
obligations, and market participants' perceptions of the likely restructuring costs, including severance and exit costs, that might
be incurred if our strategy is not successful. The results of our impairment analysis resulted in an implied control premium
commensurate with historical transactions observed in our industry.
Based on the results of our 2012, 2011, and 2010 annual assessments of the recoverability of goodwill, there were no
goodwill impairments.
Differences in our actual future cash flows, operating results, growth rates, capital expenditures, cost of capital and
discount rates as compared to the estimates utilized for the purpose of calculating the fair value of each reporting unit, as well
as a decline in macroeconomic conditions, the industry, the market, overall financial performance or our stock price and related
market capitalization, could affect the results of our annual goodwill assessment and, accordingly, potentially lead to future
goodwill impairment charges.