Nike 2006 Annual Report Download - page 38

inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference
between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to
cost of sales. If changes in market conditions result in reductions in the estimated net realizable value of our
inventory below our previous estimate, we would increase our reserve in the period in which we made such a
determination and record a charge to cost of sales.
Contingent Payments under Endorsement Contracts
A significant portion of our demand creation expense relates to payments under endorsement contracts. In
general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract
elements may be accounted for differently, based upon the facts and circumstances of each individual contract.
Some of the contracts provide for contingent payments to endorsers based upon specific achievements in
their sports (e.g., winning a championship). We record selling and administrative expense for these amounts
when the endorser achieves the specific goal.
Some of the contracts provide for payments based upon endorsers maintaining a level of performance in
their sport over an extended period of time (e.g., maintaining a top ranking in a sport for a year). These amounts
are reported in selling and administrative expense when we determine that it is probable that the specified level
of performance will be maintained throughout the period. In these instances, to the extent that actual payments to
the endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or
decreased selling and administrative expense may be reported in a future period.
Some of the contracts provide for royalty payments to endorsers based upon a predetermined percentage of
sales of particular products. We expense these payments in cost of sales as the related sales are made. In certain
contracts, we offer minimum guaranteed royalty payments. For contractual obligations for which we estimate
that we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the
amount of the guaranteed payment in excess of that earned through sales of product in selling and administrative
expense uniformly over the remaining guarantee period.
Property, Plant and Equipment
Property, plant and equipment, including buildings, equipment, and computer hardware and software is
recorded at cost (including, in some cases, the cost of internal labor) and is depreciated over its estimated useful
life. Changes in circumstances (such as technological advances or changes to our business operations) can result
in differences between the actual and estimated useful lives. In those cases where we determine that the useful
life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to
depreciate the asset’s net book value to its salvage value.
When events or circumstances indicate that the carrying value of property, plant and equipment may be
impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or
not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows,
we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair
market value. Any impairment charges are recorded as other expense, net. We estimate future undiscounted cash
flows using assumptions about our expected future operating performance. Our estimates of undiscounted cash
flows may change in future periods due to, among other things, technological changes, economic conditions,
changes to our business operations or inability to meet business plans. Such changes may result in impairment
charges in the period in which such changes in estimates are made.
Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), goodwill and
intangible assets with indefinite lives are not amortized but instead measured for impairment at least annually in
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