Nike 2006 Annual Report Download - page 39

the fourth fiscal quarter, or when events indicate that an impairment exists. As required by FAS 142, in our
impairment tests for goodwill and other indefinite-lived intangible assets, we compare the estimated fair value of
goodwill and other intangible assets to the carrying value. If the carrying value exceeds our estimate of fair value,
we calculate impairment as the excess of the carrying value over our estimate of fair value. Our estimates of fair
value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors,
including our assumptions about the expected future operating performance of our reporting units. Our estimates
may change in future periods due to, among other things, technological change, economic conditions, changes to
our business operations or inability to meet business plans. Such changes may result in impairment charges
recorded in future periods. Any impairment charge related to goodwill would be classified as a separate line item
on our consolidated statement of income as part of income before income taxes and any impairment charge
related to other indefinite-lived intangible assets would be classified as other expense, net.
Intangible assets that are determined to have definite lives are amortized over their useful lives and are
measured for impairment only when events or circumstances indicate the carrying value may be impaired. In
these cases, 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
value. Any impairment charges would be classified as other expense, net.
Hedge Accounting for Derivatives
We use forward exchange contracts and option contracts to hedge certain anticipated foreign currency
exchange transactions, as well as any resulting receivable or payable balance. When specific criteria required by
SFAS No. 133, “Accounting for Derivative and Hedging Activities,” as amended and interpreted (“FAS 133”)
have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other
comprehensive income rather than net income until the underlying hedged transaction affects net income. In most
cases, this results in gains and losses on hedge derivatives being released from other comprehensive income into
net income some time after the maturity of the derivative. One of the criteria for this accounting treatment is that
the forward exchange contract amount should not be in excess of specifically identified anticipated transactions.
By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary
from actual transactions. When anticipated transaction estimates or actual transaction amounts decrease below
hedged levels, or when the timing of transactions changes significantly, we are required to reclassify at least a
portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income
to other expense, net during the quarter in which such changes occur. Once an anticipated transaction estimate or
actual transaction amount decreases below hedged levels, we make adjustments to the related hedge contract in
order to reduce the amount of the hedge contract to that of the revised anticipated transaction.
Taxes
We record valuation allowances against our deferred tax assets, when necessary, in accordance with SFAS
No. 109, “Accounting for Income Taxes.” Realization of deferred tax assets (such as net operating loss
carryforwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess
the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we
believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing
our income tax expense in the period such determination is made.
In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to
be indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings
designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our
offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax
considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested
offshore.
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