Nike 2010 Annual Report Download - page 52

Table of Contents
which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in
the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by
determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual
disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of
the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies which would typically
include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its
estimated fair value.
Goodwill and Indefinite−Lived Intangible Assets
We perform annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events
occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below
its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate,
operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors. The
impairment test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of
that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an
impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise.
We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and
the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows
we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of
capital; long−term rate of growth and profitability of the reporting unit’s business; and working capital effects. The market valuation approach indicates the
fair value of the business based on a comparison of the reporting unit to comparable publicly traded firms in similar lines of business. Significant estimates
in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and
return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
We believe the weighted use of discounted cash flows and the market valuation approach is the best method for determining the fair value of our
reporting units because these are the most common valuation methodologies used within our industry, and the blended use of both models compensates for
the inherent risks associated with either model if used on a stand−alone basis.
Indefinite−lived intangible assets primarily consist of acquired trade names and trademarks. In measuring the fair value for these intangible assets, we
utilize the relief−from−royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the
obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate
royalty rate and the weighted average cost of capital.
Hedge Accounting for Derivatives
We use forward and option contracts to hedge certain anticipated foreign currency exchange transactions as well as certain resulting receivable or
payable balances. When specific criteria for hedge accounting 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
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