Nike 2011 Annual Report Download - page 30

30 NIKE,INC.-Form10-K
PARTII
ITEM7Management’s Discussion and Analysis of Financial Condition and Results of Operations
Allowance for Uncollectible Accounts
Receivable
We make ongoing estimates relating to the ability to collect our accounts
receivable and maintain an allowance for estimated losses resulting from the
inability of our customers to make required payments. In determining the
amount of the allowance, we consider our historical level of credit losses and
make judgments about the creditworthiness of signifi cant customers based
on ongoing credit evaluations. Since we cannot predict future changes in
the fi nancial stability of our customers, actual future losses from uncollectible
accounts may differ from our estimates. If the fi nancial condition of our customers
were to deteriorate, resulting in their inability to make payments, a larger
allowance might be required. In the event we determine that a smaller or larger
allowance is appropriate, we would record a credit or a charge to selling and
administrative expense in the period in which such a determination is made.
Inventory Reserves
We also make ongoing estimates relating to the net realizable value of inventories,
based upon our assumptions about future demand and market conditions.
If we estimate that the net realizable value of our 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 signifi cant 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 specifi c achievements in their sports (e.g., winning a championship).
We record selling and administrative expense for these amounts when the
endorser achieves the specifi c 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 specifi ed 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 occur. In certain contracts, we offer
minimum guaranteed royalty payments. For contractual obligations for which
we estimate 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 and Defi nite-
Lived Assets
Property, plant and equipment, including buildings, equipment, and computer
hardware and software are recorded at cost (including, in some cases, the
cost of internal labor) and are depreciated over the 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.
We review the carrying value of long-lived assets or asset groups to be used
in operations whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recoverable. Factors that would
necessitate an impairment assessment include a signifi cant adverse change in
the extent or manner in which an asset is used, a signifi cant adverse change
in legal factors or the business climate that could affect the value of the asset,
or a signifi cant 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 fl ows 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
fl ows. Any impairment would be measured as the difference between the
asset groups carrying amount and its estimated fair value.
Goodwill and Indefi nite-Lived Intangible Assets
We perform annual impairment tests on goodwill and intangible assets with
indefi nite lives in the fourth quarter of each fi scal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 indefi nite life below its
carrying value. Events or changes in circumstances that may trigger interim
impairment reviews include signifi cant 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 fl ows and the
market valuation approach. The discounted cash fl ows model indicates the
fair value of the reporting unit based on the present value of the cash fl ows we
expect the reporting unit to generate in the future. Our signifi cant estimates in
the discounted cash fl ows model include: our weighted average cost of capital;
long-term rate of growth and profi tability 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 fi rms in similar lines of business. Signifi cant estimates in the
market valuation approach model include identifying similar companies with
comparable business factors such as size, growth, profi tability, 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 fl ows 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.
Indefi nite-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 benefi ts 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.