Nike 2014 Annual Report Download - page 39

PART II
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 companies 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.
Indefinite-lived intangible assets primarily consist of acquired trade names and
trademarks. We may first perform a qualitative assessment to determine
whether it is more likely than not that an indefinite-lived intangible asset is
impaired. If, after assessing the totality of events and circumstances, we
determine that it is more likely than not that the indefinite-lived intangible asset
is not impaired, no quantitative fair value measurement is necessary. If a
quantitative fair value measurement calculation is required 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.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis,
fair value is the price we would receive to sell an asset or pay to transfer a
liability in an orderly transaction with a market participant at the measurement
date. In general, and where applicable, we use quoted prices in active
markets for identical assets or liabilities to determine the fair values of our
financial instruments. This pricing methodology applies to our Level 1
investments, including U.S. Treasury securities.
In the absence of active markets for identical assets or liabilities, such
measurements involve developing assumptions based on market observable
data, including quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in markets that are
not active. This pricing methodology applies to our Level 2 investments such
as commercial paper and bonds, U.S. Agency securities, and money market
funds.
Level 3 investments are valued using internally developed models with
unobservable inputs. Assets and liabilities measured using unobservable
inputs are an immaterial portion of our portfolio.
A majority of our available-for-sale securities are priced by pricing vendors and
are generally Level 1 or Level 2 investments as these vendors either provide a
quoted market price in an active market or use observable inputs without
applying significant adjustments in their pricing. Observable inputs include
broker quotes, interest rates and yield curves observable at commonly
quoted intervals, volatilities, and credit risks. Our fair value processes include
controls that are designed to ensure appropriate fair values are
recorded. These controls include an analysis of period-over-period
fluctuations and comparison to another independent pricing vendor.
Hedge Accounting for Derivatives
We use forward and option contracts to hedge certain anticipated foreign
currency exchange transactions as well as certain non-functional currency
monetary assets and liabilities. When the specific criteria to qualify for hedge
accounting has been met, changes in the fair value of contracts hedging
probable forecasted future cash flows 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
sometime after the maturity of the derivative. One of the criteria for this
accounting treatment is that the notional value of forward and option
contracts 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 decline
below hedged levels, or if it is no longer probable that a forecasted transaction
will occur by the end of the originally specified time period or within an
additional two-month period of time thereafter, we are required to reclassify
the cumulative change in fair value of the over-hedged portion of the related
hedge contract from Other comprehensive income to Other expense
(income), net during the quarter in which the decrease occurs.
We have used and may in the future use, forward contracts or options to
hedge our investment in the net assets of certain international subsidiaries to
offset foreign currency translation related to our net investment in those
subsidiaries. The change in fair value of the forward contracts or options
hedging our net investments is reported in the cumulative translation
adjustment component of Accumulated other comprehensive income within
Total shareholders’ equity, to the extent effective, to offset the foreign
currency translation adjustments on those investments. As the value of our
underlying net investments in wholly-owned international subsidiaries is
known at the time a hedge is placed, the designated hedge is matched to the
portion of our net investment at risk. Accordingly, the variability involved in net
investment hedges is substantially less than that of other types of hedge
transactions and we do not expect any material ineffectiveness. We consider,
on a quarterly basis, the need to redesignate existing hedge relationships
based on changes in the underlying net investment. Should the level of our net
investment decrease below hedged levels, the cumulative change in fair value
of the over-hedged portion of the related hedge contract would be reported
as Other expense (income), net during the period in which changes occur.
Stock-based Compensation
We account for stock-based compensation by estimating the fair value of
stock-based compensation on the date of grant using the Black-Scholes
option pricing model. The Black-Scholes option pricing model requires the
input of highly subjective assumptions including volatility. Expected volatility is
estimated based on implied volatility in market traded options on our common
stock with a term greater than one year, along with other factors. Our decision
to use implied volatility was based on the availability of actively traded options
on our common stock and our assessment that implied volatility is more
representative of future stock price trends than historical volatility. If factors
change and we use different assumptions for estimating stock-based
compensation expense in future periods, stock-based compensation
expense may differ materially in the future from that recorded in the current
period.
Income Taxes
We record valuation allowances against our deferred tax assets, when
necessary. Realization of deferred tax assets (such as net operating loss
carry-forwards) 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 net deferred tax asset, which increases our Income tax expense in the
period when 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 outside the
United States, 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.
We carefully review all factors that drive the ultimate disposition of foreign
earnings determined to be reinvested offshore and apply stringent standards
to overcome the presumption of repatriation. Despite this approach, because
the determination involves our future plans and expectations of future events,
the possibility exists that amounts declared as indefinitely reinvested offshore
may ultimately be repatriated. For instance, the actual cash needs of our U.S.
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