Nike 2014 Annual Report Download - page 55

PART II
Impairment of Long-Lived Assets
The Company reviews 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
significant adverse change in the extent or manner in 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,
the Company 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, the Company 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 group’s carrying amount and its estimated fair value.
Goodwill and Indefinite-Lived Intangible Assets
The Company performs 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, planned
divestitures or an expectation that the carrying amount may not be
recoverable, among other factors. The Company may first assess qualitative
factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the totality of
events and circumstances, the Company determines that it is more likely than
not that the fair value of the reporting unit is greater than its carrying amount,
the two-step impairment test is unnecessary. The two-step impairment test
first requires the Company to estimate the fair value of its reporting units. If the
carrying value of a reporting unit exceeds its fair value, the goodwill of that
reporting unit is potentially impaired and the Company proceeds to step two
of the impairment analysis. In step two of the analysis, the Company
measures and records an impairment loss equal to the excess of the carrying
value of the reporting unit’s goodwill over its implied fair value, if any.
The Company generally bases its 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 that the Company expects the reporting unit to generate in the
future. The Company’s significant estimates in the discounted cash flows
model include: its 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. The Company 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,
the Company determines 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, the Company utilizes 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 the Company to estimate
the future revenue for the related brands, the appropriate royalty rate and the
weighted average cost of capital.
Operating Leases
The Company leases retail store space, certain distribution and warehouse
facilities, office space, and other non-real estate assets under operating
leases. Operating lease agreements may contain rent escalation clauses, rent
holidays or certain landlord incentives, including tenant improvement
allowances. Rent expense for non-cancelable operating leases with
scheduled rent increases or landlord incentives are recognized on a straight-
line basis over the lease term, beginning with the effective lease
commencement date, which is generally the date in which the Company
takes possession of or controls the physical use of the property. Certain
leases also provide for contingent rents, which are determined as a
percentage of sales in excess of specified levels. A contingent rent liability is
recognized together with the corresponding rent expense when specified
levels have been achieved or when the Company determines that achieving
the specified levels during the period is probable.
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a
recurring basis, including derivatives and available-for-sale securities. Fair
value is the price the Company would receive to sell an asset or pay to transfer
a liability in an orderly transaction with a market participant at the
measurement date. The Company uses a three-level hierarchy established by
the Financial Accounting Standards Board (“FASB”) that prioritizes fair value
measurements based on the types of inputs used for the various valuation
techniques (market approach, income approach, and cost approach).
The levels of hierarchy are described below:
•Level 1: Observable inputs such as quoted prices in active markets for
identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly; these include 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.
•Level 3: Unobservable inputs for which there is little or no market data
available, which require the reporting entity to develop its own assumptions.
The Company’s assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers factors
specific to the asset or liability. Financial assets and liabilities are classified in
their entirety based on the most conservative level of input that is significant to
the fair value measurement.
Pricing vendors are utilized for certain Level 1 and Level 2 investments. 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. The fair
value of derivative contracts is determined using observable market inputs
such as the daily market foreign currency rates, forward pricing curves,
currency volatilities, currency correlations and interest rates, and considers
nonperformance risk of the Company and that of its counterparties.
The Company’s 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.
Refer to Note 6 — Fair Value Measurements for additional information.
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