Nike 2015 Annual Report Download - page 40

PART II
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, planned divestitures or an
expectation that the carrying amount may not be recoverable, among other
factors. We 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, we
determine 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 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, if any.
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 that 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 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 time deposits, 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 a comparison to another independent
pricing vendor.
Hedge Accounting for Derivatives
We use derivative contracts to hedge certain anticipated foreign currency and
interest rate 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 these derivative 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 (income) expense, net during the quarter in
which the decrease occurs.
We have, in the past, 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 (income) expense, 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.
NIKE, INC. 2015 Annual Report and Notice of Annual Meeting 101
FORM 10-K