Best Buy 2012 Annual Report Download - page 56

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Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions
Long-Lived Assets
Long-lived assets other than goodwill and
indefinite-lived intangible assets, which are
separately tested for impairment, are evaluated
for impairment whenever events or changes in
circumstances indicate that the carrying value
may not be recoverable.
When evaluating long-lived assets for
potential impairment, we first compare the
carrying value of the asset to the asset's
estimated future cash flows (undiscounted and
without interest charges). If the estimated
future cash flows are less than the carrying
value of the asset, we calculate an impairment
loss. The impairment loss calculation
compares the carrying value of the asset to the
asset's estimated fair value, which may be
based on estimated future cash flows
(discounted and with interest charges). We
recognize an impairment loss if the amount of
the asset's carrying value exceeds the asset's
estimated fair value. If we recognize an
impairment loss, the adjusted carrying amount
of the asset becomes its new cost basis. For a
depreciable long-lived asset, the new cost
basis will be depreciated (amortized) over the
remaining useful life of that asset.
When reviewing long-lived assets for
impairment, we group long-lived assets with
other assets and liabilities at the lowest level
for which identifiable cash flows are largely
independent of the cash flows of other assets
and liabilities.
Our impairment loss calculations contain
uncertainties because they require
management to make assumptions and to
apply judgment to estimate future cash flows
and asset fair values, including forecasting
useful lives of the assets and selecting the
discount rate that reflects the risk inherent in
future cash flows.
We have not made any material changes in the
accounting methodology we use to assess impairment
loss during the past three fiscal years.
We do not believe there is a reasonable likelihood that
there will be a material change in the estimates or
assumptions we use to calculate long-lived asset
impairment losses, except in relation to the store closures
and other strategic changes announced in March 2012
(See Note 17, Subsequent Event, to the Notes to
Consolidated Financial Statements, included in Item 8,
Financial Statements and Supplementary Data).
If actual results are not consistent with our estimates and
assumptions used in estimating future cash flows and
asset fair values, we may be exposed to losses that could
be material.
Goodwill and Intangible Assets
We evaluate goodwill and other indefinite-
lived intangible assets for impairment
annually in the fiscal fourth quarter and
whenever events or changes in circumstances
indicate their carrying value may not be
recoverable.
We test for goodwill impairment at the
reporting unit level, which is at the operating
segment level or one level below the operating
segment. Our impairment evaluation involves
comparing the fair value of each reporting unit
to its carrying value, including goodwill. Fair
value reflects the price a market participant
would be willing to pay in a potential sale of
the reporting unit. If the fair value exceeds
carrying value, then it is concluded that no
goodwill impairment has occurred. If the
carrying value of the reporting unit exceeds its
fair value, a second step is required to measure
possible goodwill impairment loss. The
second step includes hypothetically valuing
the tangible and intangible assets and
liabilities of the reporting unit as if the
reporting unit had been acquired in a business
combination. Then, the implied fair value of
the reporting unit's goodwill is compared to
the carrying value of that goodwill. If the
carrying value of the reporting unit's goodwill
exceeds the implied fair value of the goodwill,
we recognize an impairment loss in an amount
equal to the excess, not to exceed the carrying
value.
We carry forward the detailed determination of
the fair value of a reporting unit in our annual
goodwill impairment analysis if three criteria
are met: (1) the assets and liabilities that make
up the reporting unit have not changed
significantly since the most recent fair value
determination; (2) the most recent fair value
determination resulted in an amount that
exceeded the carrying amount of the reporting
unit by a substantial margin; and (3) based on
an analysis of events that have occurred since
the most recent fair value determination, the
likelihood that a current fair value
determination would be less than the current
carrying amount of the reporting unit is
remote. For all other reporting units, we
perform a detailed determination of fair value
of the reporting unit.
Our detailed impairment analysis involves the
use of a discounted cash flow model.
Significant management judgment is necessary
to evaluate the impact of operating and
macroeconomic changes on each reporting
unit. Critical assumptions include projected
comparable store sales growth, store count,
gross profit rates, SG&A rates, working capital
fluctuations, capital expenditures and terminal
growth rates, as well as an appropriate
discount rate. We determine discount rates
separately for each reporting unit using the
capital asset pricing model. We also use
comparable market earnings multiple data and
our company's market capitalization to
corroborate our reporting unit valuations.
These types of analyses contain uncertainties
because they require management to make
assumptions and to apply judgment to estimate
industry economic factors and the profitability
of future business strategies. It is our policy to
conduct impairment testing based on our
current business strategy in light of present
industry and economic conditions, as well as
our future expectations.
We have not made any material changes in the
accounting methodology we use to assess impairment
loss on goodwill and other intangible assets during the
past three fiscal years.
The carrying values of goodwill and indefinite-lived
intangible assets at March 3, 2012, were $1.3 billion and
$130 million, respectively. In fiscal 2012, we recorded a
$1.2 billion goodwill impairment attributable to our Best
Buy Europe reporting unit, representing full impairment
of the reporting unit's goodwill. For the remainder of our
goodwill outside the Best Buy Europe reporting unit, we
determined that the excess of fair value over carrying
value for each of our reporting units was substantial. As
part of our recent restructuring activities, we recorded
impairment charges of $3 million and $10 million in
fiscal 2012 and 2011, respectively, related to certain
indefinite-lived tradenames in our Domestic segment.
These impairments were recorded within Loss from
discontinued operations within our Consolidated
Statements of Earnings for the respective years.
We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions we use to test for impairment losses on
goodwill and other intangible assets. However, if actual
results are not consistent with our estimates or
assumptions, we may be exposed to an impairment
charge that could be material.