Impairment of Long-Lived Assets, Goodwill and Other Intangibles for Foot

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Foot Locker (FL)

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FL » Topics » Impairment of Long-Lived Assets, Goodwill and Other Intangibles

These excerpts taken from the FL 10-K filed Mar 30, 2009.

Impairment of Long-Lived Assets, Goodwill and Other Intangibles

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists, a triggering event, comprises measurable operating performance criteria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a triggering event, the Company uses assumptions, which are predominately identified from the Company’s three-year strategic plans, in determining the impairment amount. In the calculation of the fair value of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by discounting expected future cash flows at the Company’s weighted-average cost of capital. Management believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon estimates that, if not achieved, may result in significantly different results. During 2008, the Company recorded non-cash impairment charges totaling $67 million primarily to write-down long-lived assets such as store fixtures and leasehold improvements for the Company’s U.S. store operations pursuant to SFAS No. 144.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to perform an impairment review of its goodwill and intangible assets with indefinite lives if impairment indicators arise and, at a minimum, annually. The Company has chosen to perform this review at the beginning of each fiscal year, and it is done in a two-step approach. The initial step requires that the carrying value of each reporting unit be compared with its estimated fair value. The second step — to evaluate goodwill of a reporting unit for impairment — is only required if the carrying value of that reporting unit exceeds its estimated fair value. The Company used a combination of a discounted cash flow approach and market-based approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. The market approach requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests or securities that have been sold. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.

The Company assigned discount rates ranging from 12 to 14 percent for the four reporting units. The Company evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable and are consistent with prior valuations.

Owned trademarks and tradenames that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment in accordance with SFAS No. 142, as mentioned above. The fair values of purchased intangible assets are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

We consider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including declines in stock price and market capitalization in relation to the book value of the Company and macroeconomic conditions affecting retail. In the last few months of 2008 and into 2009, the capital markets experienced substantial volatility and the Company’s stock price declined substantially, causing the Company’s book value to exceed its market capitalization. Accordingly, we concluded that a triggering event had occurred. During the fourth quarter of 2008, the Company performed an analysis of its goodwill and other intangibles.

Based on the results of step one, the fair values of the Direct-to-Customers and Foot Locker Europe reporting units exceeded their carrying values, indicating that there was no impairment of goodwill at these reporting units. The discount rates would have to be increased to over 17 percent before the fair values of these reporting units would be less than their carrying values. The Company does not believe the resulting discount rates would be reasonable relative to the risks associated with the future cash flows of these reporting units. The results of both the income and market approaches indicated that the fair values were in excess of the carrying values. The Company has applied these approaches consistent with prior valuations.

However, the fair values of the Foot Locker, Kids Foot Locker and Footaction reporting unit and the Champs Sports reporting unit indicated a potential impairment. The decline in the fair values of these reporting units reflected lower expected sales and cash flows as a result of the macroeconomic environment and uncertainty around future cash flows. The Company completed the second step where the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess. Accordingly, the Company determined that the goodwill assigned to these reporting units were fully impaired. Additionally, the Company performed a reconciliation of its market capitalization to the total fair value. The principal reconciling item was ascribed to a control premium associated with the consolidated businesses that would not be reflected in public market trading prices.

The Company’s review of goodwill and other intangibles resulted in impairment charges totaling $169 million.

Impairment of Long-Lived
Assets, Goodwill and Other Intangibles

In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), the Company recognizes an impairment loss
when circumstances indicate that the carrying value of long-lived tangible and
intangible assets with finite lives may not be recoverable. Management’s policy
in determining whether an impairment indicator exists, a triggering event,
comprises measurable operating performance criteria at the division level as
well as qualitative measures. If an analysis is necessitated by the occurrence
of a triggering event, the Company uses assumptions, which are predominately
identified from the Company’s three-year strategic plans, in determining the
impairment amount. In the calculation of the fair value of long-lived assets,
the Company compares the carrying amount of the asset with the estimated future
cash flows expected to result from the use of the asset. If the carrying amount
of the asset exceeds the estimated expected undiscounted future cash flows, the
Company measures the amount of the impairment by comparing the carrying amount
of the asset with its estimated fair value. The estimation of fair value is
measured by discounting expected future cash flows at the Company’s
weighted-average cost of capital. Management believes its policy is reasonable
and is consistently applied. Future expected cash flows are based upon estimates
that, if not achieved, may result in significantly different results. During
2008, the Company recorded non-cash impairment charges totaling $67 million
primarily to write-down long-lived assets such as store fixtures and leasehold
improvements for the Company’s U.S. store operations pursuant to SFAS No.
144.

In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the
Company is required to perform an impairment review of its goodwill and
intangible assets with indefinite lives if impairment indicators arise and, at a
minimum, annually. The Company has chosen to perform this review at the
beginning of each fiscal year, and it is done in a two-step approach. The
initial step requires that the carrying value of each reporting unit be compared
with its estimated fair value. The second step — to evaluate goodwill of a
reporting unit for impairment — is only required if the carrying value of that
reporting unit exceeds its estimated fair value. The Company used a combination
of a discounted cash flow approach and market-based approach to determine the
fair value of a reporting unit. The determination of discounted cash
flows of the reporting units and assets and liabilities within the
reporting units requires us to make significant estimates and assumptions. These
estimates and assumptions primarily include, but are not limited to, the
discount rate, terminal growth rates, earnings before depreciation and
amortization, and capital expenditures forecasts. The market approach requires
judgment and uses one or more methods to compare the reporting unit with similar
businesses, business ownership interests or securities that have been sold. Due
to the inherent uncertainty involved in making these estimates, actual results
could differ from those estimates.

The Company assigned discount rates
ranging from 12 to 14 percent for the four reporting units. The Company
evaluated the merits of each significant assumption, both individually and in
the aggregate, used to determine the fair value of the reporting units, as well
as the fair values of the corresponding assets and liabilities within the
reporting units, and concluded they are reasonable and are consistent with prior
valuations.

Owned trademarks and tradenames that have been determined to have
indefinite lives are not subject to amortization but are reviewed at least
annually for potential impairment in accordance with SFAS No. 142, as mentioned
above. The fair values of purchased intangible assets are estimated and compared
to their carrying values. We estimate the fair value of these intangible assets
based on an income approach using the relief-from-royalty method. This
methodology assumes that, in lieu of ownership, a third party would be willing
to pay a royalty in order to exploit the related benefits of these types of
assets. This approach is dependent on a number of factors, including estimates
of future growth and trends, royalty rates in the category of intellectual
property, discount rates and other variables. We base our fair value estimates
on assumptions we believe to be reasonable, but which are unpredictable and
inherently uncertain. Actual future results may differ from those estimates. We
recognize an impairment loss when the estimated fair value of the intangible
asset is less than the carrying value.

We
consider many factors in evaluating whether the carrying value of goodwill may
not be recoverable, including declines in stock price and market capitalization
in relation to the book value of the Company and macroeconomic
conditions affecting retail. In the last few months of 2008 and into 2009,
the capital markets experienced substantial volatility and the Company’s stock
price declined substantially, causing the Company’s book value to exceed its
market capitalization. Accordingly, we concluded that a triggering event had
occurred. During the fourth quarter of 2008, the Company performed an analysis
of its goodwill and other intangibles.

Based on the results of step one, the fair values of the
Direct-to-Customers and Foot Locker Europe reporting units exceeded their
carrying values, indicating that there was no impairment of goodwill at these
reporting units. The discount rates would have to be increased to over 17
percent before the fair values of these reporting units would be less than their
carrying values. The Company does not believe the resulting discount rates would
be reasonable relative to the risks associated with the future cash flows of
these reporting units. The results of both the income and market approaches
indicated that the fair values were in excess of the carrying values. The
Company has applied these approaches consistent with prior
valuations.

However, the fair values of the Foot Locker, Kids Foot Locker and
Footaction reporting unit and the Champs Sports reporting unit indicated a
potential impairment. The decline in the fair values of these reporting units
reflected lower expected sales and cash flows as a result of the macroeconomic
environment and uncertainty around future cash flows. The Company completed the
second step where the fair value of the reporting unit is allocated to all of
the assets and liabilities of the reporting unit to determine an implied
goodwill value. This allocation is similar to a purchase price allocation
performed in purchase accounting. If the carrying amount of the reporting unit’s
goodwill exceeds the implied goodwill value, an impairment loss should be
recognized in an amount equal to that excess. Accordingly, the Company
determined that the goodwill assigned to these reporting units were fully
impaired. Additionally, the Company performed a reconciliation of its market
capitalization to the total fair value. The principal reconciling item was
ascribed to a control premium associated with the consolidated businesses that
would not be reflected in public market trading prices.

The Company’s review of goodwill and
other intangibles resulted in impairment charges totaling $169
million.