In Terex Corporation's 2009 Annual Report, the company's CEO, Ronald Defeo, made this statement regarding the recessionary times that his company is facing:
I like to say that, "when you are in a hurricane, you have to expect to get wet and blown around!" In 2009, many of our markets declined 70% to 80% almost overnight. Backlogs that looked solid evaporated, and geographies that were growing and demanding more and faster shipments went silent. We were in a capital goods hurricane, and everything about our business changed in the fourth quarter of 2008. So, for most of 2009 we were focused on weathering the storm and preparing for the calm that would inevitably follow. As I write this letter in the early spring of 2010, this is where we find ourselves. Our business has stabilized, but any growth of consequence is going to be hard won. Difficulties like these are commonplace today, and they can have an important impact on a company's profitability because they are often associated with corporate restructuring, downsizing, and the recognition of asset impairments. A typical example of the disclosures made regarding asset impairments can be found in Starbucks' 2009 Annual Report, which states:
When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying values of the assets to projected future cash flows, in addition to other quantitative and qualitative analyses. For goodwill and other indefinite-lived intangible assets, impairment tests are performed annually and more frequently if facts and circumstances indicate carrying values exceed estimated fair values and if indefinite useful lives are no longer appropriate for the Company's trademarks.
Upon determination that the carrying values of such assets are in excess of their estimated fair values, the Company recognizes an impairment loss as a charge against current operations. Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize material impairment charges.
Required
1. Locate the 2009 Starbucks Annual Report online at its website, www.starbucks.com.
2. What is the dollar magnitude of the impairment charges that Starbucks recorded in 2009 and 2008? Summarize the issues that Starbucks is facing regarding asset impairments, and the relationship between those impairments and the recent recession.
3. What judgments that managers made at Starbucks may affect the ability of the external auditor to assess the reasonableness of the impairment charges?
4. Locate another company online that is also facing economic difficulties. Be prepared to discuss the company that you have chosen with your class or small group, and indicate the following in your report:
a. Name of your company, and its principal line of business.
b. Nature of financial difficulties the company is facing.
c. Nature of the company's long-term fixed assets.
d. Nature of the impairment charges, and their magnitude as a percentage of total assets, total sales, and net income.