| Significant Accounting Policies | 2. Significant Accounting
Policies Use of
Estimates Cash and Cash
Equivalents Allowances for Doubtful
Accounts Inventories We also use the last-in, first-out
(“LIFO”) inventory method in those product groups in
which metals inventories comprise a significant portion of our
inventories. LIFO inventories at December 31, 2015 and 2014
were $227.9 million (with a current cost of $243.1 million) and
$197.6 million (with a current cost of $217.5 million),
respectively. Property, Plant and
Equipment
Buildings and leasehold
improvements 15 to 40 years
Machinery and equipment 3 to 10 years
Software 3 to 7 years Long-lived
Assets Goodwill and Indefinite-lived
Intangible Assets We evaluate the recoverability of
goodwill using a weighting of the income (80%) and market
(20%) approaches. For the income approach, we use a discounted
cash flow model, estimating the future cash flows of the reporting
units to which the goodwill relates, and then discounting the
future cash flows at a market-participant-derived weighted-average
cost of capital. In determining the estimated future cash flows, we
consider current and projected future levels of income based on
management’s plans for that business; business trends,
prospects and market and economic conditions; and
market-participant considerations. Furthermore, our projection for
the U.S. home products market is inherently subject to a number of
uncertain factors, such as employment, home prices, credit
availability, new home starts and the rate of home foreclosures.
For the market approach, we apply market multiples for peer groups
to the current operating results of the reporting units to
determine each reporting unit’s fair value. The
Company’s reporting units are operating segments. When the
estimated fair value of a reporting unit is less than its carrying
value, we measure and recognize the amount of the goodwill
impairment loss, if any. Impairment losses, limited to the carrying
value of goodwill, represent the excess of the carrying value of a
reporting unit’s goodwill over the implied fair value of that
goodwill. The implied fair value of a reporting unit is estimated
based on a hypothetical allocation of each reporting unit’s
fair value to all of its underlying assets and
liabilities. Purchased intangible assets other
than goodwill are amortized over their useful lives unless those
lives are determined to be indefinite. The determination of the
useful life of an intangible asset other than goodwill is based on
factors including historical and tradename performance with respect
to consumer name recognition, geographic market presence, market
share, and plans for ongoing tradename support and promotion.
Certain of our tradenames have been assigned an indefinite life as
we currently anticipate that these tradenames will contribute cash
flows to the Company indefinitely. Indefinite-lived intangible
assets are not amortized, but are evaluated at least annually to
determine whether the indefinite useful life is appropriate. We
review indefinite-lived intangible assets for impairment annually
in the fourth quarter, and whenever market or business events
indicate there may be a potential impairment of that intangible.
Impairment losses are recorded to the extent that the carrying
value of the indefinite-lived intangible asset exceeds its fair
value. We measure fair value using the standard relief-from-royalty
approach which estimates the present value of royalty income that
could be hypothetically earned by licensing the brand name to a
third party over the remaining useful life. We first assess
qualitative factors to determine whether it is more likely than not
that an indefinite-lived intangible asset is impaired. Qualitative
factors include changes in volume, customers and the industry. If
it is deemed more likely than not that an intangible asset is
impaired, we will perform a quantitative impairment
test. The Company cannot predict the
occurrence of certain events or changes in circumstances that might
adversely affect the carrying value of goodwill and
indefinite-lived intangible assets. Such events may include, but
are not limited to, the impact of the economic environment; a
material negative change in relationships with significant
customers; or strategic decisions made in response to economic and
competitive conditions. Defined Benefit
Plans We record amounts relating to these
plans based on calculations in accordance with ASC requirements for
Compensation — Retirement Benefits, which include various
actuarial assumptions, including discount rates, assumed rates of
return, compensation increases, turnover rates and health care cost
trend rates. We recognize changes in the fair value of pension plan
assets and net actuarial gains or losses in excess of 10 percent of
the greater of the fair value of pension plan assets or each
plan’s projected benefit obligation (the
“corridor”) in earnings immediately upon remeasurement,
which is at least annually in the fourth quarter of each year. We
review our actuarial assumptions on an annual basis and make
modifications to the assumptions based on current economic
conditions and trends. The discount rate used to measure
obligations is based on a spot-rate yield curve on a plan-by-plan
basis that matches projected future benefit payments with the
appropriate interest rate applicable to the timing of the projected
future benefit payments. The expected rate of return on plan assets
is determined based on the nature of the plans’ investments,
our current asset allocation and our expectations for long-term
rates of return. Compensation increases reflect expected future
compensation trends. For postretirement benefits, our health care
trend rate assumption is based on historical cost increases and
expectations for long-term increases. The cost or benefit of plan
changes, such as increasing or decreasing benefits for prior
employee service (prior service cost), is deferred and included in
expense on a straight-line basis over the average remaining service
period of the related employees. We believe that the assumptions
utilized in recording obligations under our plans, which are
presented in Note 14, “Defined Benefit Plans,” are
reasonable based on our experience and on advice from our
independent actuaries; however, differences in actual experience or
changes in the assumptions may materially affect our financial
position and results of operations. We will continue to monitor
these assumptions as market conditions warrant. Litigation
Contingencies Income
Taxes We record liabilities for uncertain
income tax positions based on a two-step process. The first step is
recognition, where we evaluate whether an individual tax position
has a likelihood of greater than 50% of being sustained upon
examination based on the technical merits of the position,
including resolution of any related appeals or litigation
processes. For tax positions that are currently estimated to have a
less than 50% likelihood of being sustained, no tax benefit is
recorded. For tax positions that have met the recognition threshold
in the first step, we perform the second step of measuring the
benefit to be recorded. The actual benefits ultimately realized may
differ from our estimates. In future periods, changes in facts,
circumstances, and new information may require us to change the
recognition and measurement estimates with regard to individual tax
positions. Changes in recognition and measurement estimates are
recorded in the consolidated statement of income and consolidated
balance sheet in the period in which such changes occur. As of
December 31, 2015, we had liabilities for unrecognized tax
benefits pertaining to uncertain tax positions totaling $38.2
million. It is reasonably possible that the unrecognized tax
benefits may decrease in the range of $7.5 million to $12.5 million
in the next 12 months primarily as a result of the conclusion of
U.S. federal, state and foreign income tax proceedings. Revenue
Recognition
Cost of Products
Sold Customer Program
Costs Selling, General and
Administrative Expenses . Advertising costs, which amounted to
$195.4 million, $200.4 million and $197.1 million in 2015, 2014 and
2013, respectively, are principally expensed as incurred.
Advertising costs include product displays, media production costs
and point of sale materials. Advertising costs recorded as a
reduction to net sales, primarily cooperative advertising, were
$63.2 million, $66.8 million and $56.8 million in 2015, 2014 and
2013, respectively. Advertising costs recorded in selling, general
and administrative expenses were $132.2 million, $133.6 million and
$140.3 million in 2015, 2014 and 2013, respectively. Research and development expenses
include product development, product improvement, product
engineering and process improvement costs. Research and development
expenses, which were $48.7 million, $46.1 million and $50.8 million
in 2015, 2014 and 2013, respectively, are expensed as
incurred. Stock-based
Compensation
Earnings Per
Share Foreign Currency
Translation Derivative Financial
Instruments Net deferred currency gains of $3.8
million was reclassified into earnings for the year ended
December 31, 2015. There was no impact of deferred currency
gains/losses on earnings in 2014. Net deferred currency gains of
$2.3 million was reclassified into earnings for the years ended
December 31, 2013. Based on foreign exchange rates as of
December 31, 2015, we estimate that $3.1 million of net
currency derivative gains included in AOCI as of December 31,
2015 will be reclassified to earnings within the next twelve
months. Recently Issued Accounting
Standards Balance Sheet Classification of
Deferred Taxes In November 2015, the Financial
Accounting Standards Board (“FASB”) issued final
guidance that requires companies to classify all deferred tax
assets and liabilities as noncurrent on the balance sheet instead
of separating deferred taxes into current and noncurrent amounts.
While the guidance changes the way deferred taxes are classified on
the balance sheet, companies are still required to offset deferred
tax assets and liabilities for each taxpaying component within a
tax jurisdiction. The standard is effective starting
January 1, 2017. We have early adopted this standard as of
December 31, 2015. We have elected to apply the new standard
prospectively and therefore we have not adjusted prior periods
presented. Simplifying Accounting for
Measurement-Period Adjustments In September 2015, the FASB issued a
final standard that eliminates the requirement for an acquirer in a
business combination to account for measurement-period adjustments
retrospectively. Instead, acquirers must recognize
measurement-period adjustments during the period in which they
determine the amounts, including the effect on earnings of any
amounts they would have recorded in previous periods if the
accounting had been completed at the acquisition date. The new
standard is effective for the annual period beginning
January 1, 2016 (calendar year 2016 for Fortune Brands). Early
application is permitted, however we elected not to early adopt. We
do not expect this standard to have a material effect on our
financial statements. Simplifying Subsequent Measurement
of Inventory In July 2015, the FASB issued a final
standard that simplifies the subsequent measurement of inventory by
replacing lower of cost or market test under the current GAAP.
Under the current guidance the subsequent measurement of inventory
is measured at the lower of cost or market, where
“market” may have multiple possible outcomes. The new
guidance requires subsequent measurement of inventory at the lower
of cost or net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs to sell (completion, disposal, and
transportation). This new standard is effective for the annual
period beginning January 1, 2017 (calendar year 2017 for
Fortune Brands). Earlier application is permitted, however we
elected not to early adopt. We do not expect this standard to have
a material effect on our financial statements. Disclosures for Investments in
Certain Entities That Calculate Net Asset Value per
Share In May 2015, the FASB issued a final
standard that eliminates the requirement to categorize within the
fair value hierarchy investments whose fair values are measured at
net asset value. Instead, entities will be required to disclose the
fair values of such investments so that financial statement users
can reconcile amounts reported in the fair value hierarchy table
and the amounts reported on the balance sheet. The new guidance
will be applied retrospectively and is effective for fiscal years
beginning after December 15, 2015 (calendar year 2016 for
Fortune Brands). Early adoption is permitted, however we elected
not to early adopt. We do not expect this standard to have a
material effect on our financial statements. Simplifying the Presentation of
Debt Issuance Costs In April 2015, the FASB issued
Accounting Standards Update (“ASU”) 2015-03,
“Simplifying the Presentation of Debt Issuance Costs.”
This ASU requires debt issuance costs to be presented in the
balance sheet as a direct deduction from the carrying value of the
associated debt liability, instead of as a deferred charge (i.e.,
as an asset). This new standard is effective for the annual period
beginning after December 15, 2015 (calendar year 2016 for
Fortune Brands), and for annual periods and interim periods
thereafter. Early adoption is permitted, however we elected not to
early adopt. The guidance will be applied on a retrospective basis.
The adoption of this ASU will require us to reclassify
approximately $3 million of debt issuance costs from a deferred
asset to long-term debt as of March 31, 2016. Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going
Concern In August 2014, the FASB issued ASU
2014-15, “Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.” This ASU provides
guidance about management’s responsibility to evaluate
whether there is substantial doubt about an entity’s ability
to continue as a going concern and to provide related footnote
disclosures. This amendment is effective for the annual period
ending after December 15, 2016 (calendar year 2016 for Fortune
Brands), and for annual periods and interim periods thereafter.
Early application is permitted, however we elected not to early
adopt. We do not expect this standard to have a material effect on
our financial statements.
Revenue from Contracts with
Customers In May 2014, the FASB issued ASU
2014-09, “Revenue from Contracts with Customers.” This
ASU clarifies the accounting for revenue arising from contracts
with customers and specifies the disclosures that an entity should
include in its financial statements. Further, in August 2015, the
FASB issued a standard, which clarified that the amendment is
effective for annual reporting periods beginning after
December 15, 2017 (calendar year 2018 for Fortune Brands), and
annual and interim periods thereafter. We are assessing the impact
the adoption of this standard will have on our financial
statements. |
