Goodwill

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but must be evaluated for impairment.

A summary of changes in Safeway’s goodwill by geographic area is as follows (in millions):



				2011										2010
	U.S.			Canada				Total			U.S.			Canada			Total
Balance – beginning of year:
Goodwill	$	4,324.4		$	97.8			$	4,422.2		$	4,324.4		$	93.5		$	4,417.9
Accumulated impairment charges	(3,991.3		)	—				(3,991.3		)	(3,991.3		)	—			(3,991.3		)
	333.1			97.8				430.9			333.1			93.5			426.6
Activity during the year:
Acquisition	40.5			—				40.5			—			—			—
Other adjustments	—			(1.6		)	⁽¹⁾	(1.6		)	—			4.3		⁽¹⁾	4.3
	40.5			(1.6		)		38.9			—			4.3			4.3
Balance – end of year:
Goodwill	4,364.9			96.2				4,461.1			4,324.4			97.8			4,422.2
Accumulated impairment charges	(3,991.3		)	—				(3,991.3		)	(3,991.3		)	—			(3,991.3		)
	$	373.6		$	96.2			$	469.8		$	333.1		$	97.8		$	430.9


(1)	Represents foreign currency translation adjustments in Canada.

On September 15, 2011, Blackhawk acquired Cardpool, Inc., a prepaid card exchange company where customers can buy, sell or trade previously issued prepaid cards. The purchase consideration was $42.3 million, consisting of $9.9 million cash paid at close, a $9.2 million payment due one year after close, and contingent payments for up to $23.2 million. The contingent payments are potentially payable between one and three years after acquisition, based on the achievement of certain financial targets and operational milestones. Goodwill recognized in this transaction amounted to $40.5 million which is not deductible for tax purposes.

We test goodwill for impairment annually (on the first day of the fourth quarter) or whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.

The impairment test is a two-step process. In the first step, we determine if the fair value of the reporting units is less than the book value. If we conclude that fair value is greater than the book value, we do not have to proceed to step two, and we can conclude there is no goodwill impairment. If we conclude that the fair value of a reporting unit is less than book value, we must perform step two, in which we calculate the implied fair value of goodwill and compare it to carrying value. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment.

In the fourth quarter of 2011, Safeway adopted ASU 2011-08, “Intangibles-Goodwill and Other (Topic 350),” which permits companies to perform the first step of the two-step impairment process by assessing qualitative factors to determine whether events or circumstances exist which lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of our reporting units with goodwill is greater than the book value and, therefore, that there is no goodwill impairment.

Under generally accepted accounting principles, a reporting unit is either the equivalent to, or one level below, an operating segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Our operating segments are our retail divisions. Our reporting units are generally consistent with our operating segments.

Based upon the results of our 2011 and 2010 analyses, no impairment of goodwill was indicated in 2011 or 2010. As a result of the Company’s 2009 annual impairment test, Safeway recorded a non-cash impairment charge in the amount of $1,974.2 million (pre-tax) to reduce the carrying value of goodwill. The impairment was due primarily to Safeway’s reduced market capitalization and a weak economy. The difficult economic environment negatively impacted all of Safeway’s divisions; however, due to their large goodwill balances, the goodwill impairment resulted primarily from the Vons and Eastern divisions.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimated fair value of each reporting unit is based on an average of the guideline company method and the discounted cash flow method. These methods are based on historical and forecasted amounts specific to each reporting unit and consider sales, gross profit, operating profit and cash flows and general economic and market conditions, as well as the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Measuring the fair value of reporting units would constitute a Level 3 measurement under the fair value hierarchy. See Note F for a discussion of levels.