Kraft Heinz Co

Our significant accounting policies are described in Note 2, Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 30, 2023.

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions. Our critical accounting estimates and assumptions related to goodwill and intangible assets are described below. We have included this update to our critical accounting estimates as we are performing an interim triggering event impairment test as a result of the Q2 North America reorganization. The Q2 North America reorganization did not impact our brands and the information below is limited to our consolidated goodwill balances. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 30, 2023 for a discussion of our other critical accounting estimates and assumptions.

As of June 29, 2024, we maintain 13 reporting units, nine of which comprise our goodwill balance. These nine reporting units had an aggregate goodwill carrying amount of $29.5 billion at June 29, 2024.

We test our reporting units and brands for impairment annually, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections, disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster, pandemic, or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, significant adverse changes in the markets in which we operate, changes in income tax rates, changes in interest rates, or changes in management strategy. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount of goodwill. See Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, for a discussion of the timing of the annual impairment test.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units and brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows (including net sales, cost of products sold, SG&A, depreciation and amortization, working capital, and capital expenditures), income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, market capitalization, income tax rates, foreign currency exchange rates, or inflation, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our reporting units or brands might become impaired in the future. Additionally, any decisions to divest certain non-strategic assets has led and could in the future lead to goodwill or intangible asset impairments.

As of March 31, 2024, which was the first day of our second quarter of 2024, certain organizational changes occurred that impacted our reporting unit composition within our North America segment (the “Q2 North America reorganization”). Two of our North America reporting units — TMA and FBD — were reorganized into the four reporting units: TMS, HD, MC and AFH. The CNAC and Other North America reporting units were not impacted by this reorganization. As a result, reporting units impacted by this change were tested for impairment. Our indefinite-lived brands were not impacted by this reorganization and there are no material changes to the brands disclosed in our Annual Report on Form 10-K for the year ended December 30, 2023.

As part of the 2024 transition test, we recognized a non-cash impairment loss of approximately $854 million related to our MC reporting unit, which had a goodwill carrying amount of approximately $2.5 billion after impairment. Our reporting units that were impaired during the 2023 annual impairment test or the 2024 transition test were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Our reporting units that have 20% or less excess fair value over carrying amount as of the 2023 annual impairment test or the 2024 transition test have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future.

Reporting units with 10% or less fair value over carrying amount had an aggregate goodwill carrying amount after impairment of $6.0 billion as of the latest impairment test of each reporting unit and included MC, Northern Europe, Continental Europe, and CNAC. Reporting units with 10-20% fair value over carrying amount had an aggregate goodwill carrying amount of $18.9 billion as of the latest impairment test and TMS, AFH, and LATAM. Our HD and Asia reporting units had between 20-50% fair value over carrying amount with an aggregate goodwill carrying amount of $4.6 billion as of their latest impairment test. Our reporting units that have less than 5% excess fair value over carrying amount of their latest impairment test are considered at a heightened risk of future impairments and include our MC, Continental Europe, and CNAC reporting units, which had an aggregate goodwill carrying amount of $4.3 billion. Our four remaining reporting units had no goodwill carrying amount at the time of their latest impairment test.

We generally utilize the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, cost of products sold, SG&A, depreciation and amortization, working capital, and capital expenditures), income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.

The discount rates and long-term growth rates used to estimate the fair values of our reporting units with 20% or less excess fair value over carrying amount, as well as the goodwill carrying amounts, as of their latest impairment test date were as follows:

Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in discount rates and long-term growth rates, on the fair values of our reporting units with 20% or less excess fair value over carrying amount. These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline.

If we had changed the assumptions used to estimate the fair value of our reporting units with 20% or less excess fair value over carrying amount, as a result of their latest impairment test date, these isolated changes, which are reasonably possible to occur, would have led to the following increase/(decrease) in the aggregate fair value of these reporting units (in billions):

See Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, for our impairment testing results.