CVS 2009 Annual Report Download - page 41

and current operating trends and our consolidated revenues,
profitability and cash flow results and forecasts. These estimates
can be affected by a number of factors including, but not
limited to, general economic conditions, efforts of third-party
organizations to reduce their prescription drug costs and/or
increase member co-payments, the continued efforts of com-
petitors to gain market share and consumer spending patterns.
The carrying value of goodwill and intangible assets covered by
this critical accounting policy was $36 billion as of December 31,
2009. We did not record any impairment losses related to
goodwill or intangible assets during 2009, 2008 or 2007.
Although we believe we have sufficient current and historical
information available to us to test for impairment, it is possible
that actual cash flows could differ from the estimated cash
flows used in our impairment tests. Due to the nature of the
uncertainties discussed previously in this document, we cannot
determine a reasonably likely change.
We have not made any material changes in the methodologies
utilized to test the carrying values of goodwill and intangible
assets for impairment during the past three years.
CLOSED STORE LEASE LIABILITY
We account for closed store lease termination costs when
a leased store is closed. When a leased store is closed,
we record a liability for the estimated present value of the
remaining obligation under the noncancellable lease, which
includes future real estate taxes, common area maintenance
and other charges, if applicable. The liability is reduced by
estimated future sublease income.
The initial calculation and subsequent evaluations of our
closed store lease liability contain uncertainty since we must
use judgment to estimate the timing and duration of future
vacancy periods, the amount and timing of future lump sum
settlement payments and the amount and timing of potential
future sublease income. When estimating these potential
termination costs and their related timing, we consider a
number of factors, which include, but are not limited to,
historical settlement experience, the owner of the property,
the location and condition of the property, the terms of the
underlying lease, the specific marketplace demand and
general economic conditions.
Our total closed store lease liability covered by this critical
accounting policy was $586 million as of December 31, 2009.
This amount is net of $325 million of estimated sublease income
that is subject to the uncertainties discussed above. Although
drug costs and/or increased member co-payments, the
continued efforts of competitors to gain market share and
consumer spending patterns.
Goodwill and indefinitely-lived intangible assets are subject to
impairment reviews annually, or if changes or events indicate
the carrying value may not be recoverable.
Indefinitely-lived intangible assets are tested by comparing
the estimated fair value of the asset to its carrying value. If the
carrying value of the asset exceeds its estimated fair value, an
impairment loss is recognized and the asset is written down to
its estimated fair value.
Our indefinitely-lived intangible asset impairment loss calcula-
tion contains uncertainty since we must use judgment to estimate
the fair value based on the assumption that in lieu of owner-
ship of an intangible asset, the Company would be willing to
pay a royalty in order to utilize the benefits of the asset. Value
is estimated by discounting the hypothetical royalty payments
to their present value over the estimated economic life of the
asset. These estimates can be affected by a number of factors
including, but not limited to, general economic conditions,
availability of market information as well as the profitability
of the Company.
Goodwill is tested for impairment on a reporting unit basis
using a two-step process. The first step of the impairment test
is to identify potential impairment by comparing the reporting
unit’s fair value with its net book value (or carrying amount),
including goodwill. The fair value of our reporting units is
estimated using a combination of the discounted cash flow
valuation model and comparable market transaction models.
If the fair value of the reporting unit exceeds its carrying
amount, the reporting unit’s goodwill is not considered to
be impaired and the second step of the impairment test is
not performed. If the carrying amount of the reporting unit’s
carrying amount exceeds its fair value, the second step of
the impairment test is performed to measure the amount of
impairment loss, if any. The second step of the impairment
test compares the implied fair value of the reporting unit’s
goodwill with the carrying amount of the goodwill. If the
carrying amount of the reporting unit’s goodwill exceeds
the implied fair value of the goodwill, an impairment loss is
recognized in an amount equal to that excess.
Our impairment loss calculation contains uncertainty since
we must use judgment to estimate each reporting unit’s future
revenues, profitability and cash flows as well as comparability
with recent transactions in the industry. When preparing these
estimates, we consider each reporting unit’s historical results
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