CVS 2010 Annual Report Download - page 42

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Our total reserve for estimated inventory losses covered by this critical accounting policy was $120 million as of December 31,
2010. Although we believe we have sufficient current and historical information available to us to record reasonable estimates
for estimated inventory losses, it is possible that actual results could differ. In order to help you assess the aggregate risk, if any,
associated with the uncertainties discussed previously, a ten percent (10%) pre-tax change in our estimated inventory losses,
which we believe is a reasonably likely change, would increase or decrease our total reserve for estimated inventory losses by
about $12 million as of December 31, 2010.
We have not made any material changes in the accounting methodology used to establish our inventory loss reserves during the
past three years. Although we believe that the estimates discussed previously are reasonable and the related calculations conform
to generally accepted accounting principles, actual results could differ from our estimates, and such differences could be material.
GOODWILL AND INTANGIBLE ASSETS
Identifiable intangible assets consist primarily of trademarks, client contracts and relationships, favorable leases and covenants
not to compete. These intangible assets arise primarily from the allocation of the purchase price of businesses acquired to
identifiable intangible assets based on their respective fair market values at the date of acquisition.
Amounts assigned to identifiable intangible assets, and their related useful lives, are derived from established valuation tech-
niques and management estimates. Goodwill represents the excess of amounts paid for acquisitions over the fair value of the
net identifiable assets acquired.
We evaluate the recoverability of certain long-lived assets, including intangible assets with finite lives, but excluding goodwill
and intangible assets with indefinite lives, which are tested for impairment using separate tests, whenever events or changes
in circumstances indicate that the carrying value of an asset may not be recoverable. We group and evaluate these long-lived
assets for impairment at the lowest level at which individual cash flows can be identified. When evaluating these long-lived assets
for potential impairment, we first compare the carrying amount of the asset group to the asset group’s estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash flows are less than the carrying amount of the asset
group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset
group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is
recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted
and with interest charges). Our long-lived asset impairment loss calculation contains uncertainty since we must use judgment
to estimate each asset group’s future sales, profitability and cash flows. When preparing these estimates, we consider historical
results and current operating trends and our consolidated sales, profitability and cash flow results and forecasts.
These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory condi-
tions, efforts of third party organizations to reduce their prescription 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 annual impairment reviews, or more frequent reviews if events or
circumstances indicate that 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 esti-
mated fair value.
Our indefinitely-lived intangible asset impairment loss calculation contains uncertainty since we must use judgment to estimate
the fair value based on the assumption that in lieu of ownership 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.
– 38 –
CVS Caremark 2010 Annual Report