CVS 2011 Annual Report Download - page 43

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CVS CAREMARK 41 2011 ANNUAL REPORT
Our indefinitely-lived intangible asset impairment loss calcu-
lation 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 roy-
alty payments to their present value over the estimated eco-
nomic life of the asset. These estimates can be affected by a
number of factors including, but not limited to, general eco-
nomic 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 carry-
ing amount), including goodwill. The fair value of our report-
ing units is estimated using a combination of the discounted
cash flow valuation model and comparable market transac-
tion models. If the fair value of the reporting unit exceeds its
carrying amount, the reporting unit’s goodwill is not consid-
ered 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 carry-
ing 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.
The determination of the fair value of our reporting units
requires the Company to make significant assumptions
and estimates. These assumptions and estimates primar-
ily include, but are not limited to, the selection of appropriate
peer group companies; control premiums and valuation mul-
tiples appropriate for acquisitions in the industries in which
the Company competes; discount rates, terminal growth
rates; and forecasts of revenue, operating profit, depreciation
and amortization, capital expenditures and future working
capital requirements. When determining these assumptions
and preparing these estimates, we consider each reporting
unit’s historical results and current operating trends and our
consolidated revenues, profitability and cash flow results and
forecasts. Our estimates can be affected by a number of fac-
tors including, but not limited to, general economic and regu-
latory conditions, our market capitalization, efforts of third
party organizations to reduce their prescription drug costs
and/or increase member co-payments, the continued efforts
of competitors to gain market share and consumer spend-
ing patterns.
The carrying value of goodwill and other intangible assets cov-
ered by this critical accounting policy was $26.5 billion and
$9.9 billion as of December 31, 2011, respectively. We did
not record any impairment losses related to goodwill or other
intangible assets during 2011, 2010 or 2009. During the third
quarter of 2011, we performed our required annual impairment
tests of goodwill and indefinitely-lived trademarks. The results
of the impairment tests concluded that there was no impair-
ment of goodwill or trademarks. The goodwill impairment test
resulted in the fair value of our Retail Pharmacy reporting unit
exceeding its carrying value by a substantial margin and the
fair value of our Pharmacy Services reporting unit exceeding
its carrying value by approximately 15%. The carrying value
of goodwill as of December 31, 2011, in our Retail Pharmacy
and Pharmacy Services reporting units was $6.8 billion and
$19.7 billion, respectively.
Although we believe we have sufficient current and historical
information available to us to test for impairment, it is possi-
ble that actual results could differ from the estimates used in
our impairment tests.
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.
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