CVS 2013 Annual Report Download - page 47

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45
2013 Annual Report
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 determination of 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 techniques 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 regula-
tory conditions, 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 estimated 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.
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 impair-
ment test is not performed. If the carrying amount of the reporting unit 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.