CVS 2013 Annual Report Download - page 48

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
46
CVS Caremark
The determination of the fair value of our reporting units requires the Company to make significant assumptions and
estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer
group companies; control premiums and valuation multiples 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 factors including, but not limited to, general economic and regulatory 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 spending patterns.
The carrying value of goodwill and other intangible assets covered by this critical accounting policy was $26.5 billion
and $9.5 billion as of December 31, 2013, respectively. We did not record any impairment losses related to goodwill
or other intangible assets during 2013, 2012 or 2011. During the third quarter of 2013, we performed our required
annual impairment tests of goodwill and indefinitely-lived trademarks. The results of the impairment tests concluded
that there was no impairment of goodwill or trademarks. The goodwill impairment test resulted in the fair value of our
Pharmacy Services and Retail Pharmacy reporting units exceeding their carrying values by a significant margin. The
carrying value of goodwill as of December 31, 2013, in our Pharmacy Services and Retail Pharmacy reporting units
was $19.6 billion and $6.9 billion, respectively.
Although we believe we have sufficient current and historical information available to us to test for impairment, it is
possible 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.
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 noncancelable 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 $310 million as of December 31,
2013. This amount is net of $178 million of estimated sublease income that is subject to the uncertainties discussed
above. Although we believe we have sufficient current and historical information available to us to record reasonable
estimates for sublease income, it is possible that actual results could differ.
In order to help you assess the risk, if any, associated with the uncertainties discussed above, a ten percent (10%)
pre-tax change in our estimated sublease income, which we believe is a reasonably likely change, would increase or
decrease our total closed store lease liability by about $18 million as of December 31, 2013.
We have not made any material changes in the reserve methodology used to record closed store lease reserves
during the past three years.