CVS 2014 Annual Report Download - page 47

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45
2014 Annual Report
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 appropri-
ate 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, forecasts and industry trends.
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 spend-
ing patterns.
The carrying value of goodwill and other intangible assets covered by this critical accounting policy was $28.1 billion
and $9.8 billion as of December 31, 2014, respectively. We did not record any impairment losses related to goodwill
or other intangible assets during 2014, 2013 or 2012. During the third quarter of 2014, 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, 2014, in our Pharmacy Services and Retail Pharmacy reporting units
was $21.2 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 $268 million as of December 31,
2014. This amount is net of $142 million of estimated sublease income that is subject to the uncertainties discussed
previously. 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 previously, 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 $14 million as of December 31, 2014.
We have not made any material changes in the reserve methodology used to record closed store lease reserves
during the past three years.