Cardinal Health 2009 Annual Report Download - page 77

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estimating the fair value. Costs are not assigned to IPR&D unless future development is probable. Once the fair
value is determined, an asset is established, and in accordance with FASB Interpretation No. 4, “Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,” is immediately
written-off as a special item in the Company’s consolidated statements of earnings. During fiscal 2009, the
Company did not record any charges related to the write-off of IPR&D costs. During fiscal 2008, the Company
reversed $25.0 million of a previously recorded write-off of IPR&D costs associated with Viasys as a result of
the finalization of the Viasys purchase price allocation process and recorded charges of $17.7 million and $25.3
million related to the write-off of IPR&D costs associated with Enturia and other minor acquisitions,
respectively. During fiscal 2007, the Company recorded charges of $83.9 million and $0.6 million related to the
write-off of IPR&D costs associated with the acquisitions of Viasys and Care Fusion, respectively (see Note 3 of
“Notes to Consolidated Financial Statements.”)
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements.” These Statements provide guidance on the
accounting and reporting for business combinations and minority interests in consolidated financial statements.
These Statements are effective for fiscal years beginning after December 15, 2008. Upon adoption in fiscal 2010,
these Statements are expected to have a significant impact on the Company’s accounting and disclosure practices
for future business combinations.
Goodwill and Other Intangibles
The Company accounts for goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible
Assets.” Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are not amortized,
but instead are tested for impairment annually or when indicators of impairment exist. Intangible assets with
finite lives, primarily customer relationships and patents and trademarks, continue to be amortized over their
useful lives. In conducting the impairment test, the estimated fair value of the Company’s reporting units is
compared to its carrying amount including goodwill. If the estimated fair value exceeds the carrying amount,
then no impairment exists. If the carrying amount exceeds the estimated fair value, further analysis is performed
to assess impairment.
The Company’s determination of estimated fair value of the reporting units is based on a discounted cash
flow analysis, a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and, if
available, a review of the price/earnings ratio for publicly traded companies similar in nature, scope and size of
the applicable reporting unit. The methods and assumptions used to test impairment have been revised for any
segment realignments for the periods presented. The discount rates used for impairment testing are based on the
risk-free rate plus an adjustment for risk factors. The EBITDA multiples used for impairment testing are
judgmentally selected based on factors such as the nature, scope and size of the applicable reporting unit. The use
of alternative estimates, peer groups or changes in the industry, or adjusting the discount rate, EBITDA multiples
or price earnings ratios used could affect the estimated fair value of the assets and potentially result in
impairment. Any identified impairment would result in an adjustment to the Company’s results of operations.
The Company performed its annual impairment tests in fiscal 2009, 2008 and 2007, which resulted in no
impairment charges. Decreasing the price/earnings ratio of competitors used for impairment testing by one point
or increasing the discount rate in the discounted cash flow analysis used for impairment testing by 1% would not
have indicated impairment for any of the Company’s reporting units for fiscal 2009 or 2008. See Note 8 of
“Notes to Consolidated Financial Statements” for additional information regarding goodwill and other
intangibles.
Special Items
The Company records restructuring charges, acquisition integration charges and certain litigation and other
items as special items. A restructuring activity is a program whereby the Company fundamentally changes its
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