Discover 2011 Annual Report Download - page 108

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Purchased software and capitalized costs related to internally developed software are amortized over their useful lives of
three to five years. Costs incurred during the application development stage related to internally developed software are
capitalized in accordance with ASC Subtopic 350-40, Intangibles - Goodwill and Other: Internal Use Software. Pursuant to
that guidance, costs are expensed as incurred during the preliminary project stage and post implementation stage. Once the
capitalization criteria as defined in GAAP have been met, external direct costs incurred for materials and services used in
developing or obtaining internal-use computer software, payroll and payroll-related costs for employees who are directly
associated with the internal-use computer software project (to the extent those employees devoted time directly to the project),
and interest costs incurred when developing computer software for internal use are capitalized. Amortization of capitalized
costs begins when the software is ready for its intended use. Capitalized software is included in premises and equipment, net in
the Company's consolidated statements of financial condition. See Note 8: Premises and Equipment for further information
about the Company's premises and equipment.
Goodwill. Goodwill is recorded as part of the Company's acquisitions of businesses when the purchase price exceeds the
fair value of the net tangible and separately identifiable intangible assets acquired. The Company's goodwill is not amortized,
but rather is subject to an impairment test at the reporting unit level each year, or more often if conditions indicate impairment
may have occurred, pursuant to ASC Topic 350, Intangibles - Goodwill and Other. The Company's reported goodwill relates to
PULSE and the reporting unit is comprised of the PULSE business. The goodwill impairment analysis is a two-step test. In the
first step, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds its
carrying value including goodwill, goodwill is considered to be not impaired. If the carrying value including goodwill exceeds
its fair value, goodwill is potentially impaired and the second step of the test becomes necessary. In the second step, the implied
fair value of goodwill is derived and compared to the carrying amount of goodwill. The implied fair value of goodwill is the
excess of the fair value of the reporting unit over the sum of the fair values of all identifiable assets less the liabilities associated
with the reporting unit. If the carrying value of goodwill allocated to the reporting unit exceeds its implied fair value, an
impairment charge is recorded for the excess.
Intangible Assets. The Company's intangible assets consist of both amortizable and non-amortizable intangible assets.
The Company's amortizable intangible assets consist primarily of acquired customer relationships and certain trade name
intangibles. All of the Company's amortizable intangible assets are carried at net book value and are amortized over their
estimated useful lives. The amortization periods approximate the periods over which the Company expects to generate future
net cash inflows from the use of these assets. The Company's policy is to amortize intangibles in a manner that reflects the
pattern in which the projected net cash inflows to the Company are expected to occur, where such pattern can be reasonably
determined, as opposed to the straight-line basis. This method of amortization typically results in a greater portion of the
intangible asset being amortized in the earlier years of its useful life.
All of the Company's amortizable intangible assets, as well as other amortizable or depreciable long-lived assets such as
premises and equipment, are subject to impairment testing when events or conditions indicate that the carrying value of an asset
may not be fully recoverable from future cash flows. A test for recoverability is done by comparing the asset's carrying value to
the sum of the undiscounted future net cash inflows expected to be generated from the use of the asset over its remaining useful
life. Impairment exists if the sum of the undiscounted expected future net cash inflows is less than the carrying amount of the
asset. Impairment would result in a write-down of the asset to its estimated fair value. The estimated fair values of these assets
are based on the discounted present value of the stream of future net cash inflows expected to be derived over the remaining
useful lives of the assets. If an impairment write-down is recorded, the remaining useful life of the asset will be evaluated to
determine whether revision of the remaining amortization or depreciation period is appropriate.
The Company's nonamortizable intangible assets consist of the international transaction processing rights and brand-
related intangibles included in the acquisition of Diners Club as well as the trade names acquired in The Student Loan
Corporation acquisition. These assets are deemed to have indefinite useful lives and are therefore not subject to amortization.
All of the Company's nonamortizable intangible assets are subject to a test for impairment annually, or more frequently if
events or changes in circumstances indicate that the asset might be impaired. As required by GAAP, if the carrying value of a
nonamortizable intangible asset is in excess of its fair value, the asset must be written down to its fair value through the
recognition of an impairment charge to earnings. In contrast to amortizable intangibles, there is no test for recoverability
associated with the impairment test for nonamortizable intangible assets.
Stock-based Compensation. Pursuant to ASC Topic 718, Compensation - Stock Compensation, the Company measures
the cost of employee services received in exchange for an award of stock-based compensation based on the grant-date fair
value of the award. The cost is recognized over the requisite service period, except for awards granted to retirement-eligible
employees, which are fully expensed by the grant date. No compensation cost is recognized for awards that are subsequently
forfeited.
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