Goldman Sachs 2012 Annual Report Download - page 44

Management’s Discussion and Analysis
Goodwill and Identifiable Intangible Assets
Goodwill. Goodwill is the cost of acquired companies in
excess of the fair value of net assets, including identifiable
intangible assets, at the acquisition date. Goodwill is
assessed annually for impairment, or more frequently if
events occur or circumstances change that indicate an
impairment may exist, by first assessing qualitative factors
to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If
the results of the qualitative assessment are not conclusive,
a quantitative goodwill impairment test is performed by
comparing the estimated fair value of each reporting unit
with its estimated net book value.
Estimating the fair value of our reporting units requires
management to make judgments. Critical inputs to the fair
value estimates include (i) projected earnings, (ii) estimated
long-term growth rates and (iii) cost of equity. The net
book value of each reporting unit reflects an allocation of
total shareholders’ equity and represents the estimated
amount of shareholders’ equity required to support the
activities of the reporting unit under guidelines issued by the
Basel Committee on Banking Supervision (Basel
Committee) in December 2010.
Our market capitalization was below book value during
2012. Accordingly, we performed a quantitative
impairment test during the fourth quarter of 2012 and
determined that goodwill was not impaired. The estimated
fair value of our reporting units in which we hold
substantially all of our goodwill significantly exceeded the
estimated carrying values. We believe that it is appropriate
to consider market capitalization, among other factors, as
an indicator of fair value over a reasonable period of time.
If the more recent improvement in market conditions does
not continue, and we return to a prolonged period of
weakness in the business environment or financial markets,
our goodwill could be impaired in the future. In addition,
significant changes to critical inputs of the goodwill
impairment test (e.g., cost of equity) could cause the
estimated fair value of our reporting units to decline, which
could result in an impairment of goodwill in the future.
See Note 13 to the consolidated financial statements for
further information about our goodwill.
Identifiable Intangible Assets. We amortize our
identifiable intangible assets (i) over their estimated lives,
(ii) based on economic usage or (iii) in proportion to
estimated gross profits or premium revenues. Identifiable
intangible assets are tested for impairment whenever events
or changes in circumstances suggest that an asset’s or asset
group’s carrying value may not be fully recoverable.
An impairment loss, generally calculated as the difference
between the estimated fair value and the carrying value of
an asset or asset group, is recognized if the sum of the
estimated undiscounted cash flows relating to the asset or
asset group is less than the corresponding carrying value.
See Note 13 to the consolidated financial statements for the
carrying value and estimated remaining lives of our
identifiable intangible assets by major asset class and
impairments of our identifiable intangible assets.
A prolonged period of market weakness could adversely
impact our businesses and impair the value of our
identifiable intangible assets. In addition, certain events
could indicate a potential impairment of our identifiable
intangible assets, including (i) decreases in revenues from
commodity-related customer contracts and relationships,
(ii) decreases in cash receipts from television broadcast
royalties, (iii) an adverse action or assessment by a regulator
or (iv) adverse actual experience on the contracts in our
variable annuity and life insurance business. Management
judgment is required to evaluate whether indications of
potential impairment have occurred, and to test intangibles
for impairment if required.
42 Goldman Sachs 2012 Annual Report