HP 2005 Annual Report Download - page 82

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
of goodwill and purchased intangible assets with indefinite useful lives. HP reviews goodwill and
purchased intangible assets with indefinite lives for impairment annually at the beginning of its fourth
fiscal quarter and whenever events or changes in circumstances indicate the carrying value of an asset
may not be recoverable in accordance with SFAS 142. For goodwill, HP performs a two-step
impairment test. In the first step, HP compares the fair value of each reporting unit to its carrying
value. HP determines the fair value of its reporting units based on a weighting of income and market
approaches. Under the income approach, HP calculates the fair value of a reporting unit based on the
present value of estimated future cash flows. Under the market approach, HP estimates the fair value
based on market multiples of revenue or earnings for comparable companies. If the fair value of the
reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not
impaired and no further testing is performed. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then HP must perform the second step of
the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the
carrying value of a reporting unit’s goodwill exceeds its implied fair value, HP records an impairment
loss equal to the difference.
SFAS 142 also requires that the fair value of the indefinite-lived purchased intangible assets be
estimated and compared to the carrying value. HP estimates the fair value of these intangible assets
using an income approach. HP recognizes an impairment loss when the estimated fair value of the
indefinite-lived purchased intangible assets is less than the carrying value.
Long-Lived Assets Including Finite-Lived Purchased Intangible Assets
HP amortizes purchased intangible assets with finite lives using the straight-line method over the
estimated economic lives of the assets, ranging from one to ten years.
HP evaluates long-lived assets, such as property, plant and equipment and purchased intangible
assets with finite lives, for impairment whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable in accordance with SFAS No. 144, ‘‘Accounting for
the Impairment or Disposal of Long-Lived Assets.’’ HP assesses the fair value of the assets based on
the undiscounted future cash flow the assets are expected to generate and recognizes an impairment
loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net
proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset.
When HP identifies an impairment, HP reduces the carrying amount of the asset to its estimated fair
value based on a discounted cash flow approach or, when available and appropriate, to comparable
market values.
Capitalized Software
HP capitalizes certain internal and external costs incurred to acquire or create internal use
software, principally related to software coding, designing system interfaces and installation and testing
of the software. HP amortizes capitalized costs using the straight-line method over the estimated useful
lives of the software, generally from one to three years.
Derivative Financial Instruments
HP uses derivative financial instruments, primarily forwards, swaps, and options, to hedge certain
foreign currency and interest rate exposures. HP also may use other derivative instruments not
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