HP 2007 Annual Report Download - page 55

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The provisions of SFAS No. 142
require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting
unit to its carrying value. Our reporting units are consistent with the reportable segments identified in Note 18 to the
Consolidated Financial Statements in Item 8. We determine the fair value of our reporting units based on a weighting of
income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the
present value of estimated future cash flows. Under the market approach, we estimate 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 we are not required to perform further testing. If the
carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we 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, then we record an impairment loss equal to
the difference. SFAS No. 142 also requires that the fair value of the purchased intangible assets with indefinite lives be
estimated and compared to the carrying value. We estimate the fair value of these intangible assets using an income approach.
We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature
and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates
and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates,
future economic and market conditions and determination of appropriate market comparables. We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future
results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets
and liabilities to determine the carrying values for each of our reporting units.
Our annual goodwill impairment analysis, which we performed during the fourth quarter of fiscal 2007, did not result in
an impairment charge. The excess of fair value over carrying value for each of HP’ s reporting units as of August 1, 2007, the
annual testing date, ranged from approximately $520 million to approximately $46 billion. In order to evaluate the sensitivity
of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of
each reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying value ranging from
approximately $360 million to approximately $41 billion for each of HP’ s reporting units.
Warranty Provision
We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty
obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or
replacement of a product at no additional charge for a specified period of time. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality of our component suppliers, we base our
estimated warranty obligation upon warranty terms, ongoing product failure rates, repair costs, product call rates, average
cost per call, and current period product shipments. If actual product failure rates, repair rates, service delivery costs or post-
sales support costs differ from our estimates, we would be required to make revisions to the estimated warranty liability.
Warranty terms generally range from
41