HP 2007 Annual Report Download - page 96

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
If circumstances related to customers change, HP would further adjust estimates of the recoverability of receivables.
Inventory
HP values inventory at the lower of cost or market, with cost computed on a first-in, first-out basis.
Fixed Assets
HP states property, plant and equipment at cost less accumulated depreciation. HP capitalizes additions and
improvements. HP expenses maintenance and repairs as incurred. HP provides depreciation using straight-line or accelerated
methods over the estimated useful lives of the assets. Estimated useful lives are 5 to 40 years for buildings and improvements
and 3 to 15 years for machinery and equipment. HP depreciates leasehold improvements over the life of the lease or the asset,
whichever is shorter. HP depreciates equipment held for lease over the initial term of the lease to the equipment’ s estimated
residual value.
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 three to five years.
Goodwill and Indefinite-Lived Purchased Intangible Assets
Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
prohibits the amortization 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.
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