HP 2009 Annual Report Download - page 51

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Valuation of Goodwill and Purchased Intangible Assets
We review goodwill and purchased intangible assets with indefinite lives for impairment annually
and whenever events or changes in circumstances indicate the carrying value of an asset may not be
recoverable. The provisions of Accounting Standards Codification Topic 350, ‘‘Intangibles—Goodwill
and Other’’ 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 19 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. We also compare the fair value of purchased
intangible assets with indefinite lives to their 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
2009, 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, 2009, the annual testing date, ranged from approximately
$750 million to approximately $35 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 $550 million to approximately $31 billion for each of HP’s reporting
units.
Fair Value of Financial Instruments
We measure certain financial assets and liabilities at fair value based on valuation techniques using
the best information available, which may include quoted market prices, market comparables, and
discounted cash flow projections. Financial instruments are primarily comprised of time deposits,
money market funds, commercial paper, corporate and other debt securities, equity securities and other
investments in common stock and common stock equivalents and derivative instruments.
44