HP 2013 Annual Report Download - page 122

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Fair Value (Continued)
Other Fair Value Disclosures
Short- and Long-Term Debt: HP calculates the estimated fair value of its debt primarily using an
expected present value technique which is based upon observable market inputs using interest rates
currently available to companies of similar credit standing for similar terms and remaining maturities
and considers HP’s own credit risk. The portion of HP’s fixed-rate debt obligations that is hedged is
reflected in the Consolidated Balance Sheets as an amount equal to the debt’s carrying amount, which
includes a fair value adjustment representing changes in the fair value of the hedged debt obligations
arising from movements in benchmark interest rates. The estimated fair value of HP’s short- and
long-term debt was approximately $22.7 billion at October 31, 2013, compared to its carrying value of
$22.6 billion at that date. The estimated fair value of HP’s short- and long-term debt approximated its
carrying value of $28.4 billion at October 31, 2012. If measured at fair value in the Consolidated
Balance Sheets, short- and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of HP’s financial instruments, primarily accounts
receivable, accounts payable and financial liabilities in other accrued liabilities, the carrying amounts
approximate fair value due to their short maturities. If measured at fair value in the Consolidated
Balance Sheets, these other financial instruments would be classified in Level 3 of the fair value
hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: HP’s non-marketable equity
investments and non-financial assets, such as intangible assets, goodwill and property, plant and
equipment, are recorded at fair value only if an impairment charge is recognized. For the fiscal year
ended October 31, 2012, HP recognized a goodwill and intangible asset impairment charge of
$8.8 billion associated with the Autonomy reporting unit within the Software segment, a goodwill
impairment charge of $8.0 billion associated with the ES reporting unit within the Services segment and
an intangible asset impairment charge of $1.2 billion associated with the ‘‘Compaq’’ trade name within
the Personal Systems segment.
The fair value of HP’s reporting units was classified in Level 3 of the fair value hierarchy due to
the significance of unobservable inputs developed using company-specific information. HP used the
income approach to measure the fair value of the ES and Autonomy reporting units. Under the income
approach, HP calculated the fair value of a reporting unit based on the present value of the estimated
future cash flows. Cash flow projections were based on management’s estimates of revenue growth
rates and operating margins, taking into consideration industry and market conditions. The discount
rate used was based on the weighted-average cost of capital adjusted for the relevant risk associated
with business-specific characteristics and the uncertainty related to the business’s ability to execute on
the projected cash flows. The discount rate also reflected adjustments required when comparing the
sum of the fair values of HP’s reporting units to HP’s market capitalization as discussed in Note 6. The
unobservable inputs used to estimate the fair value these reporting units included projected revenue
growth rates, profitability and the risk factor added to the discount rate.
The inputs used to estimate the fair value of the intangible assets of Autonomy and the ‘‘Compaq’’
trade name were largely unobservable, and, accordingly, these measurements were classified in Level 3
of the fair value hierarchy. The fair value of the intangible assets for Autonomy were estimated using
an income approach, which is based on management’s cash flow projections of revenue growth rates
and operating margins, taking into consideration industry and market conditions. HP estimated the fair
value of the ‘‘Compaq’’ trade name by calculating the present value of the royalties saved that would
have been paid to a third party had HP not owned the trade name. The discount rates used in the fair
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