HP 2014 Annual Report Download - page 144

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Acquisitions, Goodwill and Intangible Assets (Continued)
Goodwill is tested for impairment at the reporting unit level. At the beginning of its first quarter
of fiscal 2014, HP made a change to its reporting units. In connection with continued operational
synergies and interdependencies between the Enterprise Servers, Storage and Networking reporting unit
and the TS reporting unit within the EG segment, HP combined these reporting units to create the EG
reporting unit. As of October 31, 2014, HP’s reporting units are consistent with the reportable
segments identified in Note 2, except for ES, which includes two reporting units: MphasiS Limited; and
the remainder of ES.
Based on the results of its annual impairment tests, HP determined that no impairment of
goodwill existed as of August 1, 2014. However, future goodwill impairment tests could result in a
charge to earnings. HP will continue to evaluate goodwill on an annual basis as of the beginning of its
fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential
impairment.
Goodwill impairments
There were no goodwill impairments in fiscal 2014 and 2013.
During fiscal 2012, HP determined that sufficient indicators of potential impairment existed to
require an interim goodwill impairment analysis for the ES reporting unit. These indicators included
the trading values of HP’s stock at the time of the impairment test, coupled with market conditions and
business trends within ES. The fair value of the ES reporting unit was based on the income approach.
The decline in the fair value of the ES reporting unit resulted from lower projected revenue growth
rates and profitability levels as well as an increase in the risk factor that was included in the discount
rate used to calculate the discounted cash flows. The increase in the discount rate was due to the
implied control premium resulting from trading values of HP stock at the time of the impairment test.
The resulting adjustments to discount rates caused a significant reduction in the fair value for the ES
reporting unit. Based on the step one and step two analyses, HP recorded an $8.0 billion goodwill
impairment charge in fiscal 2012, and there was no remaining goodwill in the ES reporting unit as of
October 31, 2012. Prior to completing the goodwill impairment test, HP tested the recoverability of the
ES long-lived assets (other than goodwill) and concluded that such assets were not impaired.
Also during fiscal 2012, the Software segment included two reporting units, which were Autonomy
and the legacy HP Software business. HP initiated its annual goodwill impairment analysis in the fourth
quarter of fiscal 2012 and concluded that fair value was below carrying amount for the Autonomy
reporting unit. The fair value of the Autonomy reporting unit was based on the income approach.
The decline in the estimated fair value of the Autonomy reporting unit resulted from lower
projected revenue growth rates and profitability levels as well as an increase in the risk factor that was
included in the discount rate used to calculate the discounted cash flows. The increase in the discount
rate was due to the implied control premium that resulted from trading values of HP stock at the time
of the impairment test. The lower projected operating results reflected changes in assumptions related
to organic revenue growth rates, market trends, business mix, cost structure, expected deal synergies
and other expectations about the anticipated short-term and long-term operating results of the
Autonomy business. These assumptions incorporated HP’s analysis of what it believes were accounting
improprieties, incomplete disclosures and misrepresentations at Autonomy that occurred prior to the
Autonomy acquisition with respect to Autonomy’s pre-acquisition business and related operating results.
In addition, as noted above, when estimating the fair value of a reporting unit HP may need to adjust
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