HP 2014 Annual Report Download - page 145

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Acquisitions, Goodwill and Intangible Assets (Continued)
discount rates and/or other assumptions in order to derive a reasonable implied control premium when
comparing the sum of the fair values of HP’s reporting units to HP’s market capitalization. Due to the
trading values of HP stock at the time of the impairment test, the resulting adjustments to the discount
rate to arrive at an appropriate control premium caused a significant reduction in the fair value for the
Autonomy reporting unit as well as the fair values for HP’s other reporting units.
Prior to conducting step one of the goodwill impairment test for the Autonomy reporting unit, HP
first evaluated the recoverability of the long-lived assets, including intangible assets. When indicators of
impairment are present, HP tests long-lived assets (other than goodwill) for recoverability by comparing
the carrying amount of an asset group to its undiscounted cash flows. HP considered the lower-than-
expected revenue and profitability levels over a sustained period of time, the trading values of HP stock
and downward revisions to management’s short- and long-term forecasts for the Autonomy business to
be indicators of impairment for the Autonomy long-lived assets. Based on the results of the
recoverability test, HP determined that the carrying amount of the Autonomy asset group exceeded its
undiscounted cash flows and was therefore not recoverable. HP then compared the fair value of the
asset group to its carrying amount and determined the impairment loss. The impairment loss was
allocated to the carrying values of the long-lived assets but not below their individual fair values. Based
on the analysis, HP recorded an impairment charge of $3.1 billion on intangible assets, which resulted
in a remaining carrying amount of approximately $0.8 billion as of October 31, 2012. The decline in the
fair value of the Autonomy intangible assets was attributable to the same factors as discussed above for
the fair value of the Autonomy reporting unit.
The decline in the fair value of the Autonomy reporting unit and Autonomy intangibles, as well as
fair value changes for other assets and liabilities in the step two goodwill impairment test, resulted in
an implied fair value of goodwill substantially below the carrying amount of the goodwill for the
Autonomy reporting unit. As a result, HP recorded a goodwill impairment charge of $5.7 billion, which
resulted in a $1.2 billion remaining carrying amount of Autonomy goodwill as of October 31, 2012.
Both the goodwill impairment charge and the intangible assets impairment charge, totaling $8.8 billion,
were included in the Impairment of goodwill and intangible assets line item in the Consolidated
Statements of Earnings.
Subsequent to the Autonomy purchase price allocation period, which concluded in the first quarter
of fiscal 2012, and in conjunction with HP’s annual goodwill impairment testing, HP identified certain
indicators of impairment. The indicators of impairment included lower-than-expected revenue and
profitability levels over a sustained period of time, the trading values of HP stock and downward
revisions to management’s short- and long-term forecasts for the Autonomy business. HP revised its
multi-year forecast for the Autonomy business, and the timing of this forecast revision coincided with
the timing of HP’s overall forecasting process for all reporting units, which is completed each year in
the fourth fiscal quarter in conjunction with the annual goodwill impairment analysis. The change in
assumptions used in the revised forecast and the fair value estimates utilized in the impairment testing
of the Autonomy goodwill and long-lived assets incorporated insights gained from having owned the
Autonomy business for the preceding year. The revised forecast reflected changes related to organic
revenue growth rates, current market trends, business mix, cost structure, expected deal synergies and
other expectations about the anticipated short- and long-term operating results of the Autonomy
business, driven by HP’s analysis regarding certain 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. Accordingly, the change in fair
values represented a change in accounting estimate that occurred outside the purchase price allocation
period, resulting in the recorded impairment charge.
Based on the results of the annual impairment test for all other reporting units, HP concluded that
no other goodwill impairment existed as of August 1, 2012, apart from the impairment charges
discussed above.
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