HP 2015 Annual Report Download - page 105

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HP includes the results of operations of acquired businesses in HP's consolidated results prospectively from the date of acquisition. HP allocates the fair
value of purchase consideration to the assets acquired, including in-process research and development ("IPR&D"), liabilities assumed, and non-controlling
interests in the acquired entity generally based on their fair values at the acquisition date. IPR&D is initially capitalized at fair value as an intangible asset
with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible
asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, HP will record a charge for the value of the related intangible asset to
HP's Consolidated Statement of Earnings in the period it is abandoned. The excess of the fair value of purchase consideration over the fair value of these
assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill
include the value of the synergies between the acquired company and HP and the value of the acquired assembled workforce, neither of which qualifies for
recognition as an intangible asset. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business
combination and are expensed as incurred.
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HP reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be
recoverable. While HP is permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill
impairment test, for its annual goodwill impairment test in the fourth quarter of fiscal 2015, HP performed a quantitative test for all of its reporting units.
Goodwill is tested for impairment at the reporting unit level. As of October 31, 2015, HP's reporting units are consistent with the reportable segments
identified in Note 2, except for Enterprise Services ("ES"), which consists of two reporting units: MphasiS Limited and the remainder of ES.
In the first step of the impairment test, HP compares the fair value of each reporting unit to its carrying amount. HP estimates the fair value of its reporting
units using a weighting of fair values derived most significantly from the income approach, and to a lesser extent, the market approach. Under the income
approach, HP estimates the fair value of a reporting unit based on the present value of estimated future cash flows. HP bases cash flow projections on
management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. HP bases the discount rate
on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the
reporting unit's ability to execute on the projected cash flows. Under the market approach, HP estimates fair value based on market multiples of revenue and
earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. HP weights the fair
value derived from the market approach depending on the level of comparability of these publicly-traded companies to the reporting unit. When market
comparables are not meaningful or not available, HP estimates the fair value of a reporting unit using only the income approach. For the MphasiS Limited
reporting unit, HP utilized the quoted market price in an active market to estimate fair value.
In order to assess the reasonableness of the estimated fair value of HP's reporting units, HP compares the aggregate reporting unit fair value to HP's market
capitalization and calculates an
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Source: HP INC, 10-K, December 16, 2015 Powered by Morningstar® Document Research℠
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