HP 2015 Annual Report Download - page 56

Table of Contents
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reporting unit level. As of October 31, 2015, our 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.
In the first step of the goodwill impairment test, we compare the fair value of each reporting unit to its carrying amount. We estimate the fair value of our
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, we estimate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on
management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is
based 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, we estimate fair value based on market multiples of revenue and
earnings derived from comparable publicly-traded companies with operating and investment characteristics similar to the reporting unit. We weight 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, we estimate the fair value of a reporting unit using only the income approach. For the MphasiS Limited
reporting unit, we 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 our reporting units, we compare the aggregate reporting unit fair value to HP's market
capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair value over HP's market capitalization). We evaluate
the control premium by comparing it to observable control premiums from recent comparable transactions. If the implied control premium is not believed to
be reasonable in light of these recent transactions, we reevaluate reporting unit fair values, which may result in an adjustment to the discount rate and/or other
assumptions. This reevaluation could result in a change to the estimated fair value for certain or all of our reporting units.
Estimating the fair value of a reporting unit 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, future economic
and market conditions and the determination of appropriate comparable publicly-traded companies. In addition, we make certain judgments and assumptions
in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each reporting unit.
If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired and no further
testing is required. If the fair value of the reporting unit is less than its carrying amount, then we perform the second step of the goodwill impairment test to
measure the amount of impairment loss, if any. In the second step, the reporting unit's assets, including any unrecognized intangible assets, liabilities and
non-controlling interests are measured at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same
manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than its carrying
amount, the difference is recorded as an impairment loss.
Our annual goodwill impairment analysis, which we performed as of the first day of the fourth quarter of fiscal 2015, did not result in any impairment
charges. The excess of fair value over carrying amount for our reporting units ranged from 19% to approximately 2,600% of carrying amounts. The Software
reporting unit has the lowest excess of fair value over carrying amount at 19%.
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Source: HP INC, 10-K, December 16, 2015 Powered by Morningstar® Document Research℠
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