Halliburton 2011 Annual Report Download - page 78

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Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to
assets acquired and liabilities assumed. We test goodwill for impairment annually, during the third quarter,
or if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. For purposes of performing the goodwill impairment test our
reporting units are the same as our reportable segments, the Completion and Production division and the
Drilling and Evaluation division. In September 2011, the Financial Accounting Standards Board (FASB)
issued an update to existing guidance on the assessment of goodwill impairment to allow companies the
option to perform a qualitative assessment to determine whether further goodwill impairment testing is
necessary. The impairment test consists of a two-step process. The first step compares the fair value of a
reporting unit with its carrying amount, including goodwill, and utilizes a future cash flow analysis based
on the estimates and assumptions of our forecasted long-term growth model. If the fair value of a reporting
unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying
amount of a reporting unit exceeds its fair value, we perform the second step of the goodwill impairment
test to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit’ s goodwill with the carrying amount of that goodwill.
The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized
in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of
the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of the reporting unit was the purchase price
paid. If the carrying amount of the reporting unit’ s goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to that excess. Any impairment charge that we record
reduces our earnings. Our goodwill impairment assessment indicated the fair value of each of our reporting
units exceeded its carrying amount by a significant margin for 2011, 2010, and 2009. See Note 1 to the
consolidated financial statements for accounting policies related to long-lived assets and intangible assets.
Acquisitions-purchase price allocation
We allocate the purchase price of an acquired business to its identifiable assets and liabilities
based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and
liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values including
quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such
as discounted cash flows. We engage third-party appraisal firms to assist in fair value determination of
inventories, identifiable intangible assets, and any other significant assets or liabilities when appropriate.
The judgments made in determining the estimated fair value assigned to each class of assets acquired and
liabilities assumed, as well as asset lives, can materially impact our results of operations.
Pensions
Our pension benefit obligations and expenses are calculated using actuarial models and methods.
Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate
for determining the current value of benefit obligations and the expected long-term rate of return on plan
assets used in determining net periodic benefit cost. Other critical assumptions and estimates used in
determining benefit obligations and cost, including demographic factors such as retirement age, mortality,
and turnover, are also evaluated periodically and updated accordingly to reflect our actual experience.
Discount rates are determined annually and are based on the prevailing market rate of a portfolio
of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit
obligations. Expected long-term rates of return on plan assets are determined annually and are based on an
evaluation of our plan assets and historical trends and experience, taking into account current and expected
market conditions. Plan assets are comprised primarily of equity and debt securities. As we have both
domestic and international plans, these assumptions differ based on varying factors specific to each
particular country or economic environment.