National Oilwell Varco 2015 Annual Report Download - page 56

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Table of Contents
In addition, the Company’s Rig Offshore, Dynamic Drilling Solutions, Process and Flow Technologies and Fiberglass reporting units each had calculated fair
values that were between 15% and 30% in excess of the respective carrying values. We continue to monitor the cash flows for these reporting units as they
each contain material goodwill.
The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of that
reporting unit as a whole. Fair value of the reporting units is determined in accordance with ASC Topic 820 “Fair Value Measurements and Disclosures”
using significant unobservable inputs, or level 3 in the fair value hierarchy. These inputs are based on internal management estimates, forecasts and
judgments, using discounted cash flow.
Other indefinite-lived intangible assets, representing trade names management intends to use indefinitely, were valued using significant unobservable inputs
(level 3) and are tested for impairment using the Relief from Royalty Method, a form of the Income Approach. An impairment is measured and recognized
based on the amount the book value of the indefinite-lived intangible assets exceeds its estimated fair value as of the date of the impairment test. Included in
the impairment test are assumptions, for each trade name, regarding the related revenue streams attributable to the trade names, which are determined in a
manner consistent with the forecasting process described above, the royalty rate, and the discount rate applied.
Based on the Company’s indefinite-lived intangible asset impairment analysis performed during the fourth quarter of 2015, the fair value for all of the
Company’s intangible assets with indefinite lives were in excess of the respective asset carrying values, with one exception. This intangible asset, which
represents a trade name within the Company’s Wellbore Technologies segment, had a calculated fair value approximately $149 million below its carrying
value.
Impairment charges in the fourth quarter of 2015 were primarily the result of the substantial decline in worldwide rig counts through the fourth quarter of
2015, declines in forecasts in rig activity, and a decline in the revenue forecast for the Company for 2016.
Based on its analysis, the Company did not report any impairment of goodwill and other indefinite-lived intangible assets, other than those mentioned
above, for the years ended December 31, 2015, 2014 and 2013.
Purchase Price Allocation of Acquisitions
The Company allocates 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. The Company uses 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.
The Company engages 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, could materially impact the Company’s results of operations.
Service and Product Warranties
The Company provides service and warranty policies on certain of its products. The Company accrues liabilities under service and warranty policies based
upon specific claims and a review of historical warranty and service claim experience in accordance with ASC Topic 450 “Contingencies” (“ASC Topic
450”). Adjustments are made to accruals as claim data and historical experience change. In addition, the Company incurs discretionary costs to service its
products in connection with product performance issues and recognizes them when they are incurred. At December 31, 2015 and 2014, service and product
warranty accruals totaled $244 million and $272 million, respectively.
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