Quest Diagnostics 2005 Annual Report Download - page 88

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed as incurred. Costs incurred for computer software developed or obtained
for internal use are capitalized for application development activities and expensed as incurred for preliminary
project activities and post-implementation activities. Capitalized costs include external direct costs of materials
and services consumed in developing or obtaining internal-use software, payroll and payroll-related costs for
employees who are directly associated with and who devote time to the internal-use software project, and
interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases
when the project is substantially complete and ready for its intended purpose. Certain costs, such as
maintenance and training, are expensed as incurred. The Company capitalizes interest on borrowings during the
active construction period of major capital projects. Capitalized interest is added to the cost of the underlying
assets and is amortized over the useful lives of the assets. Depreciation and amortization are provided on the
straight-line method over expected useful asset lives as follows: buildings and improvements, ranging from ten
to thirty years; laboratory equipment and furniture and fixtures, ranging from three to seven years; leasehold
improvements, the lesser of the useful life of the improvement or the remaining life of the building or lease, as
applicable; and computer software developed or obtained for internal use, ranging from three to five years.
Goodwill
Goodwill represents the cost of acquired businesses in excess of the fair value of assets acquired, including
separately recognized intangible assets, less the fair value of liabilities assumed in a business combination. The
Company uses a nonamortization approach to account for purchased goodwill. Under a nonamortization
approach, goodwill is not amortized, but instead is reviewed for impairment.
Intangible Assets
Intangible assets are recognized as an asset apart from goodwill if the asset arises from contractual or
other legal rights, or if it is separable. Intangible assets, principally representing the cost of customer
relationships, customer lists and non-competition agreements acquired, are capitalized and amortized on the
straight-line method over their expected useful life, which generally ranges from five to twenty years. Intangible
assets with indefinite useful lives, consisting principally of acquired tradenames, are not amortized, but instead
are reviewed for impairment.
Recoverability and Impairment of Goodwill
Under the nonamortization provisions of SFAS No. 142, “Goodwill and Other Intangible Assets’’ (“SFAS
142’’), goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for
impairment and an impairment charge is recorded in the periods in which the recorded carrying value of
goodwill and certain intangibles is more than its estimated fair value. The provisions of SFAS 142 require that
a goodwill impairment test be performed annually or in the case of other events that indicate a potential
impairment. The annual impairment tests of goodwill were performed at the end of each of the Company’s
fiscal years on December 31st and indicated that there was no impairment of goodwill as of December 31,
2005 or 2004.
The Company evaluates the recoverability and measures the potential impairment of its goodwill under
SFAS 142. The annual impairment test is a two-step process that begins with the estimation of the fair value of
the reporting unit. The first step screens for potential impairment and the second step measures the amount of
the impairment, if any. Management’s estimate of fair value considers publicly available information regarding
the market capitalization of the Company as well as (i) publicly available information regarding comparable
publicly-traded companies in the clinical laboratory testing industry, (ii) the financial projections and future
prospects of the Company’s business, including its growth opportunities and likely operational improvements,
and (iii) comparable sales prices, if available. As part of the first step to assess potential impairment,
management compares the estimate of fair value for the reporting unit to the book value of the reporting unit.
If the book value is greater than the estimate of fair value, the Company would then proceed to the second step
to measure the impairment, if any. The second step compares the implied fair value of goodwill with its
carrying value. The implied fair value is determined by allocating the fair value of the reporting unit to all of
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