Quest Diagnostics 2006 Annual Report Download - page 98

standardized approach to estimate and review the collectibility of its receivables based on a number of factors,
including the period they have been outstanding. Historical collection and payer reimbursement experience is an
integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company
regularly assesses the state of its billing operations in order to identify issues which may impact the collectibility
of receivables or reserve estimates. Revisions to the allowances for doubtful accounts estimates are recorded as
an adjustment to bad debt expense within selling, general and administrative expenses. Receivables deemed to be
uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off.
Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts.
Inventories
Inventories, which consist principally of testing supplies and reagents, are valued at the lower of cost (first
in, first out method) or market.
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 periodically 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 periodically
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 periodically
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
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)