Quest Diagnostics 2011 Annual Report Download - page 82

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abandoned, the IPR&D asset is immediately expensed. IPR&D assets are also periodically reviewed for
impairment.
Recoverability and Impairment of Goodwill
The Company reviews goodwill and certain intangible assets periodically 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 goodwill impairment test is performed annually, or more frequently, in
the case of other events that indicate a potential impairment. The annual impairment test of goodwill was
performed at the end of each of the Company’s fiscal years and indicated that there was no impairment of
goodwill as of December 31, 2011 or 2010.
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) the financial projections and future prospects of the
Company’s business, including its growth opportunities and likely operational improvements, and (ii) 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 the assets and liabilities of that unit
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 to acquire the reporting unit. The excess of the fair value of the reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the
reporting unit’s goodwill is greater than its implied fair value, an impairment loss will be recognized in the
amount of the excess. Management believes its estimation methods are reasonable and reflective of common
valuation practices.
On a quarterly basis, management performs a review of the Company’s business to determine if events or
changes in circumstances have occurred which could have a material adverse effect on the fair value of the
Company and its goodwill. If such events or changes in circumstances were deemed to have occurred, the
Company would perform an impairment test of goodwill as of the end of the quarter, consistent with the annual
impairment test, and record any noted impairment loss.
Recoverability and Impairment of Intangible Assets and Other Long-Lived Assets
The Company reviews the recoverability of its long-lived assets when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment
is based on the Company’s ability to recover the asset from the expected future pre-tax cash flows (undiscounted
and without interest charges) of the related operations. If the expected undiscounted pre-tax cash flows are less
than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated
fair value and carrying amount of the asset.
Investments
The Company accounts for investments in trading and available-for-sale equity securities, which are included
in other assets in the consolidated balance sheets at fair value. Both realized and unrealized gains and losses for
trading securities are recorded currently in earnings as a component of non-operating expenses within other
income (expense), net in the consolidated statements of operations. Unrealized gains and losses, net of tax, for
available-for-sale securities are recorded as a component of accumulated other comprehensive (loss) income
within stockholders’ equity. Recognized gains and losses for available-for-sale securities are recorded in other
income (expense), net in the consolidated statements of operations. Gains and losses on securities sold are based
on the average cost method.
The Company periodically reviews its investments to determine whether a decline in fair value below the
cost basis is other than temporary. The primary factors considered in the determination are: the length of time
F-10
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)