Quest Diagnostics 2012 Annual Report Download - page 84

F- 11
Goodwill
Goodwill represents the excess of the fair value of the acquiree (including the fair value of non-controlling interests)
over the recognized bases of the net identifiable assets acquired and includes the future economic benefits from other assets that
could not be individually identified and separately recognized. Goodwill is not amortized, but instead is periodically reviewed
for impairment.
Intangible Assets
Intangible assets are recognized at fair value, 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 related intangibles, non-
competition agreements and technology 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. In certain business
acquisitions, the Company recognizes in-process research and development (“IPR&D”) assets apart from other identifiable
intangible assets and net tangible assets. IPR&D assets are initially recognized at fair value and classified as non-amortizable,
indefinite-lived intangible assets until completion or abandonment of the research and development project. Upon completion
of the project, the IPR&D asset becomes a finite-lived, amortizable asset and if the project is 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 at least annually, or more frequently, in the case of other events that indicate
a potential impairment.
The annual impairment test includes an option to perform a qualitative assessment of whether it is more-likely-than-
not that a reporting unit's fair value is less than its carrying value prior to performing the two-step quantitative goodwill
impairment test. The quantitative 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.
As of December 31, 2012, the Company classified the assets and liabilities of HemoCue as held for sale in the
accompanying consolidated balance sheets. In the fourth quarter of 2012, the Company received several offers to purchase
HemoCue, and in February 2013, the Company agreed to sell HemoCue. The proposed consideration to be received indicated
that the carrying value of HemoCue is in excess of its fair value. As a result, the Company re-assessed the fair value of the net
assets of HemoCue and determined that the goodwill associated with this business was impaired and recorded a pre-tax
impairment charge of $78 million in discontinued operations in December 2012 to write down the goodwill.
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)