Walgreens 2015 Annual Report Download - page 58

Goodwill and indefinite-lived intangible asset impairment – Goodwill and indefinite-lived intangible assets are
not amortized, but are evaluated for impairment annually during the fourth quarter, or more frequently if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying value. As part of our impairment analysis for each reporting unit, we engage a third party appraisal firm
to assist in the determination of estimated fair value for each reporting unit. This determination includes
estimating the fair value using both the income and market approaches. The income approach requires
management to estimate a number of factors for each reporting unit, including projected future operating results,
economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value
using comparable marketplace fair value data from within a comparable industry grouping.
The determination of the fair value of the reporting units and the allocation of that value to individual assets and
liabilities within those reporting units requires us to make significant estimates and assumptions. These estimates
and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies;
control premiums appropriate for acquisitions in the industries in which we compete; the discount rates; terminal
growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital
expenditures. The allocation requires several analyses to determine the fair value of assets and liabilities
including, among other things, purchased prescription files, customer relationships, pharmacy licenses and trade
names. Although we believe our estimates of fair value are reasonable, actual financial results could differ from
those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions
concerning future financial results or other underlying assumptions could have a significant impact on either the
fair value of the reporting units, the amount of any goodwill impairment charge, or both.
We also compared the sum of the estimated fair values of the reporting units to the Company’s total value as
implied by the market value of the Company’s equity and debt securities. This comparison indicated that, in total,
our assumptions and estimates were reasonable. However, future declines in the overall market value of the
Company’s equity and debt securities may indicate that the fair value of one or more reporting units has declined
below its carrying value.
One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount
by which each reporting unit “passed” (fair value exceeds the carrying amount) or “failed” (the carrying amount
exceeds fair value) the first step of the goodwill impairment test. Our reporting units’ fair values exceeded their
carrying amounts ranging from approximately 12% to more than 130%. See Note 9, Goodwill and Other
Intangible Assets, to the Consolidated Financial Statements for additional information.
Indefinite-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying
value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the
asset is written down to its estimated fair value.
Our indefinite-lived intangible asset fair value is estimated by discounting the hypothetical royalty payments to
their present value over the estimated economic life of the asset. These estimates can be affected by a number of
factors including, but not limited to, general economic conditions, availability of market information as well as
our profitability.
Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material
change in the estimates or assumptions used to determine impairment.
Allowance for doubtful accounts – The provision for bad debt is based on estimates of recoverability using both
historical write-off percentages and specifically identified receivables. Based on current knowledge, we do not
believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used
to determine the allowance.
Vendor allowances – Vendor allowances are principally received as a result of purchases, sales or promotion of
vendors’ products. Allowances are generally recorded as a reduction of inventory and are recognized as a
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