Xerox 2012 Annual Report Download - page 67

65Xerox 2012 Annual Report
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value
of acquired net assets in a business combination, including the amount
assigned to identifiable intangible assets. The primary drivers that
generate goodwill are the value of synergies between the acquired
entities and the company and the acquired assembled workforce,
neither of which qualifies as an identifiable intangible asset. Goodwill
is not amortized but rather is tested for impairment annually or more
frequently if an event or circumstance indicates that an impairment
loss may have been incurred.
Impairment testing for goodwill is done at the reporting unit level.
A reporting unit is an operating segment or one level below an
operating segment (a “component”) if the component constitutes
a business for which discrete financial information is available, and
segment management regularly reviews the operating results of that
component.
When testing goodwill for impairment, we may assess qualitative
factors for some or all of our reporting units to determine whether it
is more likely than not (that is, a likelihood of more than 50 percent)
that the fair value of a reporting unit is less than its carrying amount,
including goodwill. Alternatively, we may bypass this qualitative
assessment for some or all of our reporting units and perform a
detailed quantitative test of impairment (Step 1). If we perform the
detailed quantitative impairment test and the carrying amount of the
reporting unit exceeds its fair value, we would perform an analysis (Step
2) to measure such impairment. In 2012, we elected to proceed to the
quantitative assessment of the recoverability of our goodwill balances
for each of our reporting units in performing our annual impairment
test. Based on our quantitative assessments, we concluded that the fair
values of each of our reporting units exceeded their carrying values and
no impairments were identified.
Other intangible assets primarily consist of assets obtained in
connection with business acquisitions, including installed customer
base and distribution network relationships, patents on existing
technology and trademarks. We apply an impairment evaluation
whenever events or changes in business circumstances indicate that
the carrying value of our intangible assets may not be recoverable.
Other intangible assets are amortized on a straight-line basis over their
estimated economic lives. We believe that the straight-line method
of amortization reflects an appropriate allocation of the cost of the
intangible assets to earnings in proportion to the amount of economic
benefits obtained annually by the Company.
Refer to Note 9 – Goodwill and Intangible Assets, Net for further
information.
Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets, including
buildings, equipment, internal use software and other intangible assets,
when events or changes in circumstances occur that indicate that the
carrying value of the asset may not be recoverable. The assessment
of possible impairment is based on our ability to recover the carrying
value of the asset from the expected future pre-tax cash flows
(undiscounted and without interest charges) of the related operations.
If these cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair
value and carrying value. Our primary measure of fair value is based on
discounted cash flows.
Pension and Post-Retirement Benefit Obligations
We sponsor defined benefit pension plans in various forms in several
countries covering employees who meet eligibility requirements. Retiree
health benefit plans cover U.S. and Canadian employees for retiree
medical costs. We employ a delayed recognition feature in measuring
the costs of pension and post-retirement benefit plans. This requires
changes in the benefit obligations and changes in the value of assets
set aside to meet those obligations to be recognized not as they occur,
but systematically and gradually over subsequent periods. All changes
are ultimately recognized as components of net periodic benefit cost,
except to the extent they may be offset by subsequent changes. At
any point, changes that have been identified and quantified but not
recognized as components of net periodic benefit cost, are recognized
in Accumulated Other Comprehensive Loss, net of tax.
Several statistical and other factors that attempt to anticipate future
events are used in calculating the expense, liability and asset values
related to our pension and retiree health benefit plans. These factors
include assumptions we make about the discount rate, expected return
on plan assets, rate of increase in healthcare costs, the rate of future
compensation increases and mortality. Actual returns on plan assets
are not immediately recognized in our income statement due to the
delayed recognition requirement. In calculating the expected return
on the plan asset component of our net periodic pension cost, we
apply our estimate of the long-term rate of return on the plan assets
that support our pension obligations, after deducting assets that are
specifically allocated to Transitional Retirement Accounts (which are
accounted for based on specific plan terms).
For purposes of determining the expected return on plan assets, we
utilize a market-related value approach in determining the value of
the pension plan assets, rather than a fair market value approach. The
primary difference between the two methods relates to systematic
recognition of changes in fair value over time (generally two years)