Cardinal Health 2008 Annual Report Download - page 80

In conjunction with the review of a transaction, the status of the acquired company’s research and
development projects is assessed to determine the existence of IPR&D. In connection with certain acquisitions,
the Company is required to estimate the fair value of acquired IPR&D which requires selecting an appropriate
discount rate and estimating future cash flows for each project. Management also assesses the current status of
development, nature and timing of efforts to complete such development, uncertainties and other factors when
estimating the fair value. Costs are not assigned to IPR&D unless future development is probable. Once the fair
value is determined, an asset is established, and in accordance with FASB Interpretation No. 4, “Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,” is immediately
written-off as a special item in the Company’s consolidated statement of earnings. During fiscal 2008, the
Company reversed $25.0 million of a previously recorded write-off of IPR&D costs associated with Viasys as a
result of the finalization of the Viasys purchase price allocation process and recorded charges of $17.7 million
and $25.3 million related to the write-off of IPR&D costs associated with Enturia and other minor acquisitions,
respectively. During fiscal 2007, the Company recorded charges of $83.9 million and $0.6 million related to the
write-off of IPR&D costs associated with Viasys and Care Fusion, respectively (see Note 3 of “Notes to
Consolidated Financial Statements”).
Goodwill and Other Intangibles
The Company accounts for goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible
Assets.” Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are not amortized,
but instead are tested for impairment annually or when indicators of impairment exist. Intangible assets with
finite lives, primarily customer relationships and patents and trademarks, continue to be amortized over their
useful lives. In conducting the impairment test, the fair value of the Company’s reporting units is compared to its
carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If
the carrying amount exceeds the fair value, further analysis is performed to assess impairment.
The Company’s determination of fair value of the reporting units is based on a discounted cash flow
analysis, a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and, if
available, a review of the price/earnings ratio for publicly traded companies similar in nature, scope and size. The
methods and assumptions used to test impairment have been revised for any segment realignments for the periods
presented. The discount rates used for impairment testing are based on the risk-free rate plus an adjustment for
risk factors. The EBITDA multiples used for impairment testing are judgmentally selected based on factors such
as the nature, scope and size of the applicable reporting unit. The use of alternative estimates, peer groups or
changes in the industry, or adjusting the discount rate, EBITDA multiples or price earnings ratios used could
affect the estimated fair value of the assets and potentially result in impairment. Any identified impairment
would result in an adjustment to the Company’s results of operations.
The Company performed its annual impairment tests in fiscal 2008 and 2007, neither of which resulted in
the recognition of any impairment charges. Decreasing the price/earnings ratio of competitors used for
impairment testing by one point or increasing the discount rate in the discounted cash flow analysis used for
impairment testing by 1% would not have indicated impairment for any of the Company’s reporting units for
fiscal 2008 or 2007. See Note 9 of “Notes to Consolidated Financial Statements” for additional information
regarding goodwill and other intangibles.
Special Items
The Company records restructuring charges, acquisition integration charges and certain litigation and other
items as special items. A restructuring activity is a program whereby the Company fundamentally changes its
operations such as closing facilities, moving a product to another location or outsourcing the production of a
product. Restructuring activities may also involve substantial re-alignment of the management structure of a
business unit in response to changing market conditions. Restructuring charges are recorded in accordance with
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, a
liability is measured at its fair value and recognized as incurred.
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