Cardinal Health 2009 Annual Report Download - page 91

Property and Equipment. Property and equipment are carried at cost less accumulated depreciation. Property
and equipment held for sale are recorded at the lower of cost or fair value less cost to sell. Depreciation expense
for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the
assets, including capital lease assets which are depreciated over the terms of their respective leases. The
Company uses the following range of useful lives for its property and equipment categories: buildings and
improvements—1 to 50 years; machinery and equipment—2 to 20 years; furniture and fixtures—3 to 10 years.
Depreciation expense was $306.3 million, $286.9 million and $249.7 million for fiscal 2009, 2008 and 2007,
respectively. When certain events or changes in operating conditions occur, an impairment assessment may be
performed on the recoverability of the carrying amounts. The Company expenses repairs and maintenance
expenditures as incurred. The Company capitalizes interest on long-term fixed asset projects using a rate that
approximates the Company’s weighted average interest rate on long-term obligations which was 5.7% at June 30,
2009. The amount of capitalized interest was immaterial for all fiscal years presented.
Goodwill and Other Intangibles. The Company accounts for purchased goodwill and other intangible assets
in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“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 at
least annually. Intangible assets with finite lives, primarily customer relationships, patents and trademarks,
continue to be amortized over their useful lives. The Company tests for impairment during the fourth quarter of
each fiscal year, or more frequently if certain indicators are present or changes in circumstances suggest that an
impairment may exist.
SFAS No. 142 requires that testing for goodwill impairment be conducted at the reporting unit level using a
two-step approach. The first step requires a comparison of the carrying value of the reporting units to the
estimated fair value of these units. If the carrying value of a reporting unit exceeds its estimated fair value, the
Company performs the second step of the goodwill impairment to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the estimated implied fair value of a reporting unit’s
goodwill to its carrying value. The estimated implied fair value of goodwill is determined in the same manner
that the amount of goodwill recognized in a business combination is determined. The Company allocates the
estimated fair value of a reporting unit to all of the assets and liabilities in that unit, including intangible assets,
as if the reporting unit had been acquired in a business combination. Any excess of the estimated fair value of a
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
The Company’s determination of estimated fair value of the reporting units is based on a combination of 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 of the respective reporting units. 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
reporting units and potentially result in goodwill impairment. Any identified impairment would result in an
expense to the Company’s results of operations. The Company performed its annual impairment test in fiscal
2009, 2008 and 2007, which resulted in no impairment charges. See Note 8 for additional information regarding
goodwill and other intangible assets.
Income Taxes. In accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes,” the
Company accounts for income taxes using the asset and liability method. The asset and liability method requires
recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences
that currently exist between the tax bases and financial reporting bases of the Company’s assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which the
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