Cardinal Health 2015 Annual Report Download - page 52

Notes to Financial Statements
51 Cardinal Health | Fiscal 2015 Form 10-K
value of a contingent consideration obligation requires subjective
assumptions to be made regarding future business results, discount
rates, discount periods and probabilities assigned to various potential
business result scenarios. Subsequent revisions to these
assumptions could materially change the estimate of the fair value
of contingent consideration obligations and therefore could materially
affect our financial position or results of operations. See Note 2 for
additional information regarding our acquisitions.
Goodwill and Other Intangible Assets
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; trademarks, trade names and
patents; and developed technology, are amortized over their useful
lives.
Goodwill impairment testing involves a comparison of the estimated
fair value of reporting units to the respective carrying amount, which
may be performed utilizing either a qualitative or quantitative
assessment. A reporting unit is defined as an operating segment or
one level below an operating segment (also known as a component).
If the estimated fair value exceeds the carrying amount, then no
impairment exists. If the carrying amount exceeds the estimated fair
value, then a second step is performed to determine the amount of
impairment, if any. An impairment charge is the amount by which the
carrying amount of goodwill exceeds the estimated implied fair value
of goodwill. We estimate the implied fair value of goodwill as the
excess of the estimated fair value of the reporting unit over the
estimated fair value of its identifiable net assets. This is the same
manner we use to recognize goodwill from a business combination.
Goodwill impairment testing involves judgment, including the
identification of reporting units, the estimation of the fair value of each
reporting unit and, if necessary, the estimation of the implied fair value
of goodwill.
We have two operating segments, which are the same as our
reportable segments: Pharmaceutical and Medical. These operating
segments are comprised of divisions (components), for which
discrete financial information is available. Components are
aggregated into reporting units for purposes of goodwill impairment
testing to the extent that they share similar economic characteristics.
Our reporting units are: Pharmaceutical operating segment
(excluding our Nuclear Pharmacy Services division and Cardinal
Health China - Pharmaceutical division); Nuclear Pharmacy Services
division; Cardinal Health China - Pharmaceutical division; Medical
operating segment (excluding our Cardinal Health at Home division);
and our Cardinal Health at Home Division.
Fair value can be determined using market, income or cost-based
approaches. Our determination of estimated fair value of the reporting
units is based on a combination of the income-based and market-
based approaches. Under the income-based approach, we use a
discounted cash flow model in which cash flows anticipated over
several future periods, plus a terminal value at the end of that time
horizon, are discounted to their present value using an appropriate
risk-adjusted rate of return. We use our internal forecasts to estimate
future cash flows and include an estimate of long-term growth rates
based on our most recent views of the long-term outlook for each
reporting unit. Actual results may differ materially from those used in
our forecasts. We use discount rates that are commensurate with the
risks and uncertainty inherent in the respective reporting units and
in our internally-developed forecasts. Discount rates used in our
reporting unit valuations ranged from 8.5 to 11 percent. Under the
market-based approach, we determine fair value by comparing our
reporting units to similar businesses or guideline companies whose
securities are actively traded in public markets. To further confirm fair
value, we compare the aggregate fair value of our reporting units to
our total market capitalization. Estimating the fair value of reporting
units requires the use of estimates and significant judgments that are
based on a number of factors including forecasted operating results.
The use of alternate estimates and assumptions or changes in the
industry or peer groups could materially affect the determination of
fair value for each reporting unit and potentially result in goodwill
impairment.
We performed annual impairment testing in fiscal 2015, 2014 and
2013 and, with the exception of our Nuclear Pharmacy Services
division in fiscal 2013, concluded that there were no impairments of
goodwill as the estimated fair value of each reporting unit exceeded
its carrying value. As discussed further in Note 4, during the fourth
quarter of fiscal 2013 we recognized an $829 million ($799 million,
net of tax) goodwill impairment charge related to our Nuclear
Pharmacy Services division, which is included in impairments and
loss on disposal of assets in our consolidated statements of earnings.
We review intangible assets with finite lives for impairment whenever
events or changes in circumstances indicate that the related carrying
amounts may not be recoverable. Determining whether an
impairment loss occurred requires a comparison of the carrying
amount to the sum of the future forecasted undiscounted cash flows
expected to be generated by the asset. Actual results may differ
materially from those used in our forecasts.
Investments
Investments in non-marketable equity securities are accounted for
under either the cost or equity method of accounting and are included
in other assets in the consolidated balance sheets. For investments
in which we can exercise significant influence, we use the equity
method of accounting and our share of the earnings and losses, which
was immaterial, both individually and in the aggregate, for all periods
presented, is recorded in other income, net in the consolidated
statements of the earnings. We monitor investments for other-than-
temporary impairment by considering factors such as the operating
performance of the investment and current economic and market
conditions.
During fiscal 2014, we sold our minority equity interests in two
investments for proceeds of $47 million, which resulted in a pre-tax
gain of $32 million ($20 million, net of tax) included in other income,
net in the consolidated statements of earnings.
Also during fiscal 2014, we purchased marketable securities, which
are classified as available-for-sale and are carried at fair value in the
consolidated balance sheets. Unrealized gains and losses on