Discover 2010 Annual Report Download - page 111

in premises and equipment, net in the Company’s consolidated statements of financial condition. See Note 8: Premises
and Equipment for further information about the Company’s premises and equipment.
Goodwill. Goodwill is recorded as part of the Company’s acquisitions of businesses when the purchase price exceeds
the fair value of the net tangible and separately identifiable intangible assets acquired. The Company’s goodwill is not
amortized, but rather is subject to an impairment test at the reporting unit level each year, or more often if conditions
indicate impairment may have occurred, pursuant to ASC Topic 350, Intangibles – Goodwill and Other. The Company’s
reported goodwill relates to PULSE and the reporting unit is comprised of the PULSE business. The goodwill impairment
analysis is a two-step test. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair
value of the reporting unit exceeds its carrying value including goodwill, goodwill is considered to be not impaired. If the
carrying value including goodwill exceeds its fair value, goodwill is potentially impaired and the second step of the test
becomes necessary. In the second step, the implied fair value of goodwill is derived and compared to the carrying
amount of goodwill. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the sum of
the fair values of all identifiable assets less the liabilities associated with the reporting unit. If the carrying value of
goodwill allocated to the reporting unit exceeds its implied fair value, an impairment charge is recorded for the excess.
Intangible Assets. The Company’s intangible assets consist of both amortizable and non-amortizable intangible assets.
The Company’s amortizable intangible assets consist primarily of acquired customer relationships and certain trade name
intangibles. All of the Company’s amortizable intangible assets are carried at net book value and are amortized over
their estimated useful lives. The amortization periods approximate the periods over which the Company expects to
generate future net cash inflows from the use of these assets. Accordingly, customer relationships are amortized over a
useful life of 15 years and trade names are amortized over a useful life of 25 years. The Company’s policy is to amortize
intangibles in a manner that reflects the pattern in which the projected net cash inflows to the Company are expected to
occur, where such pattern can be reasonably determined, as opposed to the straight-line basis. This method of
amortization typically results in a greater portion of the intangible asset being amortized in the earlier years of its useful
life.
All of the Company’s amortizable intangible assets, as well as other amortizable or depreciable long-lived assets such
as premises and equipment, are subject to impairment testing when events or conditions indicate that the carrying value
of an asset may not be fully recoverable from future cash flows. A test for recoverability is done by comparing the asset’s
carrying value to the sum of the undiscounted future net cash inflows expected to be generated from the use of the asset
over its remaining useful life. Impairment exists if the sum of the undiscounted expected future net cash inflows is less than
the carrying amount of the asset. Impairment would result in a write-down of the asset to its estimated fair value. The
estimated fair values of these assets are based on the discounted present value of the stream of future net cash inflows
expected to be derived over the remaining useful lives of the assets. If an impairment write-down is recorded, the
remaining useful life of the asset will be evaluated to determine whether revision of the remaining amortization or
depreciation period is appropriate.
The Company’s nonamortizable intangible assets consist of the international transaction processing rights and brand-
related intangibles included in the acquisition of Diners Club. These assets are deemed to have indefinite useful lives and
are therefore not subject to amortization. All of the Company’s nonamortizable intangible assets are subject to a test for
impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
As required by GAAP, if the carrying value of a nonamortizable intangible asset is in excess of its fair value, the asset
must be written down to its fair value through the recognition of an impairment charge to earnings. In contrast to
amortizable intangibles, there is no test for recoverability associated with the impairment test for nonamortizable
intangible assets.
Stock-based Compensation. Pursuant to ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), the
Company measures the cost of employee services received in exchange for an award of stock-based compensation based
on the grant-date fair value of the award. The cost is recognized over the requisite service period, except for awards
granted to retirement-eligible employees, which are fully expensed by the grant date. No compensation cost is
recognized for awards that are subsequently forfeited.
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