Discover 2015 Annual Report Download - page 112

-96-
stage. Once the capitalization criteria as defined in GAAP have been met, external direct costs incurred for materials
and services used in developing or obtaining internal-use computer software and payroll and payroll-related costs for
employees who are directly associated with the internal-use computer software project (to the extent those employees
devoted time directly to the project) are capitalized. Amortization of capitalized costs begins when the software is ready
for its intended use. Capitalized software is included in premises and equipment, net in the Company's consolidated
statements of financial condition. See Note 7: 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 annually as of October 1, or between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. The Company's reported goodwill relates to PULSE, which it acquired in
2005. The Company's 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 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. No impairment charges were identified during the impairment test
conducted at October 1, 2015.
Intangible Assets
The Company's identifiable 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. 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 non-amortizable intangible assets consist of the international transaction processing rights and
brand-related intangibles included in the acquisition of Diners Club as well as the trade names acquired in The Student
Loan Corporation acquisition. These assets are deemed to have indefinite useful lives and are therefore not subject to
amortization. All of the Company's non-amortizable intangible assets are subject to a test for impairment annually as of
October 1, 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 non-amortizable 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 non-amortizable
intangible assets. No impairment charges were identified during the impairment test conducted at October 1, 2015.