NVIDIA 2015 Annual Report Download - page 113

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Goodwill
Goodwill is subject to our annual impairment test during the fourth quarter of our fiscal year, or earlier if indicators of
potential impairment exist, using either a qualitative or a quantitative assessment. Our impairment review process compares
the fair value of the reporting unit in which the goodwill resides to its carrying value. We have identified two reporting
units, GPU and Tegra Processor, for the purposes of completing our goodwill analysis. Goodwill assigned to these reporting
units as of January 25, 2015 was $209.7 million and $408.5 million, respectively. Determining the number of reporting
units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and
assumptions. We also make judgments and assumptions in allocating assets and liabilities to each of our reporting units.
We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently
uncertain.
During the fourth quarter of fiscal year 2015, we elected to use the quantitative assessment to test goodwill for impairment
for each reporting unit. In applying the fair value based test of each reporting unit, the results from the income approach
and the market approach were equally weighted. These valuation approaches consider a number of factors that include, but
are not limited to, prospective financial information, growth rates, terminal or residual values, discount rates and comparable
multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding
industry economic factors and the future profitability of our business.
When performing an income approach valuation, we incorporate the use of projected financial information and a
discount rate that are developed using market participant based assumptions to our discounted cash flow model. Our estimates
of discounted cash flow were based upon, among other things, certain assumptions about our expected future operating
performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market
conditions. Our estimates may differ from actual cash flow due to, among other things, economic conditions, changes to
our business model or changes in operating performance. Additionally, certain estimates of discounted cash flow involve
businesses with limited financial history and developing revenue models, which increases the risk of differences between
the projected and actual performance. The long-term financial forecasts that we utilize represent the best estimate that we
have at this time and we believe that its underlying assumptions are reasonable. Significant differences between our estimates
and actual cash flow could materially affect our future financial results, which could impact our future estimates of the fair
value of our reporting units.
During the fourth quarter of fiscal year 2015, we concluded that there was no impairment of our goodwill. The fair
value of our GPU reporting unit significantly exceeded its carrying value and the fair value of our Tegra Processor reporting
unit exceeded its carrying value by 21%. As such, even if we applied a hypothetical 10% decrease to the fair value of each
reporting unit, it still would not have resulted in the fair value of our reporting units being less than their carrying values.
As an overall test of the reasonableness of estimated fair values of our reporting units, we reconciled the combined fair
value estimates of our reporting units to our market capitalization as of the valuation date. The reconciliation confirmed
that the fair values were relatively representative of the market views when applying a reasonable control premium to the
market capitalization. However, any significant reductions in the actual amount of future cash flows realized by our reporting
units, reductions in the value of market comparables, or reductions in our market capitalization could impact future estimates
of the fair values of our reporting units. Such events could ultimately result in a charge to our earnings in future periods
due to the potential for a write-down of the goodwill associated with our reporting units.
In particular, the fair value of our Tegra reporting unit exceeded its carrying value by approximately 21%. The fair
value of this reporting unit was assessed using a combination of income and market approaches. The underlying assumptions
we used in assessing the fair value of the Tegra reporting unit include, but are not limited to, assumptions around future
revenue growth rates, gross margins, operating expense investment levels, overall market growth rates, our market share
of the overall market, and the appropriate discount rates to apply to future cash flows. If the actual future results of the Tegra
reporting unit do not achieve the levels we estimated in assessing its fair value, the fair value of the Tegra reporting unit
could decline. A future decline in the fair value of the Tegra reporting unit could result a charge to our earnings as a result
of a write-down of the value of the goodwill associated with that reporting unit.