HP 2012 Annual Report Download - page 53

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
carrying value, then we must perform the second step of the impairment test to measure the amount of
impairment loss, if any. In the second step, the reporting unit’s fair value is allocated to all of the
assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a
hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the
reporting unit was being acquired in a business combination. If the implied fair value of the reporting
unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss. We also
compare the fair value of purchased intangible assets with indefinite lives to their carrying value. We
estimate the fair value of these intangible assets using an income approach. We recognize an
impairment loss when the estimated fair value of intangible assets with indefinite lives is less than the
carrying value.
We review purchased intangible assets with finite lives for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of these
intangible assets is assessed based on the estimated undiscounted future cash flows expected to result
from the use of the asset. If the undiscounted future cash flows are less than the carrying amount, the
purchased intangible assets with finite lives are considered to be impaired. The amount of the
impairment is measured as the difference between the carrying amount of these assets and the fair
value.
In order to assess the reasonableness of the calculated fair values of our reporting units, we also
compare the sum of the reporting units’ fair values to our market capitalization and calculate an
implied control premium (the excess of the sum of the reporting units’ fair values over the market
capitalization). We evaluate the control premium by comparing it to control premiums of recent
comparable transactions. If the implied control premium is not reasonable in light of these recent
transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount
rates and/or other assumptions. As a result, when there is a significant decline in our stock price, as
occurred during fiscal 2012, this reevaluation could correlate to lower estimated fair values for certain
or all of our reporting units.
Except for Services, Software and Corporate Investments, our reporting units are consistent with
the reportable segments identified in Note 19 to the Consolidated Financial Statements in Item 8,
which is incorporated herein by reference. The enterprise services (‘‘ES’’) and technology services
(‘‘TS’’) businesses are the reporting units within the Services segment. ES includes the Infrastructure
Technology Outsourcing (‘‘ITO’’) and Application and Business Services (‘‘ABS’’) business units. The
Software segment includes two reporting units, which are Autonomy Corporation plc (‘‘Autonomy’’) and
the legacy HP software business. The webOS business is also a separate reporting unit within the
Corporate Investments segment.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is
judgmental in nature and involves the use of significant estimates and assumptions. These estimates
and assumptions include revenue growth rates and operating margins used to calculate projected future
cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions
and determination of appropriate market comparables. We base our fair value estimates on
assumptions we believe to be reasonable but they are unpredictable and inherently uncertain. Actual
future results may differ from those estimates. In addition, we make certain judgments and assumptions
in allocating shared assets and liabilities to determine the carrying values for each of our reporting
units.
During fiscal 2012, we determined that sufficient indicators of potential impairment existed to
require an interim goodwill impairment analysis for the ES reporting unit. As a result, we recorded an
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