Walgreens 2014 Annual Report Download - page 81

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(7) Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets are not amortized, but are evaluated for impairment
annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying value. As part of the Company’s
impairment analysis for each reporting unit, the Company engaged a third party appraisal firm to assist in the
determination of estimated fair value for each unit. This determination included estimating the fair value using
both the income and market approaches. The income approach requires management to estimate a number of
factors for each reporting unit, including projected future operating results, economic projections, anticipated
future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair
value data from within a comparable industry grouping.
The determination of the fair value of the reporting units and the allocation of that value to individual assets and
liabilities within those reporting units requires the Company to make significant estimates and
assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of
appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the
Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income,
depreciation and amortization and capital expenditures. The allocation requires several analyses to determine the
fair value of assets and liabilities including, among other things, purchased prescription files, customer
relationships and trade names. Although the Company believes its estimates of fair value are reasonable, actual
financial results could differ from those estimates due to the inherent uncertainty involved in making such
estimates. Changes in assumptions concerning future financial results or other underlying assumptions could
have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment
charge, or both. The Company also compared the sum of the estimated fair values of its reporting units to the
Company’s total value as implied by the market value of its equity and debt securities. This comparison indicated
that, in total, its assumptions and estimates were reasonable. However, future declines in the overall market value
of the Company’s equity and debt securities may indicate that the fair value of one or more reporting units has
declined below its carrying value.
One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount
by which each reporting unit “passed” (fair value exceeds the carrying amount) or “failed” (the carrying amount
exceeds fair value) the first step of the goodwill impairment test. The Company’s reporting units’ fair values
exceeded their carrying amounts ranging from approximately 12% to more than 117%.
Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair
value of the reporting unit. That is, a 1% change in estimated future cash flows would change the estimated fair
value of the reporting unit by approximately 1%. The estimated long-term rate of net sales growth can have a
significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. Of the
other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to
changes in the estimated discount rate. The Company believes that its estimates of future cash flows and discount
rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty
in making such estimates.
Changes in the carrying amount of goodwill consist of the following activity (in millions):
2014 2013
Net book value – September 1 $2,410 $2,161
Acquisitions 58 236
Sale of business (92) —
Other (1) (17) 13
Net book value – August 31 $2,359 $2,410
(1) “Other” primarily represents immaterial purchase accounting adjustments for the Company’s acquisitions.
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