Seagate 2008 Annual Report Download - page 80

Table of Contents
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. Summary of Significant Accounting Policies (Continued)
Impairment of Goodwill and Other Long-lived Assets. The Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). As required by SFAS No. 142, the Company
tests goodwill of its reporting units for impairment annually during its fourth quarter or whenever events occur or circumstances change, such as
an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit
below its carrying amount.
Testing goodwill for impairment requires a two-step approach under SFAS No. 142. In determining the fair value of its reporting units in
step one of its SFAS No. 142 impairment analysis, the Company uses one or both of these commonly accepted valuation methodologies: 1) the
income approach, which is based on the present value of discounted cash flows and terminal value projected for the reporting unit, and 2) the
market approach, which estimates fair value based on an appropriate valuation multiple of revenue or earnings derived from comparable
companies, adjusted by an estimated control premium. The estimated control premium is based on reviewing observable transactions involving
controlling interests in comparable companies. The discount rate that the Company uses in the income approach of valuation represents the
weighted average cost of capital that the Company believes is reflective of the relevant risk associated with the projected cash flows. The
Company may use a weighted average of the fair values determined separately using the income and market approaches if it determines that this
will provide a more appropriate estimated fair value of the reporting units.
To validate the reasonableness of the reporting unit fair values, the Company reconciles the aggregate fair values of the reporting units
determined in step one (as described above) to the enterprise market capitalization to derive the implied control premium. In performing the
reconciliation the Company may, depending on the volatility of the market value of its stock price, use either the stock price on the valuation
date or the average stock price over a range of dates around the valuation date. The Company compares the implied control premium to
premiums paid in observable recent transactions of comparable companies to determine if the fair values of the reporting units estimated in step
one are reasonable.
In accordance with the guidance in SFAS No. 142, the Company has determined that it has two reporting units to which goodwill is
assignable: the Hard Disk Drive reporting unit and the Services reporting unit. Each of these reporting units constitutes a business and is the
lowest level for which discrete financial information is available and is regularly reviewed by management. The acquired businesses underlying
the Company's goodwill are specific to either the Hard Disk Drive or the Services reporting units and the goodwill amounts are assigned as such.
The Services reporting unit represents approximately 1% of the Company's revenues and total assets.
If step one of the SFAS No. 142 analysis demonstrates that the fair value of either reporting unit is below its carrying value, the Company
will proceed to step two of SFAS No. 142. If step two is necessary, the Company will estimate the fair values of all identifiable assets and
liabilities of the reporting unit using the income, market or the replacement cost approaches, as appropriate. The excess of the fair value of the
reporting unit over the fair values of the identified assets and liabilities is the implied fair value of goodwill. If the fair value of goodwill is lower
than the carrying value of the goodwill, an impairment charge is recorded to reduce the carrying value to fair value.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS No. 144), the Company tests
other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for
recoverability whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The
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