Equity Method Investments

The Company includes investments which are accounted for using the equity method, under Investments in equity interests on the Company's Consolidated Balance Sheets. As of October 31, 2016, the Company's Investments in equity interests primarily included $2.6 billion related to a 49% equity interest in H3C.

Investment in H3C

In May 2016, Tsinghua Holdings’ subsidiary, Unisplendour Corporation, purchased 51% of a new business named H3C, which is comprised of Hewlett Packard Enterprise’s former H3C Technologies and China-based servers, storage and technology services businesses which were previously reported within the EG segment. The Company retained a 49% interest in the new company, which it records as an equity method investment.

In fiscal 2016, the Company recorded its interest in the net earnings of H3C along with an adjustment to eliminate unrealized profits on intra-entity sales, and the amortization of basis difference, within earnings/loss from equity interests in the Consolidated and Combined Statements of Earnings.

In order to identify the basis difference resulting from the sale of its portion of the H3C business, the Company was required to determine the fair value of the identifiable assets and assumed liabilities on the date of sale in the same manner as it would in a business combination. These determined fair values were compared with the asset and liability carrying values reported on the Company's Consolidated Balance Sheet as of the sale date; the resulting difference was considered basis difference. Any excess cost of the investment over the Company's proportional fair value of the H3C assets acquired and liabilities assumed was identified as equity method goodwill.

The difference between the sale date carrying value of the Company's investment in H3C and its proportionate share of the net assets of H3C, which is the basis difference is summarized as follows:



	In millions
Carrying value of investment in H3C	$	2,739
Proportionate share of net assets of H3C	205
Basis difference	$	2,534

The basis difference was allocated as follows:



	In millions
Equity method goodwill	$	1,674
Intangible assets	749
In-process research and development	188
Deferred tax liabilities	(152		)
Other	75
Basis difference	$	2,534

The Company amortizes the basis difference over the estimated useful lives of the assets that gave rise to this difference. The weighted-average life of the H3C intangible assets is five years and will be amortized using a straight-line method. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, the Company will record the full basis difference charge for the value of the related intangible asset to its Consolidated and Combined Statements of Earnings in the period of abandonment. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment whenever factors indicate that the carrying value of the investment may not be recoverable.

In fiscal 2016, the Company recorded a Loss from equity interests of $76 million in the Consolidated and Combined Statement of Earnings, $93 million of which represented basis difference amortization, $15 million for elimination of profit on intra-entity sales and $32 million represented the Company's share of H3C's net income. This loss was reflected as a reduction in the carrying amount in Investments in equity interests in the Consolidated Balance Sheet as of October 31, 2016.

The Company also has commercial arrangements with H3C to buy and sell HPE branded servers, storage and technology services.