Note 9: Acquisitions, Goodwill and Intangible Assets

Acquisitions

In fiscal 2014, HP completed two acquisitions with a combined purchase price of $55 million, of which $12 million was recorded as goodwill and $25 million was recorded as intangible assets related to these acquisitions. In fiscal 2013, MphasiS Limited, a majority-owned subsidiary of HP, acquired Digital Risk LLC for $174 million. HP recorded $112 million of goodwill and $48 million of intangible assets related to this acquisition.

Goodwill

Goodwill allocated to HP's reportable segments and changes in the carrying amount of goodwill were as follows:

	Personal Systems		Printing		Enterprise Group		Enterprise Services(3)			Software			HP Financial Services		Corporate Investments		Total
	In millions
Balance at October 31, 2012(1)(2)	$	2,588	$	2,591	$	16,825	$	—		$	8,921		$	144	$	—	$	31,069
Goodwill acquired during the period		—		—		—		112			—			—		—		112
Goodwill adjustments		—		—		39		(15	)		(81	)		—		—		(57	)

Balance at October 31, 2013(1)(2)	$	2,588	$	2,591	$	16,864	$	97		$	8,840		$	144	$	—	$	31,124
Goodwill acquired during the period		—		—		—		—			12			—		—		12
Goodwill adjustments		—		—		3		—			—			—		—		3

Balance at October 31, 2014(1)	$	2,588	$	2,591	$	16,867	$	97		$	8,852		$	144	$	—	$	31,139

(1)	Goodwill is net of accumulated impairment losses of $14.5 billion. Of that amount, $8.0 billion relates to the ES segment, $5.7 billion relates to Software, and the remaining $0.8 billion relates to Corporate Investments.
(2)	Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. As a result of these organizational realignments, HP transferred $126 million of goodwill related to the transfer of the Printing spare and replacement parts business from the EG segment to the Printing segment, $48 million of goodwill related to the transfer of the Personal Systems spare and replacement parts business from the EG segment to the Personal Systems segment, $42 million of goodwill related to the transfer of the Personal Systems trade and warranty support business from the EG segment to the Personal Systems segment and $22 million of goodwill related to the transfer of the HP Exstream business from the Printing segment to the Software segment. See Note 2 for a full description of the segment realignments.
(3)	Goodwill relates to the MphasiS Limited reporting unit.

Goodwill is tested for impairment at the reporting unit level. At the beginning of its first quarter of fiscal 2014, HP made a change to its reporting units. In connection with continued operational synergies and interdependencies between the Enterprise Servers, Storage and Networking reporting unit and the TS reporting unit within the EG segment, HP combined these reporting units to create the EG reporting unit. As of October 31, 2014, HP's reporting units are consistent with the reportable segments identified in Note 2, except for ES, which includes two reporting units: MphasiS Limited; and the remainder of ES.

Based on the results of its annual impairment tests, HP determined that no impairment of goodwill existed as of August 1, 2014. However, future goodwill impairment tests could result in a charge to earnings. HP will continue to evaluate goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.

Goodwill impairments

There were no goodwill impairments in fiscal 2014 and 2013.

During fiscal 2012, HP determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the ES reporting unit. These indicators included the trading values of HP's stock at the time of the impairment test, coupled with market conditions and business trends within ES. The fair value of the ES reporting unit was based on the income approach. The decline in the fair value of the ES reporting unit resulted from lower projected revenue growth rates and profitability levels as well as an increase in the risk factor that was included in the discount rate used to calculate the discounted cash flows. The increase in the discount rate was due to the implied control premium resulting from trading values of HP stock at the time of the impairment test. The resulting adjustments to discount rates caused a significant reduction in the fair value for the ES reporting unit. Based on the step one and step two analyses, HP recorded an $8.0 billion goodwill impairment charge in fiscal 2012, and there was no remaining goodwill in the ES reporting unit as of October 31, 2012. Prior to completing the goodwill impairment test, HP tested the recoverability of the ES long-lived assets (other than goodwill) and concluded that such assets were not impaired.

Also during fiscal 2012, the Software segment included two reporting units, which were Autonomy and the legacy HP Software business. HP initiated its annual goodwill impairment analysis in the fourth quarter of fiscal 2012 and concluded that fair value was below carrying amount for the Autonomy reporting unit. The fair value of the Autonomy reporting unit was based on the income approach.

The decline in the estimated fair value of the Autonomy reporting unit resulted from lower projected revenue growth rates and profitability levels as well as an increase in the risk factor that was included in the discount rate used to calculate the discounted cash flows. The increase in the discount rate was due to the implied control premium that resulted from trading values of HP stock at the time of the impairment test. The lower projected operating results reflected changes in assumptions related to organic revenue growth rates, market trends, business mix, cost structure, expected deal synergies and other expectations about the anticipated short-term and long-term operating results of the Autonomy business. These assumptions incorporated HP's analysis of what it believes were accounting improprieties, incomplete disclosures and misrepresentations at Autonomy that occurred prior to the Autonomy acquisition with respect to Autonomy's pre-acquisition business and related operating results. In addition, as noted above, when estimating the fair value of a reporting unit HP may need to adjust discount rates and/or other assumptions in order to derive a reasonable implied control premium when comparing the sum of the fair values of HP's reporting units to HP's market capitalization. Due to the trading values of HP stock at the time of the impairment test, the resulting adjustments to the discount rate to arrive at an appropriate control premium caused a significant reduction in the fair value for the Autonomy reporting unit as well as the fair values for HP's other reporting units.

Prior to conducting step one of the goodwill impairment test for the Autonomy reporting unit, HP first evaluated the recoverability of the long-lived assets, including intangible assets. When indicators of impairment are present, HP tests long-lived assets (other than goodwill) for recoverability by comparing the carrying amount of an asset group to its undiscounted cash flows. HP considered the lower-than-expected revenue and profitability levels over a sustained period of time, the trading values of HP stock and downward revisions to management's short- and long-term forecasts for the Autonomy business to be indicators of impairment for the Autonomy long-lived assets. Based on the results of the recoverability test, HP determined that the carrying amount of the Autonomy asset group exceeded its undiscounted cash flows and was therefore not recoverable. HP then compared the fair value of the asset group to its carrying amount and determined the impairment loss. The impairment loss was allocated to the carrying values of the long-lived assets but not below their individual fair values. Based on the analysis, HP recorded an impairment charge of $3.1 billion on intangible assets, which resulted in a remaining carrying amount of approximately $0.8 billion as of October 31, 2012. The decline in the fair value of the Autonomy intangible assets was attributable to the same factors as discussed above for the fair value of the Autonomy reporting unit.

The decline in the fair value of the Autonomy reporting unit and Autonomy intangibles, as well as fair value changes for other assets and liabilities in the step two goodwill impairment test, resulted in an implied fair value of goodwill substantially below the carrying amount of the goodwill for the Autonomy reporting unit. As a result, HP recorded a goodwill impairment charge of $5.7 billion, which resulted in a $1.2 billion remaining carrying amount of Autonomy goodwill as of October 31, 2012. Both the goodwill impairment charge and the intangible assets impairment charge, totaling $8.8 billion, were included in the Impairment of goodwill and intangible assets line item in the Consolidated Statements of Earnings.

Subsequent to the Autonomy purchase price allocation period, which concluded in the first quarter of fiscal 2012, and in conjunction with HP's annual goodwill impairment testing, HP identified certain indicators of impairment. The indicators of impairment included lower-than-expected revenue and profitability levels over a sustained period of time, the trading values of HP stock and downward revisions to management's short- and long-term forecasts for the Autonomy business. HP revised its multi-year forecast for the Autonomy business, and the timing of this forecast revision coincided with the timing of HP's overall forecasting process for all reporting units, which is completed each year in the fourth fiscal quarter in conjunction with the annual goodwill impairment analysis. The change in assumptions used in the revised forecast and the fair value estimates utilized in the impairment testing of the Autonomy goodwill and long-lived assets incorporated insights gained from having owned the Autonomy business for the preceding year. The revised forecast reflected changes related to organic revenue growth rates, current market trends, business mix, cost structure, expected deal synergies and other expectations about the anticipated short- and long-term operating results of the Autonomy business, driven by HP's analysis regarding certain accounting improprieties, incomplete disclosures and misrepresentations at Autonomy that occurred prior to the Autonomy acquisition with respect to Autonomy's pre-acquisition business and related operating results. Accordingly, the change in fair values represented a change in accounting estimate that occurred outside the purchase price allocation period, resulting in the recorded impairment charge.

Based on the results of the annual impairment test for all other reporting units, HP concluded that no other goodwill impairment existed as of August 1, 2012, apart from the impairment charges discussed above.

Intangible Assets

HP's intangible assets are composed of:

	As of October 31, 2014										As of October 31, 2013
	Gross		Accumulated Amortization			Accumulated Impairment Loss			Net		Gross		Accumulated Amortization			Accumulated Impairment Loss			Net
	In millions
Customer contracts, customer lists and distribution agreements	$	5,289	$	(3,228	)	$	(856	)	$	1,205	$	5,321	$	(2,709	)	$	(856	)	$	1,756
Developed and core technology and patents		4,266		(1,301	)		(2,138	)		827		5,331		(1,966	)		(2,138	)		1,227
Trade name and trade marks		1,693		(261	)		(1,336	)		96		1,730		(211	)		(1,336	)		183
In-process research and development		—		—			—			—		3		—			—			3

Total intangible assets	$	11,248	$	(4,790	)	$	(4,330	)	$	2,128	$	12,385	$	(4,886	)	$	(4,330	)	$	3,169

For fiscal 2014, $855 million of intangible assets became fully amortized and have been eliminated from gross intangible assets and accumulated amortization. HP also eliminated gross intangible assets and accumulated amortization related to the sale of a portfolio of intellectual property ("IP") in the first quarter of fiscal 2014.

For fiscal 2013, the majority of the decrease in gross intangible assets was related to $1.7 billion of fully amortized intangible assets that were eliminated from both the gross and accumulated amounts.

In fiscal 2012, HP recorded total intangible asset impairment charges of $4.3 billion, of which $3.1 billion was related to the Autonomy reporting unit as described above. The remaining $1.2 billion was related to a change in the Compaq branding strategy. In May 2012, HP approved a change to its branding strategy for PCs, which has resulted in a more limited and focused use of the "Compaq" trade name acquired in fiscal 2002. In conjunction with the change in branding strategy, HP revised its assumption as to the useful life of that intangible asset, which resulted in a reclassification of the asset from an indefinite-lived intangible to a finite- lived intangible. These changes triggered an impairment review of the "Compaq" trade name intangible asset. In conducting an impairment review of an intangible asset, HP compares the fair value of the asset to its carrying amount. If the fair value of the asset is less than the carrying amount, the difference is recorded as an impairment loss. HP estimated the fair value of the "Compaq" trade name by calculating the present value of the royalties saved that would have been paid to a third party had HP not owned the trade name. Following the completion of that analysis, HP determined that the fair value of the trade name asset was less than the carrying amount due primarily to the change in the useful life assumption and a decrease in expected future revenues related to Compaq-branded products resulting from the more focused branding strategy. As a result, HP recorded an impairment charge of $1.2 billion in the third quarter of fiscal 2012, which was included in the Impairment of goodwill and intangible assets line item in the Consolidated Statements of Earnings.

The weighted-average useful lives of intangible assets are as follows:

	As of October 31, 2014
Finite-Lived Intangible Assets	Weighted-Average Useful Lives
	In years
Customer contracts, customer lists and distribution agreements		8
Developed and core technology and patents		8
Trade name and trade marks		7

As of October 31, 2014, estimated future amortization expense related to finite-lived intangible assets was as follows:

Fiscal year	In millions
2015	$	872
2016		653
2017		244
2018		147
2019		110
Thereafter		102

Total	$	2,128