Question

In 2018, CVS Health corporation reported a $6.1 billion charge for the impairment of goodwill its reporting unit (segment)in its 10-K annual report. Referring to CVS Health 's 2018 financial statement and any other information from the media , address the following : 1-CVS 's segments serve as its reporting units for assessing goodwill for potential impairments. Which segment suffered a 2018 impairment? Describe the revenue model for this segment. 2. What were the underlying business reasons that required CVS health to record a goodwill impairment in 2018? 3-How did CVS health reflect he 2018 goodwill impairment in its income statement and cash flow statement ? 4-Describe in your won words the goodwill impairment testing steps performed by CVS Health in 2018 and the consequent loss measurement .

Answer 1

1.

From CVS Health’s 2018 10-K (page 53)…

CVS Health’s Retail/LTC (long-term care) segment incurred a $6.1 billion goodwill impairment loss across the second and fourth quarters of 2018.

The business model for this segment includes

• Prescription drug and general merchandise sales
• Health care services through its MinuteClinic health care clinics
• Long-term care (LTC) operations that distribute prescriptions drugs and provide other services to chronic care facilities and other care settings

2.

According to the CVS 2018 10-K (page 29)

…during 2018, the LTC reporting unit continued to experience industry wide challenges that have impacted management’s ability to grow the business at the rate that was originally estimated when the Company acquired Omnicare and when the 2017 annual goodwill impairment test was performed. These challenges include lower client retention rates, lower occupancy rates in skilled nursing facilities, the deteriorating financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018, and continued facility reimbursement pressures. In June 2018, LTC management submitted its initial budget for 2019 and updated the 2018 annual forecast which showed a projected deterioration in the financial results for the remainder of 2018 and in 2019, which also caused management to update its long-term forecast beyond 2019. Based on these updated projections, management determined that there were indicators that the LTC reporting unit’s goodwill may be impaired and, accordingly, management performed an interim goodwill impairment test as of June 30, 2018.

The results of that interim impairment test showed that the fair value of the LTC reporting unit was lower than the carrying value, resulting in a $3.9 billion pre-tax goodwill impairment charge in the second quarter of 2018.

The fair value of the LTC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. In addition to the lower financial projections, higher risk-free interest rates and lower market multiples of peer group companies contributed to the amount of the second quarter 2018 goodwill impairment charge.

During the fourth quarter of 2018, the LTC reporting unit missed its forecast primarily due to operational issues and customer liquidity issues, including one significant customer bankruptcy. Additionally, LTC management submitted an updated final budget for 2019 which showed significant additional deterioration in the projected financial results for 2019 compared to the analyses performed in the second and third quarters of 2018 primarily due to continued industry and operational challenges, which also caused management to make further updates to its long-term forecast beyond 2019. The updated projections continue to reflect industry wide challenges including lower occupancy rates in skilled nursing facilities, the significant deterioration in the financial health of numerous skilled nursing facility customers and continued facility reimbursement pressures. Based on these updated projections, management determined that there were indicators that the LTC reporting unit’s goodwill may be impaired and, accordingly, an interim goodwill impairment test was performed during the fourth quarter of 2018.

The results of that impairment test showed that the fair value of the LTC reporting unit was lower than the carrying value, resulting in an additional $2.2 billion goodwill impairment charge in the fourth quarter of 2018.

3.

• Income Statement: Operating expense
• Cash Flows Statement: Adjustment to reconcile net income to cash flow from operation in its supplemental reconciliation schedule. CVS employs the direct format for its Cash Flows Statement.

4.

CVS compared the carrying amount of the Retail/LTC reporting unit to its fair value. Because the carrying amount exceeded the fair value, a goodwill impairment loss was recognized for the difference in both the second and fourth quarters of 2018