ABB Annual Report 2012 PDF - ABB Group Annual Report 2012

Goodwill and other intangible assetsWe review goodwill for impairment annually as of October 1,or more frequently if events or circumstances indicate thecarrying value may not be recoverable. In 2012, as a result ofan accounting standard update, we changed our approachto determining whether goodwill is impaired. Consistentwith the update, we have elected to first perform a qualitativeassessment to determine whether it is more likely than notthat the fair value of a reporting unit is less than its carryingamount. Based on the results of this qualitative assessment,we would only perform a two-step quantitative goodwillimpairment test if we conclude that it is more likely than notthat the fair value of a reporting unit is less than its carryingamount.Our reporting units are the same as our business divisionsfor Power Products, Power Systems, Discrete Automationand Motion, and Low Voltage Products. For ProcessAutomation, we determined the reporting units to be one levelbelow the division, as the different products produced orservices provided by this division do not share sufficientlysimilar economic characteristics to permit testing of goodwillon a total division level.When performing the qualitative assessment, we firstdetermine, for each reporting unit, factors which would affectthe fair value of those reporting units including: (i) macroeconomicconditions related to the business, (ii) industry andmarket trends, and (iii) the overall future financial performanceand future opportunities in the markets in which thebusiness operates.We then consider how these factors would impact themost recent quantitative analysis of the reporting unit’sfair value. Key assumptions in determining the value of thereporting unit include the projected level of business operations,the weighted-average cost of capital, the incometax rate and the terminal growth rate.If, after performing the qualitative assessment, we concludethat events or circumstances have occurred whichwould indicate that it is more likely than not that the fair valueof the reporting unit is less than its carrying value, we wouldperform the two-step quantitative impairment test. In the firststep, we would calculate the fair value of the reporting unit(using an income approach whereby the fair value is calculatedbased on the present value of future cash flows applyinga discount rate that represents our weighted-average cost ofcapital) and compare it to its carrying value. Where the fairvalue of the reporting unit exceeds the carrying value of thenet assets assigned to that unit, goodwill is not impairedand no further testing is performed. However, if the carryingvalue of the net assets assigned to the reporting unit is equalto or exceeds the reporting unit’s fair value, we would performthe second step of the impairment test. In the secondstep, we determine the implied fair value of the reportingunit’s goodwill and compare it to the carrying value of the reportingunit’s goodwill. If the carrying value of a reportingunit’s goodwill were to exceed its implied fair value, then wewould record an impairment loss equal to the difference. Anygoodwill impairment losses would be recorded as a separateline item in our Consolidated Income Statements in continuingoperations, unless related to a discontinued operation, inwhich case the losses would be recorded in “Income fromdiscontinued operations, net of tax”.In 2012, we performed a qualitative assessment anddetermined that it was not more likely than not that the fairvalue for each of our reporting units was below the carryingvalue. As a result, we concluded that it was not necessary toperform the two-step quantitative impairment test. In 2011and 2010, prior to adopting the accounting standard updatedallowing us to perform a qualitative assessment, we performedthe first step of the two-step impairment test on allreporting units. As the fair values of all reporting units, inboth years, exceeded their carrying values, we determinedthat none of the reporting units was at “risk” of failing thegoodwill impairment test. Consequently, the second step ofthe impairment test was not performed and we concludedgoodwill was not impaired.We review intangible assets for recoverability wheneverevents or changes in circumstances indicate that the carryingamount may not be recoverable upon the occurrence ofcertain triggering events, such as a decision to divest a businessor projected losses of an entity. We record impairmentcharges in “Other income (expense), net”, in our ConsolidatedIncome Statements, unless they relate to a discontinuedoperation, in which case the charges are recorded in “Incomefrom discontinued operations, net of tax”.New accountingpronouncementsFor a description of accounting changes and recent accountingpronouncements, including the expected dates ofadoption and estimated effects, if any, on our ConsolidatedFinancial Statements, see “Note 2 Significant accountingpolicies” to our Consolidated Financial Statements.Acquisitionsand investmentsAcquisitionsDuring 2012, 2011 and 2010, ABB invested $3,643 million,$3,805 million and $1,275 million in 9, 10 and 9 new businesses,respectively. The amounts exclude changes in costand equity investments.The principal acquisition in 2012 was Thomas & Betts,which was acquired in May 2012. Thomas & Betts designs,manufactures and markets components used to manage theconnection, distribution, transmission and reliability of electricalpower in industrial, construction and utility applications.The complementary combination of Thomas & Betts’ electricalcomponents and ABB’s low-voltage protection, controland measurement products creates a broader low-voltageportfolio (in our Low Voltage Products division) that can bedistributed through Thomas & Betts’ network of more than6,000 distributor locations and wholesalers in North America,and through ABB’s well-established distribution channelsin Europe and Asia.52 Financial review | ABB Annual Report 2012