8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2016 are as follows (in millions):



Balance as of December 31, 2015	$	8,965
Goodwill acquired as part of acquisitions during current year		70
Goodwill allocated to QHC in the spin-off		(709)
Impairment of goodwill		(1,400)
Balance as of June 30, 2016	$	6,926

Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments meet the criteria to be classified as reporting units. During the three months ended June 30, 2016, the Company allocated approximately $709 million of goodwill to the spin-off of QHC, including approximately $33 million of goodwill related to the former management services reporting unit and approximately $676 million of goodwill allocated from the hospital operations reporting unit based on a relative fair value calculation of the hospitals that were included in the QHC distribution. At June 30, 2016, after giving effect to the disposition of QHC and the $1.4 billion impairment charge discussed below, the hospital operations reporting unit and the home care agency operations reporting unit had approximately $6.9 billion and $47 million, respectively, of goodwill.

Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill utilizing a hypothetical purchase price allocation with the carrying value of the reporting unit’s goodwill. The Company performed its last annual goodwill evaluation as of September 30, 2015. No impairment was indicated by this evaluation. The next annual goodwill evaluation will be performed as of September 30, 2016.

The Company estimates the fair value of the related reporting units using both a discounted cash flow model as well as a market multiple model. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s estimate of a market participant’s weighted-average cost of capital. These models are both based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions.

During the three months ended June 30, 2016, in connection with the preparation of the Company’s financial statements included in this Quarterly Report on Form 10-Q, the Company identified certain indicators of impairment requiring an interim goodwill impairment evaluation. Those indicators were primarily the decline in the Company’s market capitalization and fair value of long-term debt during the three months ended June 30, 2016, as well as a decrease in the estimated future earnings of the Company compared to the Company’s most recent annual evaluation. The Company performed a calculation of fair value in step one of the impairment test at June 30, 2016, which indicated that the carrying value of its hospital operations reporting unit exceeded its fair value. An initial step two calculation has been performed to determine the implied value of goodwill in a hypothetical purchase price allocation. The Company recorded a non-cash impairment charge of $1.4 billion to goodwill at June 30, 2016 based on its current best estimate of fair value and resulting implied goodwill. As allowed by generally accepted accounting principles, this amount represents an estimate of the implied goodwill in the step two evaluation until that process can be finalized, which the Company expects to complete during the third quarter of 2016. Any increases or decreases in the fair value and resulting implied value of goodwill will be recorded when the evaluation is complete, and such changes could be material. Factors that could impact the final determination of fair value include a further decline in market capitalization, changes in the estimated fair values of the individual hospital assets and liabilities, or changes in projected future earnings and net cash flows.

In addition, as discussed in Note 1, in conjunction with the Company’s goodwill impairment analysis as set forth above, the Company recorded an impairment charge of approximately $239 million related to the write-down of long-lived assets to their estimated fair value for certain underperforming hospitals and certain of the hospitals that the Company is currently marketing for sale. These impairment charges for goodwill and long-lived assets do not have an impact on the calculation of the Company’s financial covenants under the Company’s Credit Facility.

The determination of fair value of the Company’s hospital operations reporting unit represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

Intangible Assets

No intangible assets other than goodwill were acquired during the six months ended June 30, 2016. The gross carrying amount of the Company’s other intangible assets subject to amortization was $36 million at June 30, 2016 and $82 million at December 31, 2015 and the net carrying amount was $11 million at June 30, 2016 and $31 million at December 31, 2015. The carrying amount of the Company’s other intangible assets not subject to amortization was $106 million at June 30, 2016 and $121 million at December 31, 2015, respectively. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, or non-compete agreements entered into in connection with prior acquisitions.

The weighted-average remaining amortization period for the intangible assets subject to amortization is approximately one year. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was $3 million and $4 million during the three months ended June 30, 2016 and 2015, respectively, and $7 million during each of the six-month periods ended June 30, 2016 and 2015. Amortization expense on intangible assets is estimated to be $6 million for the remainder of 2016, $3 million in 2017 and $2 million in 2018. No amortization expense on intangible assets is estimated thereafter.

The gross carrying amount of capitalized software for internal use was approximately $1.4 billion and $1.5 billion at June 30, 2016 and December 31, 2015, respectively, and the net carrying amount considering accumulated amortization was approximately $643 million at June 30, 2016 and $771 million at December 31, 2015. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, which is generally eight to ten years. There is no expected residual value for capitalized internal-use software. At June 30, 2016, there was approximately $44 million of capitalized costs for internal-use software that is currently in the development stage and will begin amortization once the software project is complete and ready for its intended use. Amortization expense on capitalized internal-use software was $50 million and $53 million during the three months ended June 30, 2016 and 2015, respectively, and $105 million and $106 million during the six months ended June 30, 2016 and 2015, respectively. Amortization expense on capitalized internal-use software is estimated to be $91 million for the remainder of 2016, $176 million in 2017, $113 million in 2018, $73 million in 2019, $60 million in 2020, $50 million in 2021 and $80 million thereafter.