8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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



Balance as of December 31, 2015	$	8,965
Goodwill acquired as part of acquisitions during current year		71
Goodwill allocated to QHC in the spin-off		(709)
Goodwill allocated to hospital disposal group held for sale		(31)
Impairment of goodwill		(1,395)
Balance as of September 30, 2016	$	6,901

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 September 30, 2016, after giving effect to the disposition of QHC and the estimated $1.395 billion impairment charge incurred during the three months ended June 30, 2016, as adjusted during the three months ended September 30, 2016, as 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 during the fourth quarter of 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, 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 was performed to determine the implied value of goodwill in a hypothetical purchase price allocation. The Company recorded an estimated non-cash impairment charge of $1.4 billion to goodwill at June 30, 2016 based on its best estimate at that time of fair value and resulting implied goodwill. As allowed by generally accepted accounting principles, this amount represented an estimate of the implied goodwill in the step two evaluation until that process could be finalized. The Company initiated this step two evaluation process during the third quarter of 2016, and such process is subject to ongoing review as noted below. Based on the updated step two analysis performed during the three months ended September 30, 2016, the Company adjusted the initial goodwill impairment estimate downward in the amount of $5 million, resulting in a total goodwill impairment charge of $1.395 billion. The decrease in the goodwill impairment from the original estimate was primarily due to lower estimated fair values of the individual hospital property and equipment assets as compared to the assumptions used in the June 30, 2016 estimate, resulting in a higher implied goodwill amount when applied to a hypothetical purchase price allocation as required in the step two analysis. The Company is in the process of reviewing the updated valuation information obtained as part of the detailed step two analysis and changes in the calculation of implied goodwill from the step two analysis could result from this review. Changes to the Company’s goodwill impairment charge as a result of this ongoing review could be material.

In addition, as discussed in Note 1, in conjunction with the Company’s goodwill impairment analysis as set forth above during the three months ended June 30, 2016, 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. During the three months ended September 30, 2016, the Company utilized the updated fair value information obtained as part of the step two analysis and recorded an additional impairment charge on its other long-lived assets of approximately $13 million.

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.

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.

Intangible Assets

Approximately $10 million of intangible assets other than goodwill were acquired during the nine months ended September 30, 2016, primarily related to the preliminary fair value of the tradename intangible asset associated with the La Porte and Starke acquisition. The gross carrying amount of the Company’s other intangible assets subject to amortization was $34 million at September 30, 2016 and $82 million at December 31, 2015 and the net carrying amount was $8 million at September 30, 2016 and $31 million at December 31, 2015. The carrying amount of the Company’s other intangible assets not subject to amortization was $111 million at September 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 September 30, 2016 and 2015, respectively, and $10 million and $7 million during the nine months ended September 30, 2016 and 2015, respectively. Amortization expense on intangible assets is estimated to be $3 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 September 30, 2016 and December 31, 2015, respectively, and the net carrying amount considering accumulated amortization was approximately $629 million and $771 million at September 30, 2016 and December 31, 2015, respectively. 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 September 30, 2016, there was approximately $58 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 $48 million and $49 million during the three months ended September 30, 2016 and 2015, respectively, and $153 million and $155 million during the nine months ended September 30, 2016 and 2015, respectively. Amortization expense on capitalized internal-use software is estimated to be $46 million for the remainder of 2016, $186 million in 2017, $122 million in 2018, $80 million in 2019, $65 million in 2020, $52 million in 2021 and $78 million thereafter.