Note 6—Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized.

In accordance with FASB guidance, we test goodwill to determine whether an impairment has occurred at least annually (as of June 30) and on an interim basis if it is more likely than not that a reporting unit’s fair value is less than its carrying value. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. A reporting unit is an operating segment or one level below an operating segment for which discrete financial information is available and regularly reviewed by segment management. Our reporting units are our operating segments. FASB guidance requires a two-step, quantitative approach to testing goodwill for impairment; however, we may first assess certain qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. We did not elect to apply this qualitative assessment during our 2015 annual goodwill impairment test, but proceeded directly to the two-step, quantitative test. In Step 1, we compare the fair value of the reporting unit with the respective book values, including goodwill, by using an income approach based on a discounted cash flow analysis. This approach requires us to make long-term forecasts of future revenues, expenses and other expenditures. Those forecasts require the use of various assumptions and estimates, the most significant of which are net revenues (total revenues less purchases and related costs), operating expenses, general and administrative expenses and the weighted average cost of capital. Fair value of the reporting units is determined using significant unobservable inputs, or Level 3 inputs in the fair value hierarchy. When the fair value is greater than book value, then the reporting unit’s goodwill is not considered impaired. If the book value is greater than fair value, then we proceed to Step 2. In Step 2, we compare the implied fair value of the reporting unit’s goodwill to the book value. A goodwill impairment loss is recognized if the carrying amount exceeds its fair value.

Through Step 1 of our annual testing of goodwill for potential impairment, which also includes a sensitivity analysis regarding the excess of our reporting unit’s fair value over book value, we determined that the fair value of each reporting unit was substantially greater than its respective book value; therefore, goodwill was not considered impaired. We did not recognize any material impairments of goodwill during the last three years.

As of December 31, 2015, as a result of industry conditions, we considered qualitative factors to determine whether a triggering event had occurred, which would require that a Step 1 impairment test be performed as of the end of the year. A triggering event is a determination that it is more likely than not that the fair value of any reporting unit was less than its carrying value. Based on our assessment, we concluded that a triggering event had not occurred as of December 31, 2015. However, significant negative variances in the assumptions and estimates utilized in our forecasts, such as a continued decline in petroleum commodity prices or a sustained multi-year low petroleum commodity price environment that results in lower volumes and cash flows or further increases in our weighted average cost of capital assumption, could result in reporting unit carrying values in excess of fair values.

Goodwill by segment and changes in goodwill is reflected in the following table (in millions):

	Transportation			Facilities			Supply and Logistics			Total
Balance at December 31, 2013	$	878		$	1,162		$	463		$	2,503

Acquisitions	—			1			—			1
Foreign currency translation adjustments	(24		)	(11		)	(4		)	(39		)

Balance at December 31, 2014	$	854		$	1,152		$	459		$	2,465

Acquisitions (1)	3			8			—			11
Foreign currency translation adjustments	(42		)	(19		)	(10		)	(71		)
Other	—			(54		)	54			—

Balance at December 31, 2015	$	815		$	1,087		$	503		$	2,405

(1)

Goodwill is recorded at the acquisition date based on a preliminary fair value determination. This preliminary goodwill balance may be adjusted when the fair value determination is finalized.