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Goodwill | 6 Months Ended
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Jun. 30, 2020
Goodwill | NOTE 6 – Goodwill: The changes in the carrying amount of goodwill for the period ended June 30, 2020 were as follows:
|  | North America |  |  | Europe |  |  | International Markets |  |  | Other |  |  | Total |
|  | (U.S. $ in millions) |
Balance as of December 31, 2019 (1) |  | $ | 11,091 |  |  | $ | 8,536 |  |  | $ | 2,532 |  |  | $ | 2,687 |  |  | $ | 24,846 |
Changes during the period: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Goodwill reclassified as assets held for sale |  |  | — |  |  |  | — |  |  |  | (11 | ) |  |  | — |  |  |  | (11 | )
Translation differences |  |  | (17 | ) |  |  | (33 | ) |  |  | (169 | ) |  |  | — |  |  |  | (219 | )
Balance as of June 30, 2020 (1) |  | $ | 11,074 |  |  | $ | 8,503 |  |  | $ | 2,352 |  |  | $ | 2,687 |  |  | $ | 24,616 |
(1) | Accumulated goodwill impairment as of June 30, 2020 and December 31, 2019 was approximately $21.0 billion.
Teva operates its business through three reporting segments: North America, Europe and International Markets. Each of these business segments is a reporting unit. Additional reporting units include Teva’s production and sale of APIs to third parties (“Teva API”) and an out-licensing platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. The Teva API and Medis reporting units are included under “Other” in the above table. See note 15 for additional segment information. Teva determines the fair value of its reporting units using the income approach. The income approach is a forward-looking approach for estimating fair value. Within the income approach, the method used is the discounted cash flow method. Teva starts with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then applies a discount rate to arrive at a net present value amount. Cash flow projections are based on Teva’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted average cost of capital (“WACC”), adjusted for the relevant risk associated with country-specific and business-specific characteristics. If any of these expectations were to vary materially from Teva’s assumptions, Teva may record an impairment of goodwill allocated to these reporting units in the future. First Quarter Developments During the first quarter of 2020, management assessed developments that occurred during the quarter, including expected effects of th e COVID-19 pandemic on its business, to determine if it was more likely than not that the fair value of any of its reporting units was below its carrying amount. As part of this assessment, management also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period. Based on this assessment, management concluded that it was not more likely than not that the fair value of any of the reporting units was below its carrying value as of March 31, 2020 and, therefore, no quantitative assessment was performed. Second Quarter Developments Pursuant to Company policy, the Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company changed its annual impairment assessment date from October 1 to June 30. The change was made to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process. The change in annual impairment testing date did not impact the financial statements, nor did it accelerate, avoid or trigger an impairment charge. The Company has determined that this change is preferable. During the second quarter of 2020, the Company completed its long-range planning (“LRP”) process. The LRP is part of Teva’s internal financial planning and budgeting processes and is discussed and reviewed by Teva’s management and its board of directors. In addition, Teva evaluated qualitative factors, including expected effects of the COVID-19 pandemic on its business. The impact of the COVID-19 pandemic on Teva’s projections has been evaluated and it is not expected to significantly alter the Company’s cash flows at this time. However, if circumstances were to change from Teva’s expectations about the duration or impact of the COVID-19 pandemic, one or more business units could be impacted, which may result in an impairment. During the second quarter of 2020, Teva conducted a quantitative analysis of all reporting units as part of its annual goodwill impairment test (pursuant to the change in the annual impairment assessment date as mentioned above) and utilized the assistance of an independent valuation expert. No goodwill impairment charge was recorded during the second quarter of 2020. Market Capitalization Teva analyzed the aggregated fair value of its reporting units compared to its market capitalization as part of its annual goodwill impairment test, in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis. Teva noted its market capitalization has been below management’s assessment of the aggregated fair value of the Company’s reporting units. However, as of June 30, 2020, the Company’s market capitalization plus a reasonable control premium exceeded its book value. So far, during 2020, the COVID-19 pandemic has negatively impacted the global economy and created significant volatility, uncertainty and disruption of financial markets. Although Teva experienced volatility in its share price resulting from the impact of the COVID-19 pandemic on equity markets and the global economy, its share price is relatively consistent with the share price prior to the COVID-19 pandemic outbreak. Management continues to believe the following underlying factors are driving the differences between the aggregated fair value of its reporting units and its market capitalization:
| • |  | Management believes a portion of the difference is due to sales projections of AJOVY and AUSTEDO in the International Markets reporting unit. Management continues to believe that the majority of analysts do not focus on this market in preparing their financial models and, as a result, have not attributed value to the launch potential in this reporting unit. Accordingly, management’s projections exceed those it believes are being used by analysts, particularly in International Markets. However, even if management were to conform to analyst expectations, the estimated fair value of the International Markets reporting unit would still exceed its carrying amount.
| • |  | Management believes an additional difference is due to sales projections of AUSTEDO in the North America reporting unit, resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management continues to believe that it has more accurate information based on its knowledge of the market and its growth and therefore no adjustment was incorporated to the fair value. However, even if management were to conform to analyst expectations, the estimated fair value of the North America reporting unit would still exceed its carrying amount.
| • |  | Management continues to believe that market concerns regarding the uncertainty related to the opioid and price fixing litigation risks are impacting its market capitalization. Management believes that these concerns led to an acute reaction, which resulted in a decline in Teva’s share price and continues to impact the Company’s share price during 2020. Management believes developments in the opioids case are expected to clarify the outlook with regards to the opioid litigation, when the proposed settlement framework is finalized. Based upon Teva’s current estimates of fair value, even if management was to adjust the fair value of the North America reporting unit for this uncertainty, the estimated fair value would still exceed its carrying amount. If the outcome of the litigations were to vary materially from the proposed settlement framework as explained in note 10, this may lead to a goodwill impairment charge.
While none of these factors individually would cause a goodwill impairment charge in the North America reporting unit, if management were to conform to the market’s expectations in the North America reporting unit in connection with both AUSTEDO projections and the volatility and uncertainty of certain litigation risks, the Company would record a goodwill impairment charge of $1.1 billion. Future impairment charges, if any, reflecting conditions at that time may be materially different. Sensitivity Analysis North America The estimated fair value exceeds its carrying amount for the North America reporting unit by 20%. The Company used a terminal growth rate of 1.61% and a discount rate of 10.31%. If Teva holds all other assumptions constant, a reduction in the terminal growth rate of 0.50% to 1.11%, or an increase in discount rate of 0.50% to 10.81%, would result in a reduction of the excess of fair value over carrying amount with respect to Teva’s North America reporting unit to 15% and 13%, respectively. Remaining reporting units The percentage difference between estimated fair value and estimated carrying value for the Europe, International Markets, Medis and Teva API reporting units is 34%, 43%, 147% and 30%, respectively. Management will continue to monitor business conditions, including any impact of the COVID-19 pandemic, and will consider future developments in Teva’s market capitalization when assessing whether a goodwill impairment charge is required in future periods.

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- Definition The entire disclosure for goodwill. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2144439 + Details
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