Novartis AG (NVS) | Analysis of Goodwill and Intangible Assets

Goodwill and Intangible Assets Accounting Policy

Goodwill

The excess of the consideration transferred to obtain a controlling interest and the fair value of any previous non-controlling interest in the acquiree, over the fair value of Novartis'es share of net identifiable assets in a business combination, is recorded as goodwill in the balance sheet and is denominated in the functional currency of the related acquisition. Goodwill is allocated to an appropriate cash-generating unit which is defined as the smallest group of assets that generates independent cash inflows that support the goodwill. All goodwill is tested for impairment at least annually. In addition, goodwill is evaluated for impairment at each reporting date for each cash-generating unit with any resulting goodwill impairment charge recorded under "Other Expense" in the consolidated income statement.

Goodwill is tested for possible impairment annually and whenever events or changes in circumstances indicate the value may not be fully recoverable. If the initial accounting for goodwill in the reporting period is only provisional, it is not tested for impairment unless an impairment indicator exists, and not included in the calculation of the net book values at risk from changes in the amount of discounted cash flows. An impairment is recognized when the consolidated balance sheet carrying amount is higher than the greater of "fair value less costs to sell" and "value in use."

Other Intangible Assets

All identifiable intangible assets acquired in a business combination are recognized at their fair value. Furthermore, all acquired Research & Development assets, including upfront and milestone payments on licensed or acquired compounds, which are deemed to enhance the intellectual property of Novartis, are capitalized at cost as intangible assets, when it is probable that future economic benefits will arise, even though uncertainties exist as to whether the R&D projects will be ultimately successful in producing a commercial product.

All Novartis intangible assets are allocated to cash-generating units. IPR&D and the Alcon brand name are the only classes of separately identified intangible assets that are not amortized. Both are tested for impairment on an annual basis or when facts and circumstances warrant an impairment test. Any impairment charge is recorded in the consolidated income statement under "Research & Development" for IPR&D and under "Other Expense" for the Alcon brand name. Once a project included in IPR&D has been successfully developed and is available for use, it is amortized over its useful life in the consolidated income statement under "Cost of Goods Sold," where any related impairment charges are also recorded. The Alcon brand name is considered to have an indefinite life as Alcon has a history of strong revenue and cash flow performance, and Novartis has the intent and ability to support the brand with marketplace spending for the foreseeable future.

Internally developed computer software is capitalized and once available for use amortized over its estimated useful life.

All other intangible assets are amortized over their estimated useful lives once they are available for use and tested for impairment whenever facts and circumstances indicate that their carrying value may not be recoverable. The useful lives assigned to acquired intangible assets are based on the period over which they are expected to generate economic benefits, commencing in the year in which they first generate sales or are used in development. Acquired intangible assets are amortized on a straight-line basis over the following periods:

Amortization of trademarks, currently marketed products and marketing know-how is charged in the consolidated income statement to "Cost of Goods Sold" over their useful lives. Technology, which represents identified and separable acquired know-how used in the research, development and production process, is amortized in the consolidated income statement under "Cost of Goods Sold" or "Research & Development." Any impairment charges are recorded in the consolidated income statement in the same functional cost lines as the related amortization charges.

Source: Novartis AG, Annual Report

Goodwill and Intangible Assets Disclosure

Novartis AG, Statement of Financial Position, Goodwill and Intangible Assets

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	Acquired research & development
	Alcon brand name
	Technologies
	Currently marketed products
	Marketing know-how
	Other intangible assets
	Intangible assets other than goodwill, cost
	Accumulated amortization
	Intangible assets other than goodwill, net book value
	Goodwill
	Intangible asset and goodwill, net book value

Source: Based on data from Novartis AG Annual Reports

Analyst Adjustments: Removal of Goodwill

Novartis AG, adjustments to financial data

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	Adjustment to Total Assets
	Total assets (as reported)
	Less: Goodwill
	Total assets (adjusted)
	Adjustment to Issued Share Capital And Reserves Attributable To Novartis AG Shareholders
	Issued share capital and reserves attributable to Novartis AG shareholders (as reported)
	Less: Goodwill
	Issued share capital and reserves attributable to Novartis AG shareholders (adjusted)
	Adjustment to Net Income Attributable To Shareholders Of Novartis AG
	Net income attributable to shareholders of Novartis AG (as reported)
	Add: Goodwill impairment charge
	Net income attributable to shareholders of Novartis AG (adjusted)

Adjusted Ratios: Removal of Goodwill (Summary)

Novartis AG, adjusted ratios

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	Net Profit Margin
	Reported net profit margin	%	%	%	%	%
	Adjusted net profit margin	%	%	%	%	%
	Total Asset Turnover
	Reported total asset turnover
	Adjusted total asset turnover
	Financial Leverage
	Reported financial leverage
	Adjusted financial leverage
	Return on Equity (ROE)
	Reported ROE	%	%	%	%	%
	Adjusted ROE	%	%	%	%	%
	Return on Assets (ROA)
	Reported ROA	%	%	%	%	%
	Adjusted ROA	%	%	%	%	%

Adjusted Net Profit Margin

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	As Reported
	Net income attributable to shareholders of Novartis AG (USD $ in millions)
	Net sales (USD $ in millions)
	Net profit margin1	%	%	%	%	%
	Adjusted for Goodwill
	Adjusted net income attributable to shareholders of Novartis AG (USD $ in millions)
	Net sales (USD $ in millions)
	Adjusted net profit margin2	%	%	%	%	%

2011 Calculations

Adjusted Total Asset Turnover

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	As Reported
	Net sales (USD $ in millions)
	Total assets (USD $ in millions)
	Total asset turnover1
	Adjusted for Goodwill
	Net sales (USD $ in millions)
	Adjusted total assets (USD $ in millions)
	Adjusted total asset turnover2

2011 Calculations

Adjusted Financial Leverage

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	As Reported
	Total assets (USD $ in millions)
	Issued share capital and reserves attributable to Novartis AG shareholders (USD $ in millions)
	Financial leverage1
	Adjusted for Goodwill
	Adjusted total assets (USD $ in millions)
	Adjusted issued share capital and reserves attributable to Novartis AG shareholders (USD $ in millions)
	Adjusted financial leverage2

2011 Calculations

Adjusted Return On Equity (ROE)

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	As Reported
	Net income attributable to shareholders of Novartis AG (USD $ in millions)
	Issued share capital and reserves attributable to Novartis AG shareholders (USD $ in millions)
	ROE1	%	%	%	%	%
	Adjusted for Goodwill
	Adjusted net income attributable to shareholders of Novartis AG (USD $ in millions)
	Adjusted issued share capital and reserves attributable to Novartis AG shareholders (USD $ in millions)
	Adjusted ROE2	%	%	%	%	%

2011 Calculations

Adjusted Return On Assets (ROA)

		Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
	As Reported
	Net income attributable to shareholders of Novartis AG (USD $ in millions)
	Total assets (USD $ in millions)
	ROA1	%	%	%	%	%
	Adjusted for Goodwill
	Adjusted net income attributable to shareholders of Novartis AG (USD $ in millions)
	Adjusted total assets (USD $ in millions)
	Adjusted ROA2	%	%	%	%	%

2011 Calculations