Transocean Ltd. (RIG) | Goodwill and Intangible Assets

Goodwill and Intangible Assets Accounting Policy

Goodwill and other indefinite-lived intangible assets

Transocean conducts impairment testing for goodwill and other indefinite-lived intangible assets annually as of October 1 and more frequently, on an interim basis, when an event occurs or circumstances change that may indicate a reduction in the fair value of a reporting unit or the indefinite-lived intangible asset is below its carrying value.

Transocean tests goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. Transocean has identified two reporting units for this purpose: (1) contract drilling services and (2) drilling management services. Transocean tests goodwill for impairment by comparing the carrying amount of the reporting unit, including goodwill, to the fair value of the reporting unit.

For contract drilling services reporting unit, Transocean estimates fair value using projected discounted cash flows, publicly traded company multiples and acquisition multiples. To develop the projected cash flows associated with contract drilling services reporting unit, which are based on estimated future dayrates and utilization, Transocean considers key factors that include assumptions regarding future commodity prices, credit market conditions and the effect these factors may have on contract drilling operations and the capital expenditure budgets of customers. Transocean discounts the projected cash flows using a long-term, risk-adjusted weighted-average cost of capital, which is based on estimate of the investment returns that market participants would require for each of reporting units. Transocean derives publicly traded company multiples for companies with operations similar to reporting units using observable information related to shares traded on stock exchanges and, when available, observable information related to recent acquisitions. If the reporting unit's carrying amount exceeds its fair value, Transocean considers goodwill impaired and perform a second step to measure the amount of the impairment loss, if any. As a result of annual impairment testing on October 1, 2011, Transocean concluded that goodwill was impaired due to a decline in projected cash flows and market valuations for this reporting unit, and Transocean recognized an estimated loss on impairment of goodwill in the amount of $5.2 billion ($16.15 per diluted share from continuing operations), which had no tax effect.

As a result of annual impairment testing in each of the years ended December 31, 2010 and 2009, Transocean concluded that goodwill was not impaired.

For trade name intangible asset, which Transocean has identified as indefinite-lived, Transocean estimates fair value using the relief from royalty method, which applies the income approach. As a result of impairment testing in the years ended December 31, 2011 and 2010, Transocean concluded that the trade name intangible asset for drilling management services reporting unit was not impaired. As a result of impairment testing in the year ended December 31, 2009, Transocean concluded that the trade name intangible asset for drilling management services reporting unit was impaired, and Transocean recognized a loss on impairment in the amount of $6 million ($0.02 per diluted share from continuing operations), which had no tax effect.

Source: Transocean Ltd., Annual Report

Goodwill and Intangible Assets Disclosure

Transocean Ltd., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in millions

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
Drilling contract intangible assets	191	191	191	191	191
Customer relationships	148	148	83	132	148
Contract backlog	–	–	–	16	16
Definite-lived intangible assets, gross carrying amount	339	339	274	339	355
Accumulated amortization	(285)	(275)	(187)	(150)	(20)
Definite-lived intangible assets, net carrying amount	54	64	87	189	335
Trade name	39	39	39	45	76
Indefinite-lived intangible assets	39	39	39	45	76
Other intangible assets	93	103	126	234	411
Goodwill	3,205	8,132	8,134	8,128	8,219
Goodwill and other intangible assets	3,298	8,235	8,260	8,362	8,630

Source: Based on data from Transocean Ltd. Annual Reports

Item	Description	The company
Other intangible assets	Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges.	Transocean Ltd.'s other intangible assets declined from 2009 to 2010 and from 2010 to 2011.
Goodwill	Carrying amount as of the balance sheet date, which is the cumulative amount paid and (if applicable) the fair value of any noncontrolling interest in the acquiree, adjusted for any amortization recognized prior to the adoption of any changes in generally accepted accounting principles (as applicable) and for any impairment charges, in excess of the fair value of net assets acquired in one or more business combination transactions.	Transocean Ltd.'s goodwill declined from 2009 to 2010 and from 2010 to 2011.
Goodwill and other intangible assets	Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges.	Transocean Ltd.'s goodwill and other intangible assets declined from 2009 to 2010 and from 2010 to 2011.

Analyst Adjustments: Removal of Goodwill

Transocean Ltd., adjustments to financial data

USD $ in millions

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
Adjustment to Total Assets
Total assets (as reported)	35,088	36,811	36,436	35,171	34,364
Less: Goodwill	3,205	8,132	8,134	8,128	8,219
Total assets (adjusted)	31,883	28,679	28,302	27,043	26,145
Adjustment to Controlling Interest Shareholders’ Equity
Controlling interest shareholders’ equity (as reported)	15,701	21,383	20,552	16,524	12,566
Less: Goodwill	3,205	8,132	8,134	8,128	8,219
Controlling interest shareholders’ equity (adjusted)	12,496	13,251	12,418	8,396	4,347
Adjustment to Net Income (loss) Attributable To Controlling Interest
Net income (loss) attributable to controlling interest (as reported)	(5,725)	961	3,181	4,202	3,131
Add: Goodwill impairment	5,200	2	–	176	–
Net income (loss) attributable to controlling interest (adjusted)	(525)	963	3,181	4,378	3,131

Adjusted Ratios: Removal of Goodwill (Summary)

Transocean Ltd., adjusted ratios

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
Net Profit Margin
Reported net profit margin	-62.62%	10.04%	27.53%	33.15%	49.10%
Adjusted net profit margin	-5.74%	10.06%	27.53%	34.54%	49.10%
Total Asset Turnover
Reported total asset turnover	0.26	0.26	0.32	0.36	0.19
Adjusted total asset turnover	0.29	0.33	0.41	0.47	0.24
Financial Leverage
Reported financial leverage	2.23	1.72	1.77	2.13	2.73
Adjusted financial leverage	2.55	2.16	2.28	3.22	6.01
Return on Equity (ROE)
Reported ROE	-36.46%	4.49%	15.48%	25.43%	24.92%
Adjusted ROE	-4.20%	7.27%	25.62%	52.14%	72.03%
Return on Assets (ROA)
Reported ROA	-16.32%	2.61%	8.73%	11.95%	9.11%
Adjusted ROA	-1.65%	3.36%	11.24%	16.19%	11.98%

Ratio	Description	The company
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by revenue.	Transocean Ltd.'s adjusted net profit margin deteriorated from 2009 to 2010 and from 2010 to 2011.
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Transocean Ltd.'s adjusted total asset turnover deteriorated from 2009 to 2010 and from 2010 to 2011.
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Transocean Ltd.'s adjusted financial leverage declined from 2009 to 2010 but then increased from 2010 to 2011 exceeding 2009 level.
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.	Transocean Ltd.'s adjusted ROE deteriorated from 2009 to 2010 and from 2010 to 2011.
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Transocean Ltd.'s adjusted ROA deteriorated from 2009 to 2010 and from 2010 to 2011.

Adjusted Net Profit Margin

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
As Reported
Net income (loss) attributable to controlling interest (USD $ in millions)	(5,725)	961	3,181	4,202	3,131
Operating revenues (USD $ in millions)	9,142	9,576	11,556	12,674	6,377

Net profit margin¹	-62.62%	10.04%	27.53%	33.15%	49.10%
Adjusted for Goodwill
Adjusted net income (loss) attributable to controlling interest (USD $ in millions)	(525)	963	3,181	4,378	3,131
Operating revenues (USD $ in millions)	9,142	9,576	11,556	12,674	6,377

Adjusted net profit margin²	-5.74%	10.06%	27.53%	34.54%	49.10%

2011 Calculations

¹ Net profit margin = 100 × Net income (loss) attributable to controlling interest ÷ Operating revenues
= 100 × -5,725 ÷ 9,142 = -62.62%

² Adjusted net profit margin = 100 × Adjusted net income (loss) attributable to controlling interest ÷ Operating revenues
= 100 × -525 ÷ 9,142 = -5.74%

Ratio	Description	The company
Adjusted net profit margin	An indicator of profitability, calculated as adjusted net income divided by revenue.	Transocean Ltd.'s adjusted net profit margin deteriorated from 2009 to 2010 and from 2010 to 2011.

Adjusted Total Asset Turnover

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
As Reported
Operating revenues (USD $ in millions)	9,142	9,576	11,556	12,674	6,377
Total assets (USD $ in millions)	35,088	36,811	36,436	35,171	34,364

Total asset turnover¹	0.26	0.26	0.32	0.36	0.19
Adjusted for Goodwill
Operating revenues (USD $ in millions)	9,142	9,576	11,556	12,674	6,377
Adjusted total assets (USD $ in millions)	31,883	28,679	28,302	27,043	26,145

Adjusted total asset turnover²	0.29	0.33	0.41	0.47	0.24

2011 Calculations

¹ Total asset turnover = Operating revenues ÷ Total assets
= 9,142 ÷ 35,088 = 0.26

² Adjusted total asset turnover = Operating revenues ÷ Adjusted total assets
= 9,142 ÷ 31,883 = 0.29

Ratio	Description	The company
Adjusted total asset turnover	An activity ratio calculated as total revenue divided by adjusted total assets.	Transocean Ltd.'s adjusted total asset turnover deteriorated from 2009 to 2010 and from 2010 to 2011.

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)	35,088	36,811	36,436	35,171	34,364
Controlling interest shareholders’ equity (USD $ in millions)	15,701	21,383	20,552	16,524	12,566

Financial leverage¹	2.23	1.72	1.77	2.13	2.73
Adjusted for Goodwill
Adjusted total assets (USD $ in millions)	31,883	28,679	28,302	27,043	26,145
Adjusted controlling interest shareholders’ equity (USD $ in millions)	12,496	13,251	12,418	8,396	4,347

Adjusted financial leverage²	2.55	2.16	2.28	3.22	6.01

2011 Calculations

¹ Financial leverage = Total assets ÷ Controlling interest shareholders’ equity
= 35,088 ÷ 15,701 = 2.23

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted controlling interest shareholders’ equity
= 31,883 ÷ 12,496 = 2.55

Ratio	Description	The company
Adjusted financial leverage	A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.	Transocean Ltd.'s adjusted financial leverage declined from 2009 to 2010 but then increased from 2010 to 2011 exceeding 2009 level.

Adjusted Return On Equity (ROE)

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
As Reported
Net income (loss) attributable to controlling interest (USD $ in millions)	(5,725)	961	3,181	4,202	3,131
Controlling interest shareholders’ equity (USD $ in millions)	15,701	21,383	20,552	16,524	12,566

ROE¹	-36.46%	4.49%	15.48%	25.43%	24.92%
Adjusted for Goodwill
Adjusted net income (loss) attributable to controlling interest (USD $ in millions)	(525)	963	3,181	4,378	3,131
Adjusted controlling interest shareholders’ equity (USD $ in millions)	12,496	13,251	12,418	8,396	4,347

Adjusted ROE²	-4.20%	7.27%	25.62%	52.14%	72.03%

2011 Calculations

¹ ROE = 100 × Net income (loss) attributable to controlling interest ÷ Controlling interest shareholders’ equity
= 100 × -5,725 ÷ 15,701 = -36.46%

² Adjusted ROE = 100 × Adjusted net income (loss) attributable to controlling interest ÷ Adjusted controlling interest shareholders’ equity
= 100 × -525 ÷ 12,496 = -4%

Ratio	Description	The company
Adjusted ROE	A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity.	Transocean Ltd.'s adjusted ROE deteriorated from 2009 to 2010 and from 2010 to 2011.

Adjusted Return On Assets (ROA)

	Dec 31, 2011	Dec 31, 2010	Dec 31, 2009	Dec 31, 2008	Dec 31, 2007
As Reported
Net income (loss) attributable to controlling interest (USD $ in millions)	(5,725)	961	3,181	4,202	3,131
Total assets (USD $ in millions)	35,088	36,811	36,436	35,171	34,364

ROA¹	-16.32%	2.61%	8.73%	11.95%	9.11%
Adjusted for Goodwill
Adjusted net income (loss) attributable to controlling interest (USD $ in millions)	(525)	963	3,181	4,378	3,131
Adjusted total assets (USD $ in millions)	31,883	28,679	28,302	27,043	26,145

Adjusted ROA²	-1.65%	3.36%	11.24%	16.19%	11.98%

2011 Calculations

¹ ROA = 100 × Net income (loss) attributable to controlling interest ÷ Total assets
= 100 × -5,725 ÷ 35,088 = -16.32%

² Adjusted ROA = 100 × Adjusted net income (loss) attributable to controlling interest ÷ Adjusted total assets
= 100 × -525 ÷ 31,883 = -1.65%

Ratio	Description	The company
Adjusted ROA	A profitability ratio calculated as adjusted net income divided by adjusted total assets.	Transocean Ltd.'s adjusted ROA deteriorated from 2009 to 2010 and from 2010 to 2011.