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Adobe Inc. (ADBE)
Analysis of Goodwill and Intangible Assets
Advanced level
- Accounting Policy on Goodwill and Intangible Assets
- Goodwill and Intangible Asset Disclosure
- Adjustments to Financial Statements: Removal of Goodwill
- Adjusted Financial Ratios: Removal of Goodwill (Summary)
- Adjusted Total Asset Turnover
- Adjusted Financial Leverage
- Adjusted Return on Equity (ROE)
- Adjusted Return on Assets (ROA)
Accounting Policy on Goodwill and Intangible Assets
Goodwill is assigned to one or more reporting segments on the date of acquisition. Adobe reviews the goodwill for impairment annually during the second quarter of each fiscal year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of any one of the reporting units below its respective carrying amount. In performing the goodwill impairment test, Adobe first performs a qualitative assessment, which requires that Adobe considers events or circumstances including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting segment’s net assets and changes in the stock price. If, after assessing the totality of events or circumstances, Adobe determines that it is more likely than not that the fair values of the reporting segments are greater than the carrying amounts, then the quantitative goodwill impairment test is not performed.
If the qualitative assessment indicates that the quantitative analysis should be performed, Adobe then evaluates goodwill for impairment by comparing the fair value of each of the reporting segments to its carrying value, including the associated goodwill. To determine the fair values, Adobe uses the equal weighting of the market approach based on comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Adobe’s cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors.
Adobe completed the annual goodwill impairment test in the second quarter of fiscal 2019. Adobe determined, after performing a qualitative review of each reporting segment, that it is more likely than not that the fair value of each of the reporting segments substantially exceeds the respective carrying amounts. Accordingly, there was no indication of impairment and the quantitative goodwill impairment test was not performed. Adobe did not identify any events or changes in circumstances since the performance of the annual goodwill impairment test that would require Adobe to perform another goodwill impairment test during the fiscal year.
Adobe amortizes intangible assets with finite lives over their estimated useful lives and reviews them for impairment whenever an impairment indicator exists. Adobe continually monitors events and changes in circumstances that could indicate carrying amounts of the long-lived assets, including the intangible assets, may not be recoverable. When such events or changes in circumstances occur, Adobe assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, Adobe recognizes an impairment loss based on any excess of the carrying amount over the fair value of the assets. Adobe did not recognize any intangible asset impairment charges in fiscal 2019, 2018 or 2017.
During fiscal 2019, Adobe’s intangible assets were amortized over their estimated useful lives ranging from 1 to 15 years. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed or on a straight-line basis when the consumption pattern is not apparent. The weighted average useful lives of Adobe’s intangible assets were as follows:
| Weighted Average Useful Life (years) | |
| Customer contracts and relationships | 10 |
| Purchased technology | 6 |
| Trademarks | 9 |
| Backlog | 2 |
| Acquired rights to use technology | 10 |
| Other | 4 |
Source: 10-K (filing date: 2020-01-21).
Goodwill and Intangible Asset Disclosure
Adobe Inc., balance sheet: goodwill and intangible assets
US$ in thousands
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
| Item | Description | The company |
|---|---|---|
| Goodwill | Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. | Adobe Inc.’s goodwill increased from 2017 to 2018 and from 2018 to 2019. |
| Other intangibles, net | Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. | Adobe Inc.’s other intangibles, net increased from 2017 to 2018 but then slightly decreased from 2018 to 2019. |
| Goodwill and purchased and other intangibles | Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. | Adobe Inc.’s goodwill and purchased and other intangibles increased from 2017 to 2018 but then slightly decreased from 2018 to 2019. |
Adjustments to Financial Statements: Removal of Goodwill
Adobe Inc., adjustments to financial statements
US$ in thousands
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
Adobe Inc., Financial Data: Reported vs. Adjusted
Adjusted Financial Ratios: Removal of Goodwill (Summary)
Adobe Inc., adjusted financial ratios
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
| Financial ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Adobe Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 and from 2018 to 2019. |
| 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. |
|
| Adjusted ROE | A profitability ratio calculated as net income divided by adjusted shareholders’ equity. | |
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | Adobe Inc.’s adjusted ROA improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019. |
Adobe Inc., Financial Ratios: Reported vs. Adjusted
Adjusted Total Asset Turnover
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
2019 Calculations
1 Total asset turnover = Revenue ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= ÷ =
| Activity ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Adobe Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 and from 2018 to 2019. |
Adjusted Financial Leverage
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
2019 Calculations
1 Financial leverage = Total assets ÷ Stockholders’ equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= ÷ =
| Solvency 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. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
2019 Calculations
1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × ÷ =
2 Adjusted ROE = 100 × Net income ÷ Adjusted stockholders’ equity
= 100 × ÷ =
| Profitability ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as net income divided by adjusted shareholders’ equity. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2020-01-21), 10-K (filing date: 2019-01-25), 10-K (filing date: 2018-01-22), 10-K (filing date: 2017-01-20), 10-K (filing date: 2016-01-19), 10-K (filing date: 2015-01-20).
2019 Calculations
1 ROA = 100 × Net income ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × ÷ =
| Profitability ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | Adobe Inc.’s adjusted ROA improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019. |