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Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


Goodwill and Intangible Assets Accounting Policy

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. In performing the goodwill impairment test, Adobe first evaluates goodwill to determine if it is more likely than not that the occurrence of an event or change in circumstances has reduced the fair value of a reporting segment below its carrying value. The qualitative assessment requires that Adobe considers events or circumstances that may include 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 segments' 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 value of the reporting segments are greater than the carrying amounts, then the two-step goodwill impairment test is not performed.

If the qualitative assessment indicates that the two-step quantitative analysis should be performed, Adobe 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 2017. 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 two-step quantitative goodwill impairment test was not performed.

Adobe amortizes intangible assets with finite lives over their estimated useful lives and review 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 2017, 2016 or 2015.

During fiscal 2017, Adobe's intangible assets were amortized over their estimated useful lives ranging from 1 to 14 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 AverageUseful Life (years)
Purchased technology 5
Customer contracts and relationships 9
Trademarks 8
Acquired rights to use technology 9
Localization 1
Other intangibles 5

Source: 10-K (filing date: 2018-01-22).


Goodwill and Intangible Assets Disclosure

Adobe Systems Inc., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in thousands

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
Purchased technology hidden hidden hidden hidden hidden hidden
Customer contracts and relationships hidden hidden hidden hidden hidden hidden
Trademarks hidden hidden hidden hidden hidden hidden
Acquired rights to use technology hidden hidden hidden hidden hidden hidden
Localization hidden hidden hidden hidden hidden hidden
Other intangibles hidden hidden hidden hidden hidden hidden
Other intangible assets hidden hidden hidden hidden hidden hidden
Purchased and other intangible assets, cost hidden hidden hidden hidden hidden hidden
Accumulated amortization hidden hidden hidden hidden hidden hidden
Purchased and other intangible assets, net hidden hidden hidden hidden hidden hidden
Goodwill hidden hidden hidden hidden hidden hidden
Goodwill and purchased and other intangibles hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).

Item Description The company
Purchased and other intangible assets, 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 Systems Inc.'s purchased and other intangible assets, net declined from 2015 to 2016 and from 2016 to 2017.
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 Systems Inc.'s goodwill increased from 2015 to 2016 and from 2016 to 2017.
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 Systems Inc.'s goodwill and purchased and other intangibles declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Analyst Adjustments: Removal of Goodwill

Adobe Systems Inc., adjustments to financial data

USD $ in thousands

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
Adjustment to Total Assets
Total assets (as reported) hidden hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden hidden
Total assets (adjusted) hidden hidden hidden hidden hidden hidden
Adjustment to Stockholders' Equity
Stockholders' equity (as reported) hidden hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden hidden
Stockholders' equity (adjusted) hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).


Adobe Systems Inc., Financial Data: Reported vs. Adjusted


Adjusted Ratios: Removal of Goodwill (Summary)

Adobe Systems Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
Total Asset Turnover
Reported total asset turnover hidden hidden hidden hidden hidden hidden
Adjusted total asset turnover hidden hidden hidden hidden hidden hidden
Financial Leverage
Reported financial leverage hidden hidden hidden hidden hidden hidden
Adjusted financial leverage hidden hidden hidden hidden hidden hidden
Return on Equity (ROE)
Reported ROE hidden hidden hidden hidden hidden hidden
Adjusted ROE hidden hidden hidden hidden hidden hidden
Return on Assets (ROA)
Reported ROA hidden hidden hidden hidden hidden hidden
Adjusted ROA hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Adobe Systems Inc.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.
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.
Adobe Systems Inc.'s adjusted financial leverage declined from 2015 to 2016 and from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Adobe Systems Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Adobe Systems Inc.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.

Adobe Systems Inc., Ratios: Reported vs. Adjusted


Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
As Reported
Selected Financial Data (USD $ in thousands)
Revenue hidden hidden hidden hidden hidden hidden
Total assets hidden hidden hidden hidden hidden hidden
Ratio
Total asset turnover1 hidden hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Revenue hidden hidden hidden hidden hidden hidden
Adjusted total assets hidden hidden hidden hidden hidden hidden
Ratio
Adjusted total asset turnover2 hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).

2017 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= hidden ÷ hidden = hidden

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= hidden ÷ hidden = hidden

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Adobe Systems Inc.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
As Reported
Selected Financial Data (USD $ in thousands)
Total assets hidden hidden hidden hidden hidden hidden
Stockholders' equity hidden hidden hidden hidden hidden hidden
Ratio
Financial leverage1 hidden hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Adjusted total assets hidden hidden hidden hidden hidden hidden
Adjusted stockholders' equity hidden hidden hidden hidden hidden hidden
Ratio
Adjusted financial leverage2 hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).

2017 Calculations

1 Financial leverage = Total assets ÷ Stockholders' equity
= hidden ÷ hidden = hidden

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders' equity
= hidden ÷ hidden = hidden

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.
Adobe Systems Inc.'s adjusted financial leverage declined from 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
As Reported
Selected Financial Data (USD $ in thousands)
Net income hidden hidden hidden hidden hidden hidden
Stockholders' equity hidden hidden hidden hidden hidden hidden
Ratio
ROE1 hidden hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Net income hidden hidden hidden hidden hidden hidden
Adjusted stockholders' equity hidden hidden hidden hidden hidden hidden
Ratio
Adjusted ROE2 hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).

2017 Calculations

1 ROE = 100 × Net income ÷ Stockholders' equity
= 100 × hidden ÷ hidden = hidden

2 Adjusted ROE = 100 × Net income ÷ Adjusted stockholders' equity
= 100 × hidden ÷ hidden = hidden

Ratio Description The company
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Adobe Systems Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 1, 2017 Dec 2, 2016 Nov 27, 2015 Nov 28, 2014 Nov 29, 2013 Nov 30, 2012
As Reported
Selected Financial Data (USD $ in thousands)
Net income hidden hidden hidden hidden hidden hidden
Total assets hidden hidden hidden hidden hidden hidden
Ratio
ROA1 hidden hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Net income hidden hidden hidden hidden hidden hidden
Adjusted total assets hidden hidden hidden hidden hidden hidden
Ratio
Adjusted ROA2 hidden hidden hidden hidden hidden hidden

Based on: 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), 10-K (filing date: 2014-01-21), 10-K (filing date: 2013-01-22).

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × hidden ÷ hidden = hidden

2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Adobe Systems Inc.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017.