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Broadcom Inc. (AVGO)


Analysis of Goodwill and Intangible Assets

Advanced level


Accounting Policy on Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized but is reviewed annually (or more frequently if impairment indicators arise) for impairment. To review for impairment Broadcom first assesses qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of any of the reporting units is less than its carrying amount. Broadcom’s qualitative assessment of the recoverability of goodwill, whether performed annually or based on specific events or circumstances, considers various macroeconomic, industry-specific and company-specific factors. Those factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of Broadcom’s financial performance; or (iv) a sustained decrease in Broadcom’s market capitalization below the net book value. After assessing the totality of events and circumstances, if Broadcom determines that it is not more likely than not that the fair value of any of the reporting units is less than its carrying amount, no further assessment is performed. If Broadcom determines that it is more likely than not that the fair value of any of the reporting units is less than its carrying amount, Broadcom calculates the fair value of that reporting unit and compare the fair value to the reporting unit’s net book value. If the fair value of the reporting unit is greater than its net book value, there is no impairment. Otherwise, Broadcom calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit. The implied fair value of goodwill is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.

Long-lived assets

Purchased finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is recognized over the periods during which the intangible assets are expected to contribute to Broadcom’s cash flows. Purchased IPR&D projects are capitalized at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter. Upon completion of each underlying project, IPR&D assets are reclassified as amortizable purchased intangible assets and amortized over their estimated useful lives. If an IPR&D project is abandoned, Broadcom recognizes the carrying value of the related intangible asset in the consolidated statements of operations in the period it is abandoned. On a quarterly basis, Broadcom monitors factors and changes in circumstances that could indicate carrying amounts of long-lived assets, including purchased intangible assets and property, plant and equipment, may not be recoverable. Factors Broadcom considers important which could trigger an impairment review include (i) significant under-performance relative to historical or projected future operating results, (ii) significant changes in the manner of the use of the acquired assets or the strategy for the overall business, and (iii) significant negative industry or economic trends. An impairment loss must be measured if the sum of the expected future cash flows (undiscounted and before interest) from the use and eventual disposition of the asset (or asset group) is less than the net book value of the asset (or asset group). The amount of the impairment loss will generally be measured as the difference between the net book value of the asset (or asset group) and the estimated fair value.

Source: 10-K (filing date: 2019-12-20).


Goodwill and Intangible Asset Disclosure

Broadcom Inc., balance sheet: goodwill and intangible assets

US$ in millions

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
Purchased technology 20,935  15,806  12,724  12,182  2,918  2,651 
Customer contracts and related relationships 5,978  1,792  4,240  4,231  1,702  1,570 
Order backlog 2,569  —  —  —  —  — 
Trade names 712  578  528  528  178  — 
Other 241  239  135  107  120  275 
Intangible assets subject to amortization, gross carrying amount 30,435  18,415  17,627  17,048  4,918  4,496 
Accumulated amortization (13,144) (7,917) (7,507) (3,316) (1,766) (1,033)
Intangible assets subject to amortization, net book value 17,291  10,498  10,120  13,732  3,152  3,463 
IPR&D 263  264  712  1,336  125  154 
Intangible assets 17,554  10,762  10,832  15,068  3,277  3,617 
Goodwill 36,714  26,913  24,706  24,732  1,674  1,596 
Goodwill and intangible assets 54,268  37,675  35,538  39,800  4,951  5,213 

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

Item Description The company
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. Broadcom Inc.’s intangible assets decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.
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. Broadcom Inc.’s goodwill increased from 2017 to 2018 and from 2018 to 2019.
Goodwill and 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. Broadcom Inc.’s goodwill and intangible assets increased from 2017 to 2018 and from 2018 to 2019.

Adjustments to Financial Statements: Removal of Goodwill

Broadcom Inc., adjustments to financial statements

US$ in millions

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
Adjustment to Total Assets
Total assets (as reported) 67,493  50,124  54,418  49,966  10,592  10,491 
Less: Goodwill 36,714  26,913  24,706  24,732  1,674  1,596 
Total assets (adjusted) 30,779  23,211  29,712  25,234  8,918  8,895 
Adjustment to Total Broadcom Inc. Stockholders’ Equity
Total Broadcom Inc. stockholders’ equity (as reported) 24,941  26,657  20,285  18,892  4,714  3,243 
Less: Goodwill 36,714  26,913  24,706  24,732  1,674  1,596 
Total Broadcom Inc. stockholders’ equity (adjusted) (11,773) (256) (4,421) (5,840) 3,040  1,647 

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).


Broadcom Inc., Financial Data: Reported vs. Adjusted


Adjusted Financial Ratios: Removal of Goodwill (Summary)

Broadcom Inc., adjusted financial ratios

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
Total Asset Turnover
Reported total asset turnover 0.33 0.42 0.32 0.26 0.64 0.41
Adjusted total asset turnover 0.73 0.90 0.59 0.52 0.77 0.48
Financial Leverage
Reported financial leverage 2.71 1.88 2.68 2.64 2.25 3.23
Adjusted financial leverage 2.93 5.40
Return on Equity (ROE)
Reported ROE 10.92% 45.99% 8.34% -9.20% 28.94% 8.11%
Adjusted ROE 44.87% 15.97%
Return on Assets (ROA)
Reported ROA 4.04% 24.46% 3.11% -3.48% 12.88% 2.51%
Adjusted ROA 8.85% 52.82% 5.69% -6.89% 15.29% 2.96%

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

Financial ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Broadcom Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.
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. Broadcom Inc.’s adjusted ROA improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.

Broadcom Inc., Financial Ratios: Reported vs. Adjusted


Adjusted Total Asset Turnover

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
As Reported
Selected Financial Data (US$ in millions)
Net revenue 22,597  20,848  17,636  13,240  6,824  4,269 
Total assets 67,493  50,124  54,418  49,966  10,592  10,491 
Activity Ratio
Total asset turnover1 0.33 0.42 0.32 0.26 0.64 0.41
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net revenue 22,597  20,848  17,636  13,240  6,824  4,269 
Adjusted total assets 30,779  23,211  29,712  25,234  8,918  8,895 
Activity Ratio
Adjusted total asset turnover2 0.73 0.90 0.59 0.52 0.77 0.48

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

2019 Calculations

1 Total asset turnover = Net revenue ÷ Total assets
= 22,597 ÷ 67,493 = 0.33

2 Adjusted total asset turnover = Net revenue ÷ Adjusted total assets
= 22,597 ÷ 30,779 = 0.73

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Broadcom Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.

Adjusted Financial Leverage

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets 67,493  50,124  54,418  49,966  10,592  10,491 
Total Broadcom Inc. stockholders’ equity 24,941  26,657  20,285  18,892  4,714  3,243 
Solvency Ratio
Financial leverage1 2.71 1.88 2.68 2.64 2.25 3.23
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted total assets 30,779  23,211  29,712  25,234  8,918  8,895 
Adjusted total Broadcom Inc. stockholders’ equity (11,773) (256) (4,421) (5,840) 3,040  1,647 
Solvency Ratio
Adjusted financial leverage2 2.93 5.40

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

2019 Calculations

1 Financial leverage = Total assets ÷ Total Broadcom Inc. stockholders’ equity
= 67,493 ÷ 24,941 = 2.71

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Broadcom Inc. stockholders’ equity
= 30,779 ÷ -11,773 =

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)

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income (loss) attributable to Broadcom Inc. stockholders 2,724  12,259  1,692  (1,739) 1,364  263 
Total Broadcom Inc. stockholders’ equity 24,941  26,657  20,285  18,892  4,714  3,243 
Profitability Ratio
ROE1 10.92% 45.99% 8.34% -9.20% 28.94% 8.11%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net income (loss) attributable to Broadcom Inc. stockholders 2,724  12,259  1,692  (1,739) 1,364  263 
Adjusted total Broadcom Inc. stockholders’ equity (11,773) (256) (4,421) (5,840) 3,040  1,647 
Profitability Ratio
Adjusted ROE2 44.87% 15.97%

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

2019 Calculations

1 ROE = 100 × Net income (loss) attributable to Broadcom Inc. stockholders ÷ Total Broadcom Inc. stockholders’ equity
= 100 × 2,724 ÷ 24,941 = 10.92%

2 Adjusted ROE = 100 × Net income (loss) attributable to Broadcom Inc. stockholders ÷ Adjusted total Broadcom Inc. stockholders’ equity
= 100 × 2,724 ÷ -11,773 =

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders’ equity.

Adjusted Return on Assets (ROA)

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Nov 3, 2019 Nov 4, 2018 Oct 29, 2017 Oct 30, 2016 Nov 1, 2015 Nov 2, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income (loss) attributable to Broadcom Inc. stockholders 2,724  12,259  1,692  (1,739) 1,364  263 
Total assets 67,493  50,124  54,418  49,966  10,592  10,491 
Profitability Ratio
ROA1 4.04% 24.46% 3.11% -3.48% 12.88% 2.51%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net income (loss) attributable to Broadcom Inc. stockholders 2,724  12,259  1,692  (1,739) 1,364  263 
Adjusted total assets 30,779  23,211  29,712  25,234  8,918  8,895 
Profitability Ratio
Adjusted ROA2 8.85% 52.82% 5.69% -6.89% 15.29% 2.96%

Based on: 10-K (filing date: 2019-12-20), 10-K (filing date: 2018-12-21), 10-K (filing date: 2017-12-21), 10-K (filing date: 2016-12-23), 10-K (filing date: 2015-12-17), 10-K (filing date: 2014-12-29).

2019 Calculations

1 ROA = 100 × Net income (loss) attributable to Broadcom Inc. stockholders ÷ Total assets
= 100 × 2,724 ÷ 67,493 = 4.04%

2 Adjusted ROA = 100 × Net income (loss) attributable to Broadcom Inc. stockholders ÷ Adjusted total assets
= 100 × 2,724 ÷ 30,779 = 8.85%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Broadcom Inc.’s adjusted ROA improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.