Microsoft Excel LibreOffice Calc

Microsoft Corp. (MSFT)

Analysis of Goodwill and Intangible Assets

Advanced level

Accounting Policy on Goodwill and Intangible Assets

Goodwill

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Intangible Assets

Microsoft’s intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. Microsoft evaluates the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

Source: 10-K (filing date: 2019-08-01).

Goodwill and Intangible Asset Disclosure

Microsoft Corp., balance sheet: goodwill and intangible assets

US$ in millions

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Technology-based 7,691  7,220  7,765  5,970  6,187  6,440 
Customer-related 4,709  4,031  4,045  465  632  732 
Marketing-related 4,165  4,006  4,016  1,869  1,974  1,518 
Contract-based 574  679  841  796  1,344  2,266 
Finite-lived intangible assets, gross carrying amount 17,139  15,936  16,667  9,100  10,137  10,956 
Accumulated amortization (9,389) (7,883) (6,561) (5,367) (5,302) (3,975)
Finite-lived intangible assets, net carrying amount 7,750  8,053  10,106  3,733  4,835  6,981 
Goodwill 42,026  35,683  35,122  17,872  16,939  20,127 
Intangible assets and goodwill 49,776  43,736  45,228  21,605  21,774  27,108 

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

Item Description The company
Finite-lived intangible assets, net carrying amount Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Microsoft Corp.’s finite-lived intangible assets, net carrying amount decreased from 2017 to 2018 and from 2018 to 2019.
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. Microsoft Corp.’s goodwill increased from 2017 to 2018 and from 2018 to 2019.
Intangible assets and goodwill Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Microsoft Corp.’s intangible assets and goodwill decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.

Adjustments to Financial Statements: Removal of Goodwill

Microsoft Corp., adjustments to financial statements

US$ in millions

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Adjustment to Total Assets
Total assets (as reported) 286,556  258,848  241,086  193,694  176,223  172,384 
Less: Goodwill 42,026  35,683  35,122  17,872  16,939  20,127 
Total assets (adjusted) 244,530  223,165  205,964  175,822  159,284  152,257 
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported) 102,330  82,718  72,394  71,997  80,083  89,784 
Less: Goodwill 42,026  35,683  35,122  17,872  16,939  20,127 
Stockholders’ equity (adjusted) 60,304  47,035  37,272  54,125  63,144  69,657 
Adjustment to Net Income
Net income (as reported) 39,240  16,571  21,204  16,798  12,193  22,074 
Add: Goodwill impairment —  —  —  —  5,100  — 
Net income (adjusted) 39,240  16,571  21,204  16,798  17,293  22,074 

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

Microsoft Corp., Financial Data: Reported vs. Adjusted

Adjusted Financial Ratios: Removal of Goodwill (Summary)

Microsoft Corp., adjusted financial ratios

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Net Profit Margin
Reported net profit margin 31.18% 15.02% 23.57% 19.69% 13.03% 25.42%
Adjusted net profit margin 31.18% 15.02% 23.57% 19.69% 18.48% 25.42%
Total Asset Turnover
Reported total asset turnover 0.44 0.43 0.37 0.44 0.53 0.50
Adjusted total asset turnover 0.51 0.49 0.44 0.49 0.59 0.57
Financial Leverage
Reported financial leverage 2.80 3.13 3.33 2.69 2.20 1.92
Adjusted financial leverage 4.05 4.74 5.53 3.25 2.52 2.19
Return on Equity (ROE)
Reported ROE 38.35% 20.03% 29.29% 23.33% 15.23% 24.59%
Adjusted ROE 65.07% 35.23% 56.89% 31.04% 27.39% 31.69%
Return on Assets (ROA)
Reported ROA 13.69% 6.40% 8.80% 8.67% 6.92% 12.81%
Adjusted ROA 16.05% 7.43% 10.30% 9.55% 10.86% 14.50%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

Financial ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Microsoft Corp.’s adjusted net profit margin ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Microsoft Corp.’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.		 Microsoft Corp.’s adjusted financial leverage ratio decreased from 2017 to 2018 and from 2018 to 2019.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Microsoft Corp.’s adjusted ROE deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Microsoft Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Microsoft Corp., Financial Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 39,240  16,571  21,204  16,798  12,193  22,074 
Revenue 125,843  110,360  89,950  85,320  93,580  86,833 
Profitability Ratio
Net profit margin1 31.18% 15.02% 23.57% 19.69% 13.03% 25.42%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted net income 39,240  16,571  21,204  16,798  17,293  22,074 
Revenue 125,843  110,360  89,950  85,320  93,580  86,833 
Profitability Ratio
Adjusted net profit margin2 31.18% 15.02% 23.57% 19.69% 18.48% 25.42%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 Net profit margin = 100 × Net income ÷ Revenue
= 100 × 39,240 ÷ 125,843 = 31.18%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenue
= 100 × 39,240 ÷ 125,843 = 31.18%

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Microsoft Corp.’s adjusted net profit margin ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Revenue 125,843  110,360  89,950  85,320  93,580  86,833 
Total assets 286,556  258,848  241,086  193,694  176,223  172,384 
Activity Ratio
Total asset turnover1 0.44 0.43 0.37 0.44 0.53 0.50
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Revenue 125,843  110,360  89,950  85,320  93,580  86,833 
Adjusted total assets 244,530  223,165  205,964  175,822  159,284  152,257 
Activity Ratio
Adjusted total asset turnover2 0.51 0.49 0.44 0.49 0.59 0.57

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= 125,843 ÷ 286,556 = 0.44

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 125,843 ÷ 244,530 = 0.51

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Microsoft Corp.’s adjusted total asset turnover ratio improved from 2017 to 2018 and from 2018 to 2019.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets 286,556  258,848  241,086  193,694  176,223  172,384 
Stockholders’ equity 102,330  82,718  72,394  71,997  80,083  89,784 
Solvency Ratio
Financial leverage1 2.80 3.13 3.33 2.69 2.20 1.92
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted total assets 244,530  223,165  205,964  175,822  159,284  152,257 
Adjusted stockholders’ equity 60,304  47,035  37,272  54,125  63,144  69,657 
Solvency Ratio
Adjusted financial leverage2 4.05 4.74 5.53 3.25 2.52 2.19

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity
= 286,556 ÷ 102,330 = 2.80

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= 244,530 ÷ 60,304 = 4.05

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.		 Microsoft Corp.’s adjusted financial leverage ratio decreased from 2017 to 2018 and from 2018 to 2019.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 39,240  16,571  21,204  16,798  12,193  22,074 
Stockholders’ equity 102,330  82,718  72,394  71,997  80,083  89,784 
Profitability Ratio
ROE1 38.35% 20.03% 29.29% 23.33% 15.23% 24.59%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted net income 39,240  16,571  21,204  16,798  17,293  22,074 
Adjusted stockholders’ equity 60,304  47,035  37,272  54,125  63,144  69,657 
Profitability Ratio
Adjusted ROE2 65.07% 35.23% 56.89% 31.04% 27.39% 31.69%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 39,240 ÷ 102,330 = 38.35%

2 Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders’ equity
= 100 × 39,240 ÷ 60,304 = 65.07%

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Microsoft Corp.’s adjusted ROE deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 39,240  16,571  21,204  16,798  12,193  22,074 
Total assets 286,556  258,848  241,086  193,694  176,223  172,384 
Profitability Ratio
ROA1 13.69% 6.40% 8.80% 8.67% 6.92% 12.81%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted net income 39,240  16,571  21,204  16,798  17,293  22,074 
Adjusted total assets 244,530  223,165  205,964  175,822  159,284  152,257 
Profitability Ratio
Adjusted ROA2 16.05% 7.43% 10.30% 9.55% 10.86% 14.50%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 39,240 ÷ 286,556 = 13.69%

2 Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets
= 100 × 39,240 ÷ 244,530 = 16.05%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Microsoft Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.