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Goodwill and Intangible Assets Accounting Policy

Product Rights and Other Definite-Lived Intangible Assets

Allergan's product rights and other definite-lived intangible assets are stated at cost, less accumulated amortization, and are amortized using the economic benefit model or the straight-line method, if results are materially aligned, over their estimated useful lives. Allergan determines amortization periods for product rights and other definite-lived intangible assets based on the assessment of various factors impacting estimated useful lives and cash flows. Such factors include the product's position in its life cycle, the existence or absence of like products in the market, various other competitive and regulatory issues, and contractual terms. Significant changes to any of these factors may result in a reduction in the intangibles useful life and an acceleration of related amortization expense, which could cause Allergan's net results to decline.

Product rights and other definite-lived intangible assets are tested periodically for impairment when events or changes in circumstances indicate that an asset's carrying value may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows. In the event the carrying value of the asset exceeds the undiscounted future cash flows, the carrying value is considered not recoverable and an impairment exists. An impairment loss is measured as the excess of the asset's carrying value over its fair value, calculated using discounted future cash flows. The computed impairment loss is recognized in net (loss) / income in the period that the impairment occurs. Assets which are not impaired may require an adjustment to the remaining useful lives for which to amortize the asset. Allergan's projections of discounted cash flows use a discount rate determined by the management to be commensurate with the risk inherent in the business model. Allergan's estimates of future cash flows attributable to the other definite-lived intangible assets require significant judgment based on the historical and anticipated results and are subject to many factors. Different assumptions and judgments could materially affect the calculation of the fair value of the other definite-lived intangible assets which could trigger impairment.

Goodwill and Intangible Assets with Indefinite-Lives

Allergan tests goodwill and intangible assets with indefinite-lives for impairment annually in the second quarter. Additionally, Allergan may perform interim tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit below its carrying amount. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.

Goodwill is considered impaired if the carrying amount of the net assets exceeds the fair value of the reporting unit. Impairment, if any, would be recorded in operating income and this could result in a material impact to net income / (loss) and income / (loss) per share.

Acquired in-process research and development ("IPR&D") intangible assets represent the value assigned to acquired research and development projects that, as of the date acquired, represent the right to develop, use, sell and/or offer for sale a product or other intellectual property that Allergan has acquired with respect to products and/or processes that have not been completed or approved. The IPR&D intangible assets are subject to impairment testing until completion or abandonment of each project. Upon abandonment, the assets are impaired, if there is no future alternative use or no market for which to sell the asset. Impairment testing requires the development of significant estimates and assumptions involving the determination of estimated net cash flows for each year for each project or product (including net revenues, cost of sales, R&D costs, selling and marketing costs and other costs which may be allocated), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset's life cycle, the potential regulatory and commercial success risks, and competitive trends impacting the asset and each cash flow stream as well as other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk, market risk and regulatory risk. Changes in these assumptions could result in future impairment charges. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change or the timely completion of each project and commercial success will occur. For these and other reasons, actual results may vary significantly from estimated results.

Upon successful completion of each project and approval of the product, Allergan will make a separate determination of the useful life of the intangible, transfer the amount to currently marketed products ("CMP") and amortization expense will be recorded over the estimated useful life.

Source: Allergan PLC, Annual Report

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Goodwill and Intangible Assets Disclosure

Allergan PLC, Statement of Financial Position, Goodwill and Intangible Assets

USD $ in thousands

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Product rights and other intangibles
Trade name
Customer relationships
Definite-lived intangible assets, cost basis
Accumulated amortization
Definite-lived intangible assets, net
IPR&D
Trade name
Indefinite-lived intangible assets
Net product rights and other intangibles
Goodwill
Goodwill, product rights and other intangible assets

Source: Based on data from Allergan PLC Annual Reports

Item Description The company
Net product rights and other intangibles Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Allergan PLC's net product rights and other intangibles declined from 2015 to 2016 and from 2016 to 2017.
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. Allergan PLC's goodwill declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.
Goodwill, product rights 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. Allergan PLC's goodwill, product rights and other intangible assets declined from 2015 to 2016 and from 2016 to 2017.

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Analyst Adjustments: Removal of Goodwill

Allergan PLC, adjustments to financial data

USD $ in thousands

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported)
Less: Goodwill
Total assets (adjusted)
Adjustment to Shareholders' Equity
Shareholders' equity (as reported)
Less: Goodwill
Shareholders' equity (adjusted)
Adjustment to Net Income (loss) Attributable To Shareholders
Net income (loss) attributable to shareholders (as reported)
Add: Goodwill impairments
Net income (loss) attributable to shareholders (adjusted)

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Adjusted Ratios: Removal of Goodwill (Summary)

Allergan PLC, adjusted ratios

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net Profit Margin
Reported net profit margin % % % % %
Adjusted net profit margin % % % % %
Total Asset Turnover
Reported total asset turnover
Adjusted total asset turnover
Financial Leverage
Reported financial leverage
Adjusted financial leverage
Return on Equity (ROE)
Reported ROE % % % % %
Adjusted ROE % % % % %
Return on Assets (ROA)
Reported ROA % % % % %
Adjusted ROA % % % % %
Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Allergan PLC's adjusted net profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Allergan PLC'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.
Allergan PLC's adjusted financial leverage declined from 2015 to 2016 but then slightly increased from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Allergan PLC's adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Allergan PLC's adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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Adjusted Net Profit Margin

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (loss) attributable to shareholders (USD $ in thousands)
Net revenues (USD $ in thousands)
Net profit margin1 % % % % %
Adjusted for Goodwill
Adjusted net income (loss) attributable to shareholders (USD $ in thousands)
Net revenues (USD $ in thousands)
Adjusted net profit margin2 % % % % %

2017 Calculations

1 Net profit margin = 100 × Net income (loss) attributable to shareholders ÷ Net revenues
= 100 × ÷ = %

2 Adjusted net profit margin = 100 × Adjusted net income (loss) attributable to shareholders ÷ Net revenues
= 100 × ÷ = %

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Allergan PLC's adjusted net profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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Adjusted Total Asset Turnover

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net revenues (USD $ in thousands)
Total assets (USD $ in thousands)
Total asset turnover1
Adjusted for Goodwill
Net revenues (USD $ in thousands)
Adjusted total assets (USD $ in thousands)
Adjusted total asset turnover2

2017 Calculations

1 Total asset turnover = Net revenues ÷ Total assets
= ÷ =

2 Adjusted total asset turnover = Net revenues ÷ Adjusted total assets
= ÷ =

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

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Adjusted Financial Leverage

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total assets (USD $ in thousands)
Shareholders' equity (USD $ in thousands)
Financial leverage1
Adjusted for Goodwill
Adjusted total assets (USD $ in thousands)
Adjusted shareholders' equity (USD $ in thousands)
Adjusted financial leverage2

2017 Calculations

1 Financial leverage = Total assets ÷ Shareholders' equity
= ÷ =

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted shareholders' equity
= ÷ =

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.
Allergan PLC's adjusted financial leverage declined from 2015 to 2016 but then slightly increased from 2016 to 2017.

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Adjusted Return on Equity (ROE)

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (loss) attributable to shareholders (USD $ in thousands)
Shareholders' equity (USD $ in thousands)
ROE1 % % % % %
Adjusted for Goodwill
Adjusted net income (loss) attributable to shareholders (USD $ in thousands)
Adjusted shareholders' equity (USD $ in thousands)
Adjusted ROE2 % % % % %

2017 Calculations

1 ROE = 100 × Net income (loss) attributable to shareholders ÷ Shareholders' equity
= 100 × ÷ = %

2 Adjusted ROE = 100 × Adjusted net income (loss) attributable to shareholders ÷ Adjusted shareholders' equity
= 100 × ÷ = %

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Allergan PLC's adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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Adjusted Return on Assets (ROA)

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (loss) attributable to shareholders (USD $ in thousands)
Total assets (USD $ in thousands)
ROA1 % % % % %
Adjusted for Goodwill
Adjusted net income (loss) attributable to shareholders (USD $ in thousands)
Adjusted total assets (USD $ in thousands)
Adjusted ROA2 % % % % %

2017 Calculations

1 ROA = 100 × Net income (loss) attributable to shareholders ÷ Total assets
= 100 × ÷ = %

2 Adjusted ROA = 100 × Adjusted net income (loss) attributable to shareholders ÷ Adjusted total assets
= 100 × ÷ = %

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Allergan PLC's adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

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