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Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


Goodwill and Intangible Assets Accounting Policy

The fair value of acquired intangible assets is typically determined using the "income method" utilizing Level 3 fair value inputs. The market participant valuations assume a global view considering all potential jurisdictions and indications based on discounted after-tax cash flow projections, risk adjusted for estimated probability of technical and regulatory success (for IPRD).

Finite-lived intangible assets, including licenses, developed technology rights and IPRD projects that reach commercialization are amortized on a straight-line basis over their estimated useful life. Estimated useful lives are determined considering the period the assets are expected to contribute to future cash flows.

Goodwill is tested at least annually for impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts. Examples of qualitative factors assessed include BMS's share price, financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test performed in a prior year. Each relevant factor is assessed both individually and in the aggregate.

IPRD is tested for impairment on an annual basis and more frequently if events occur or circumstances change that would indicate a potential reduction in the fair values of the assets below their carrying value. Impairment charges are recognized to the extent the carrying value of IPRD is determined to exceed its fair value.

Finite-lived intangible assets are tested for impairment when facts or circumstances suggest that the carrying value of the asset may not be recoverable. If the carrying value exceeds the projected undiscounted pretax cash flows of the intangible asset, an impairment loss equal to the excess of the carrying value over the estimated fair value (discounted after-tax cash flows) is recognized.

Source: Bristol-Myers Squibb Co., Annual Report


Goodwill and Intangible Assets Disclosure

Bristol-Myers Squibb Co., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in millions

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Licenses 567  564  574  1,090  1,162 
Developed technology rights 2,357  2,357  2,357  2,358  2,486 
Capitalized software 1,381  1,441  1,302  1,254  1,240 
IPRD 32  107  120  280  548 
Gross other intangible assets 4,337  4,469  4,353  4,982  5,436 
Accumulated amortization (3,127) (3,084) (2,934) (3,229) (3,118)
Other intangible assets 1,210  1,385  1,419  1,753  2,318 
Goodwill 6,863  6,875  6,881  7,027  7,096 
Goodwill and other intangible assets 8,073  8,260  8,300  8,780  9,414 

Source: Based on data from Bristol-Myers Squibb Co. Annual Reports

Item Description The company
Other 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. Bristol-Myers Squibb Co.'s other intangible assets 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. Bristol-Myers Squibb Co.'s goodwill declined from 2015 to 2016 and from 2016 to 2017.
Goodwill 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. Bristol-Myers Squibb Co.'s goodwill and other intangible assets declined from 2015 to 2016 and from 2016 to 2017.

Analyst Adjustments: Removal of Goodwill

Bristol-Myers Squibb Co., adjustments to financial data

USD $ in millions

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) 33,551  33,707  31,748  33,749  38,592 
Less: Goodwill 6,863  6,875  6,881  7,027  7,096 
Total assets (adjusted) 26,688  26,832  24,867  26,722  31,496 
Adjustment to Total Bristol-Myers Squibb Company Shareholders' Equity
Total Bristol-Myers Squibb Company shareholders' equity (as reported) 11,741  16,177  14,266  14,852  15,154 
Less: Goodwill 6,863  6,875  6,881  7,027  7,096 
Total Bristol-Myers Squibb Company shareholders' equity (adjusted) 4,878  9,302  7,385  7,825  8,058 

Adjusted Ratios: Removal of Goodwill (Summary)

Bristol-Myers Squibb Co., adjusted ratios

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total Asset Turnover
Reported total asset turnover 0.62 0.58 0.52 0.47 0.42
Adjusted total asset turnover 0.78 0.72 0.67 0.59 0.52
Financial Leverage
Reported financial leverage 2.86 2.08 2.23 2.27 2.55
Adjusted financial leverage 5.47 2.88 3.37 3.41 3.91
Return on Equity (ROE)
Reported ROE 8.58% 27.55% 10.97% 13.49% 16.91%
Adjusted ROE 20.64% 47.91% 21.19% 25.61% 31.81%
Return on Assets (ROA)
Reported ROA 3.00% 13.22% 4.93% 5.94% 6.64%
Adjusted ROA 3.77% 16.61% 6.29% 7.50% 8.14%
Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Bristol-Myers Squibb Co.'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.
Bristol-Myers Squibb Co.'s adjusted financial leverage declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Bristol-Myers Squibb Co.'s adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Bristol-Myers Squibb Co.'s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Total Asset Turnover

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Revenues (USD $ in millions) 20,776  19,427  16,560  15,879  16,385 
Total assets (USD $ in millions) 33,551  33,707  31,748  33,749  38,592 
Total asset turnover1 0.62 0.58 0.52 0.47 0.42
Adjusted for Goodwill
Revenues (USD $ in millions) 20,776  19,427  16,560  15,879  16,385 
Adjusted total assets (USD $ in millions) 26,688  26,832  24,867  26,722  31,496 
Adjusted total asset turnover2 0.78 0.72 0.67 0.59 0.52

2017 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= 20,776 ÷ 33,551 = 0.62

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= 20,776 ÷ 26,688 = 0.78

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

Adjusted Financial Leverage

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total assets (USD $ in millions) 33,551  33,707  31,748  33,749  38,592 
Total Bristol-Myers Squibb Company shareholders' equity (USD $ in millions) 11,741  16,177  14,266  14,852  15,154 
Financial leverage1 2.86 2.08 2.23 2.27 2.55
Adjusted for Goodwill
Adjusted total assets (USD $ in millions) 26,688  26,832  24,867  26,722  31,496 
Adjusted total Bristol-Myers Squibb Company shareholders' equity (USD $ in millions) 4,878  9,302  7,385  7,825  8,058 
Adjusted financial leverage2 5.47 2.88 3.37 3.41 3.91

2017 Calculations

1 Financial leverage = Total assets ÷ Total Bristol-Myers Squibb Company shareholders' equity
= 33,551 ÷ 11,741 = 2.86

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Bristol-Myers Squibb Company shareholders' equity
= 26,688 ÷ 4,878 = 5.47

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.
Bristol-Myers Squibb Co.'s adjusted financial leverage declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Adjusted Return on Equity (ROE)

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net earnings attributable to BMS (USD $ in millions) 1,007  4,457  1,565  2,004  2,563 
Total Bristol-Myers Squibb Company shareholders' equity (USD $ in millions) 11,741  16,177  14,266  14,852  15,154 
ROE1 8.58% 27.55% 10.97% 13.49% 16.91%
Adjusted for Goodwill
Net earnings attributable to BMS (USD $ in millions) 1,007  4,457  1,565  2,004  2,563 
Adjusted total Bristol-Myers Squibb Company shareholders' equity (USD $ in millions) 4,878  9,302  7,385  7,825  8,058 
Adjusted ROE2 20.64% 47.91% 21.19% 25.61% 31.81%

2017 Calculations

1 ROE = 100 × Net earnings attributable to BMS ÷ Total Bristol-Myers Squibb Company shareholders' equity
= 100 × 1,007 ÷ 11,741 = 8.58%

2 Adjusted ROE = 100 × Net earnings attributable to BMS ÷ Adjusted total Bristol-Myers Squibb Company shareholders' equity
= 100 × 1,007 ÷ 4,878 = 20.64%

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

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net earnings attributable to BMS (USD $ in millions) 1,007  4,457  1,565  2,004  2,563 
Total assets (USD $ in millions) 33,551  33,707  31,748  33,749  38,592 
ROA1 3.00% 13.22% 4.93% 5.94% 6.64%
Adjusted for Goodwill
Net earnings attributable to BMS (USD $ in millions) 1,007  4,457  1,565  2,004  2,563 
Adjusted total assets (USD $ in millions) 26,688  26,832  24,867  26,722  31,496 
Adjusted ROA2 3.77% 16.61% 6.29% 7.50% 8.14%

2017 Calculations

1 ROA = 100 × Net earnings attributable to BMS ÷ Total assets
= 100 × 1,007 ÷ 33,551 = 3.00%

2 Adjusted ROA = 100 × Net earnings attributable to BMS ÷ Adjusted total assets
= 100 × 1,007 ÷ 26,688 = 3.77%

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