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CVS Health Corp. (CVS)
Analysis of Goodwill and Intangible Assets
Difficulty: Advanced
- Goodwill and Intangible Assets Accounting Policy
- Goodwill and Intangible Assets Disclosure
- Analyst Adjustments: Removal of Goodwill
- Adjusted Ratios: Removal of Goodwill (Summary)
- Adjusted Net Profit Margin
- Adjusted Total Asset Turnover
- Adjusted Financial Leverage
- Adjusted Return on Equity (ROE)
- Adjusted Return on Assets (ROA)
Goodwill and Intangible Assets Accounting Policy
Goodwill
CVS Health accounts for business combinations using the acquisition method of accounting, which requires the excess cost of an acquisition over the fair value of net assets acquired and identifiable intangible assets to be recorded as goodwill. Goodwill is not amortized, but is subject to impairment reviews annually, or more frequently if necessary. When evaluating goodwill for potential impairment, CVS Health compares the fair value of its reporting units to their respective carrying amounts. CVS Health estimates the fair value of its reporting units using a combination of a discounted cash flow method and a market multiple method. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess.
Intangible Assets
CVS Health’s definite-lived intangible assets are amortized over their estimated useful-life based upon the pattern of future cash flows attributable to the asset. Other than value of business acquired (“VOBA”), definite-lived intangible assets are amortized using the straight-line method. VOBA is amortized over the expected life of the acquired contracts in proportion to estimated premiums. CVS Health groups and evaluates definite-lived intangible assets for impairment at the lowest level at which individual cash flows can be identified whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, CVS Health first compares the carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted and without interest charges). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted and with interest charges). There were no material impairment losses recognized on definite-lived intangible assets in any of the three years ended December 31, 2018, 2017 or 2016.
Indefinitely-lived intangible assets are not amortized but are tested for impairment annually, or more frequently if necessary. Indefinitely-lived intangible assets are tested for impairment by comparing the estimated fair value of the asset to its carrying value. CVS Health estimates the fair value of its indefinitely-lived trademarks using the relief from royalty method under the income approach. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized, and the asset is written down to its estimated fair value. There were no impairment losses recognized on indefinitely-lived intangible assets in any of the three years ended December 31, 2018, 2017 or 2016.
Source: 10-K (filing date: 2019-02-28).
Goodwill and Intangible Assets Disclosure
CVS Health Corp., Statement of Financial Position, Goodwill and Intangible Assets
USD $ in millions
| Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | |||||||
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| Favorable leases and other | |
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| Finitely-lived intangible assets, gross carrying amount | |
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| Accumulated amortization | |
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| Finitely-lived intangible assets, net carrying amount | |
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| Trademark | |
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| Indefinitely-lived intangible assets | |
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| Intangible assets | |
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| Goodwill | |
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| Goodwill and other intangibles | |
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Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
| 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. | CVS Health Corp.’s intangible assets increased from 2016 to 2017 and from 2017 to 2018. |
| 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. | CVS Health Corp.’s goodwill increased from 2016 to 2017 and from 2017 to 2018. |
| Goodwill 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. | CVS Health Corp.’s goodwill and other intangibles increased from 2016 to 2017 and from 2017 to 2018. |
Analyst Adjustments: Removal of Goodwill
CVS Health Corp., adjustments to financial data
USD $ in millions
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
CVS Health Corp., Financial Data: Reported vs. Adjusted
Adjusted Ratios: Removal of Goodwill (Summary)
CVS Health Corp., adjusted ratios
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | CVS Health Corp.’s adjusted net profit margin improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | CVS Health Corp.’s adjusted total asset turnover improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
| 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. |
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| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. | |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | CVS Health Corp.’s adjusted ROA improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
CVS Health Corp., Ratios: Reported vs. Adjusted
Adjusted Net Profit Margin
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
2018 Calculations
1 Net profit margin = 100 × Net income (loss) attributable to CVS Health ÷ Revenues from customers
= 100 × ÷ =
2 Adjusted net profit margin = 100 × Adjusted net income (loss) attributable to CVS Health ÷ Revenues from customers
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | CVS Health Corp.’s adjusted net profit margin improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
Adjusted Total Asset Turnover
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
2018 Calculations
1 Total asset turnover = Revenues from customers ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Revenues from customers ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | CVS Health Corp.’s adjusted total asset turnover improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |
Adjusted Financial Leverage
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
2018 Calculations
1 Financial leverage = Total assets ÷ Total CVS Health shareholders’ equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total CVS Health 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. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
2018 Calculations
1 ROE = 100 × Net income (loss) attributable to CVS Health ÷ Total CVS Health shareholders’ equity
= 100 × ÷ =
2 Adjusted ROE = 100 × Adjusted net income (loss) attributable to CVS Health ÷ Adjusted total CVS Health shareholders’ equity
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2019-02-28), 10-K (filing date: 2018-02-14), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-09), 10-K (filing date: 2015-02-10).
2018 Calculations
1 ROA = 100 × Net income (loss) attributable to CVS Health ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Adjusted net income (loss) attributable to CVS Health ÷ Adjusted total assets
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | CVS Health Corp.’s adjusted ROA improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018. |