.Analysis of Goodwill and Intangible Assets
Difficulty: Advanced
Goodwill and Intangible Assets Accounting Policy
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. Substantially all goodwill is assigned to the reporting unit that acquires a business. A reporting unit is an operating segment as defined in ASC 280, Segment Reporting, or a business one level below an operating segment if discrete financial information for that business unit is prepared and regularly reviewed by the segment manager. Emerson conducts annual impairment tests of goodwill in the fourth quarter. If an initial assessment indicates it is more likely than not goodwill might be impaired, it is evaluated by comparing the reporting unit's estimated fair value to its carrying value. Goodwill is also tested for impairment between annual tests if events or circumstances indicate the fair value of a unit may be less than its carrying value. If the carrying amount exceeds the estimated fair value, impairment is recognized to the extent that recorded goodwill exceeds the implied fair value of that goodwill. Estimated fair values of reporting units are Level 3 measures and are developed generally under an income approach that discounts estimated future cash flows using risk-adjusted interest rates.
All of Emerson's identifiable intangible assets are subject to amortization on a straight-line basis over their estimated useful lives. Identifiable intangibles consist of intellectual property such as patents and trademarks, customer relationships and capitalized software. Identifiable intangibles are also subject to evaluation for potential impairment if events or circumstances indicate the carrying amount may not be recoverable.
Source: Emerson Electric Co., Annual Report
Goodwill and Intangible Assets Disclosure
Emerson Electric Co., Statement of Financial Position, Goodwill and Intangible Assets
USD $ in millions
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Customer relationships | ||||||
| | Intellectual property | ||||||
| | Capitalized software | ||||||
| | Identifiable intangible assets, gross carrying amount | ||||||
| | Accumulated amortization | ||||||
| | Identifiable intangible assets, net carrying amount | ||||||
| | Goodwill | ||||||
| | Goodwill and other intangibles |
Source: Based on data from Emerson Electric Co. Annual Reports
| Item | Description | The company |
|---|---|---|
| Identifiable 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. | Emerson Electric Co.'s identifiable intangible assets, net carrying amount declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
| 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. | Emerson Electric Co.'s goodwill declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level. |
| 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. | Emerson Electric Co.'s goodwill and other intangibles declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level. |
Analyst Adjustments: Removal of Goodwill
Emerson Electric Co., adjustments to financial data
USD $ in millions
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| Adjustment to Total Assets | |||||||
| | Total assets (as reported) | ||||||
| | Less: Goodwill | ||||||
| | Total assets (adjusted) | ||||||
| Adjustment to Common Stockholders' Equity | |||||||
| | Common stockholders' equity (as reported) | ||||||
| | Less: Goodwill | ||||||
| | Common stockholders' equity (adjusted) | ||||||
| Adjustment to Net Earnings Common Stockholders | |||||||
| | Net earnings common stockholders (as reported) | ||||||
| | Add: Goodwill impairment | ||||||
| | Net earnings common stockholders (adjusted) | ||||||
Adjusted Ratios: Removal of Goodwill (Summary)
Emerson Electric Co., adjusted ratios
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| 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. | Emerson Electric Co.'s adjusted net profit margin deteriorated from 2015 to 2016 and from 2016 to 2017. |
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Emerson Electric Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then slightly improved 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. |
Emerson Electric Co.'s adjusted financial leverage declined from 2015 to 2016 and from 2016 to 2017. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Emerson Electric Co.'s adjusted ROE deteriorated from 2015 to 2016 and from 2016 to 2017. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Emerson Electric Co.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Net Profit Margin
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net earnings common stockholders (USD $ in millions) | ||||||
| | Net sales (USD $ in millions) | ||||||
| | Net profit margin1 | % | % | % | % | % | % |
| Adjusted for Goodwill | |||||||
| | Adjusted net earnings common stockholders (USD $ in millions) | ||||||
| | Net sales (USD $ in millions) | ||||||
| | Adjusted net profit margin2 | % | % | % | % | % | % |
2017 Calculations
1 Net profit margin = 100 × Net earnings common stockholders ÷ Net sales
= 100 × ÷ = %
2 Adjusted net profit margin = 100 × Adjusted net earnings common stockholders ÷ Net sales
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Emerson Electric Co.'s adjusted net profit margin deteriorated from 2015 to 2016 and from 2016 to 2017. |
Adjusted Total Asset Turnover
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net sales (USD $ in millions) | ||||||
| | Total assets (USD $ in millions) | ||||||
| | Total asset turnover1 | ||||||
| Adjusted for Goodwill | |||||||
| | Net sales (USD $ in millions) | ||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted total asset turnover2 | ||||||
2017 Calculations
1 Total asset turnover = Net sales ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Emerson Electric Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Financial Leverage
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Total assets (USD $ in millions) | ||||||
| | Common stockholders' equity (USD $ in millions) | ||||||
| | Financial leverage1 | ||||||
| Adjusted for Goodwill | |||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted common stockholders' equity (USD $ in millions) | ||||||
| | Adjusted financial leverage2 | ||||||
2017 Calculations
1 Financial leverage = Total assets ÷ Common stockholders' equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted common stockholders' 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. |
Emerson Electric Co.'s adjusted financial leverage declined from 2015 to 2016 and from 2016 to 2017. |
Adjusted Return on Equity (ROE)
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net earnings common stockholders (USD $ in millions) | ||||||
| | Common stockholders' equity (USD $ in millions) | ||||||
| | ROE1 | % | % | % | % | % | % |
| Adjusted for Goodwill | |||||||
| | Adjusted net earnings common stockholders (USD $ in millions) | ||||||
| | Adjusted common stockholders' equity (USD $ in millions) | ||||||
| | Adjusted ROE2 | % | % | % | % | % | % |
2017 Calculations
1 ROE = 100 × Net earnings common stockholders ÷ Common stockholders' equity
= 100 × ÷ = %
2 Adjusted ROE = 100 × Adjusted net earnings common stockholders ÷ Adjusted common stockholders' equity
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | Emerson Electric Co.'s adjusted ROE deteriorated from 2015 to 2016 and from 2016 to 2017. |
Adjusted Return on Assets (ROA)
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2015 | Sep 30, 2014 | Sep 30, 2013 | Sep 30, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net earnings common stockholders (USD $ in millions) | ||||||
| | Total assets (USD $ in millions) | ||||||
| | ROA1 | % | % | % | % | % | % |
| Adjusted for Goodwill | |||||||
| | Adjusted net earnings common stockholders (USD $ in millions) | ||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted ROA2 | % | % | % | % | % | % |
2017 Calculations
1 ROA = 100 × Net earnings common stockholders ÷ Total assets
= 100 × ÷ = %
2 Adjusted ROA = 100 × Adjusted net earnings common stockholders ÷ Adjusted total assets
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by adjusted total assets. | Emerson Electric Co.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
