## 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

Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Several factors give rise to goodwill in FedEx's acquisitions, such as the expected benefits from synergies of the combination and the existing workforce of the acquired business. Goodwill is reviewed at least annually for impairment. In the evaluation of goodwill impairment, FedEx performs a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, FedEx proceeds to test goodwill for impairment, including comparing the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value for FedEx's reporting units is determined using an income or market approach incorporating market participant considerations and management's assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, FedEx performs the annual impairment testing in the fourth quarter.

#### INTANGIBLE ASSETS

Intangible assets primarily include customer relationships, technology assets and trademarks acquired in business combinations. Intangible assets are amortized over periods ranging from 3 to 15 years, either on a straight-line basis or on a basis consistent with the pattern in which the economic benefits are realized.

Source: FedEx Corp., Annual Report

### Goodwill and Intangible Assets Disclosure

**FedEx Corp., Statement of Financial Position, Goodwill and Intangible Assets**

USD $ in millions

May 31, 2018 | May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | ||
---|---|---|---|---|---|---|---|

Goodwill | 6,973 | 7,154 | 6,747 | 3,810 | 2,790 | 2,755 | |

Customer relationships | 676 | 656 | 912 | 338 | – | – | |

Technology | 68 | 54 | 123 | 34 | – | – | |

Trademarks and other | 141 | 136 | 202 | 60 | 57 | 72 | |

Other intangible assets, gross carrying amount | 885 | 846 | 1,237 | 432 | 57 | 72 | |

Accumulated amortization | (405) | (317) | (229) | (225) | – | – | |

Other intangible assets, net book value | 480 | 529 | 1,008 | 207 | 57 | 72 | |

Goodwill and other intangible assets | 7,453 | 7,683 | 7,755 | 4,017 | 2,847 | 2,827 |

Source: Based on data from FedEx Corp. Annual Reports

Item | Description | The company |
---|---|---|

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. | FedEx Corp.'s goodwill increased from 2016 to 2017 but then slightly declined from 2017 to 2018. |

Other intangible assets, net book value |
Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. | FedEx Corp.'s other intangible assets, net book value declined from 2016 to 2017 and from 2017 to 2018. |

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. | FedEx Corp.'s goodwill and other intangible assets declined from 2016 to 2017 and from 2017 to 2018. |

### Analyst Adjustments: Removal of Goodwill

**FedEx Corp., adjustments to financial data**

USD $ in millions

### Adjusted Ratios: Removal of Goodwill (Summary)

**FedEx Corp., adjusted ratios**

Ratio | Description | The company |
---|---|---|

Adjusted net profit margin |
An indicator of profitability, calculated as adjusted net income divided by revenue. | FedEx Corp.'s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018. |

Adjusted total asset turnover |
An activity ratio calculated as total revenue divided by adjusted total assets. | FedEx Corp.'s adjusted total asset turnover improved from 2016 to 2017 but then slightly deteriorated 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. |
FedEx Corp.'s adjusted financial leverage declined from 2016 to 2017 and from 2017 to 2018. |

Adjusted ROE |
A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | FedEx Corp.'s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018. |

Adjusted ROA |
A profitability ratio calculated as adjusted net income divided by adjusted total assets. | FedEx Corp.'s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018. |

### Adjusted Net Profit Margin

*2018 Calculations*

^{1} Net profit margin = 100 × Net income ÷ Revenues

= 100 × 4,572 ÷ 65,450 = 6.99%

^{2} Adjusted net profit margin = 100 × Adjusted net income ÷ Revenues

= 100 × 4,946 ÷ 65,450 = 7.56%

Ratio | Description | The company |
---|---|---|

Adjusted net profit margin |
An indicator of profitability, calculated as adjusted net income divided by revenue. | FedEx Corp.'s adjusted net profit margin improved from 2016 to 2017 and from 2017 to 2018. |

### Adjusted Total Asset Turnover

*2018 Calculations*

^{1} Total asset turnover = Revenues ÷ Total assets

= 65,450 ÷ 52,330 = 1.25

^{2} Adjusted total asset turnover = Revenues ÷ Adjusted total assets

= 65,450 ÷ 45,357 = 1.44

Ratio | Description | The company |
---|---|---|

Adjusted total asset turnover |
An activity ratio calculated as total revenue divided by adjusted total assets. | FedEx Corp.'s adjusted total asset turnover improved from 2016 to 2017 but then slightly deteriorated from 2017 to 2018. |

### Adjusted Financial Leverage

*2018 Calculations*

^{1} Financial leverage = Total assets ÷ Common stockholders' investment

= 52,330 ÷ 19,416 = 2.70

^{2} Adjusted financial leverage = Adjusted total assets ÷ Adjusted common stockholders' investment

= 45,357 ÷ 12,443 = 3.65

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. |
FedEx Corp.'s adjusted financial leverage declined from 2016 to 2017 and from 2017 to 2018. |

### Adjusted Return on Equity (ROE)

*2018 Calculations*

^{1} ROE = 100 × Net income ÷ Common stockholders' investment

= 100 × 4,572 ÷ 19,416 = 23.55%

^{2} Adjusted ROE = 100 × Adjusted net income ÷ Adjusted common stockholders' investment

= 100 × 4,946 ÷ 12,443 = 40%

Ratio | Description | The company |
---|---|---|

Adjusted ROE |
A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. | FedEx Corp.'s adjusted ROE improved from 2016 to 2017 and from 2017 to 2018. |

### Adjusted Return on Assets (ROA)

*2018 Calculations*

^{1} ROA = 100 × Net income ÷ Total assets

= 100 × 4,572 ÷ 52,330 = 8.74%

^{2} Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets

= 100 × 4,946 ÷ 45,357 = 10.90%

Ratio | Description | The company |
---|---|---|

Adjusted ROA |
A profitability ratio calculated as adjusted net income divided by adjusted total assets. | FedEx Corp.'s adjusted ROA improved from 2016 to 2017 and from 2017 to 2018. |