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Microsoft Excel LibreOffice Calc


Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


Goodwill and Intangible Assets Accounting Policy

Goodwill

Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If Merck concludes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.

Acquired Intangibles

Acquired intangibles include products and product rights, tradenames and patents, which are initially recorded at fair value, assigned an estimated useful life, and are amortized primarily on a straight-line basis over their estimated useful lives ranging from 2 to 20 years. Merck periodically evaluates whether current facts or circumstances indicate that the carrying values of its acquired intangibles may not be recoverable. If such circumstances are determined to exist, an estimate of the undiscounted future cash flows of these assets, or appropriate asset groupings, is compared to the carrying value to determine whether an impairment exists. If the asset is determined to be impaired, the loss is measured based on the difference between the carrying value of the intangible asset and its fair value, which is determined based on the net present value of estimated future cash flows.

Acquired In-Process Research and Development

Acquired in-process research and development (IPR&D) that Merck acquires through business combinations represents the fair value assigned to incomplete research projects which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and are accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, Merck will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization. Merck tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D intangible asset is less than its carrying amount. If Merck concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

Source: 10-K (filing date: 2018-02-27).


Goodwill and Intangible Assets Disclosure

Merck & Co. Inc., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Products and product rights hidden hidden hidden hidden hidden
IPR&D hidden hidden hidden hidden hidden
Tradenames hidden hidden hidden hidden hidden
Other hidden hidden hidden hidden hidden
Other intangibles, gross carrying amount hidden hidden hidden hidden hidden
Accumulated amortization hidden hidden hidden hidden hidden
Other intangibles, net hidden hidden hidden hidden hidden
Goodwill hidden hidden hidden hidden hidden
Goodwill and other intangibles hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

Item Description The company
Other intangibles, net Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Merck & Co. Inc.'s other intangibles, net 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. Merck & Co. Inc.'s goodwill increased from 2015 to 2016 and from 2016 to 2017.
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. Merck & Co. Inc.'s goodwill and other intangibles declined from 2015 to 2016 and from 2016 to 2017.

Analyst Adjustments: Removal of Goodwill

Merck & Co. Inc., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden
Total assets (adjusted) hidden hidden hidden hidden hidden
Adjustment to Total Merck & Co., Inc. Stockholders' Equity
Total Merck & Co., Inc. stockholders' equity (as reported) hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden
Total Merck & Co., Inc. stockholders' equity (adjusted) hidden hidden hidden hidden hidden
Adjustment to Net Income Attributable To Merck & Co., Inc.
Net income attributable to Merck & Co., Inc. (as reported) hidden hidden hidden hidden hidden
Add: Goodwill impairments hidden hidden hidden hidden hidden
Net income attributable to Merck & Co., Inc. (adjusted) hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).


Adjusted Ratios: Removal of Goodwill (Summary)

Merck & Co. Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net Profit Margin
Reported net profit margin hidden hidden hidden hidden hidden
Adjusted net profit margin hidden hidden hidden hidden hidden
Total Asset Turnover
Reported total asset turnover hidden hidden hidden hidden hidden
Adjusted total asset turnover hidden hidden hidden hidden hidden
Financial Leverage
Reported financial leverage hidden hidden hidden hidden hidden
Adjusted financial leverage hidden hidden hidden hidden hidden
Return on Equity (ROE)
Reported ROE hidden hidden hidden hidden hidden
Adjusted ROE hidden hidden hidden hidden hidden
Return on Assets (ROA)
Reported ROA hidden hidden hidden hidden hidden
Adjusted ROA hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Merck & Co. Inc.'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. Merck & Co. Inc.'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.
Merck & Co. Inc.'s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Merck & Co. Inc.'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. Merck & Co. Inc.'s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income attributable to Merck & Co., Inc. (USD $ in millions) hidden hidden hidden hidden hidden
Sales (USD $ in millions) hidden hidden hidden hidden hidden
Net profit margin1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Adjusted net income attributable to Merck & Co., Inc. (USD $ in millions) hidden hidden hidden hidden hidden
Sales (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted net profit margin2 hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

2017 Calculations

1 Net profit margin = 100 × Net income attributable to Merck & Co., Inc. ÷ Sales
= 100 × hidden ÷ hidden = hidden

2 Adjusted net profit margin = 100 × Adjusted net income attributable to Merck & Co., Inc. ÷ Sales
= 100 × hidden ÷ hidden = hidden

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Merck & Co. Inc.'s adjusted net profit margin deteriorated from 2015 to 2016 and from 2016 to 2017.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Sales (USD $ in millions) hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
Total asset turnover1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Sales (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total asset turnover2 hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

2017 Calculations

1 Total asset turnover = Sales ÷ Total assets
= hidden ÷ hidden = hidden

2 Adjusted total asset turnover = Sales ÷ Adjusted total assets
= hidden ÷ hidden = hidden

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

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
Total Merck & Co., Inc. stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
Financial leverage1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total Merck & Co., Inc. stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted financial leverage2 hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

2017 Calculations

1 Financial leverage = Total assets ÷ Total Merck & Co., Inc. stockholders' equity
= hidden ÷ hidden = hidden

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Merck & Co., Inc. stockholders' equity
= hidden ÷ hidden = hidden

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.
Merck & Co. Inc.'s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income attributable to Merck & Co., Inc. (USD $ in millions) hidden hidden hidden hidden hidden
Total Merck & Co., Inc. stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
ROE1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Adjusted net income attributable to Merck & Co., Inc. (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total Merck & Co., Inc. stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted ROE2 hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

2017 Calculations

1 ROE = 100 × Net income attributable to Merck & Co., Inc. ÷ Total Merck & Co., Inc. stockholders' equity
= 100 × hidden ÷ hidden = hidden

2 Adjusted ROE = 100 × Adjusted net income attributable to Merck & Co., Inc. ÷ Adjusted total Merck & Co., Inc. stockholders' equity
= 100 × hidden ÷ hidden = hidden

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Merck & Co. Inc.'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 income attributable to Merck & Co., Inc. (USD $ in millions) hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden
ROA1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Adjusted net income attributable to Merck & Co., Inc. (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden
Adjusted ROA2 hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-26), 10-K (filing date: 2015-02-27), 10-K (filing date: 2014-02-27).

2017 Calculations

1 ROA = 100 × Net income attributable to Merck & Co., Inc. ÷ Total assets
= 100 × hidden ÷ hidden = hidden

2 Adjusted ROA = 100 × Adjusted net income attributable to Merck & Co., Inc. ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Merck & Co. Inc.'s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.