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Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


Goodwill and Intangible Assets Accounting Policy

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is allocated to the appropriate reporting unit when acquired. Other acquired intangible assets are stated at the fair value acquired as determined by a valuation technique commensurate with the intended use of the related asset. Goodwill and indefinite-lived intangible assets are not amortized; rather, they are evaluated for impairment annually and whenever events or changes in circumstances indicate that the value of the asset may be impaired. Definite-lived intangible assets are considered long-lived assets and are amortized on a straight-line basis over the periods that expected economic benefits will be provided.

Goodwill is evaluated for impairment using either a qualitative or quantitative approach for each of Walmart's reporting units. Generally, a qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method and relative market-based approaches. After evaluation, management determined the fair value of each reporting unit is greater than the carrying amount and, accordingly, Walmart has not recorded any impairment charges related to goodwill.

Indefinite-lived intangible assets are included in other assets and deferred charges in Walmart's Consolidated Balance Sheets. These assets are evaluated for impairment based on their fair values using valuation techniques which are updated annually based on the most recent variables and assumptions. There were no significant impairment charges related to indefinite-lived intangible assets recorded for fiscal 2018, 2017 and 2016.

Source: 10-K (filing date: 2018-03-30).


Analyst Adjustments: Removal of Goodwill

Walmart Inc., adjustments to financial data

USD $ in millions

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Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015 Jan 31, 2014 Jan 31, 2013
Adjustment to Total Assets
Total assets (as reported) 204,522  198,825  199,581  203,706  204,751  203,105 
Less: Goodwill 18,242  17,037  16,695  18,102  19,510  20,497 
Total assets (adjusted) 186,280  181,788  182,886  185,604  185,241  182,608 
Adjustment to Total Walmart Shareholders' Equity
Total Walmart shareholders' equity (as reported) 77,869  77,798  80,546  81,394  76,255  76,343 
Less: Goodwill 18,242  17,037  16,695  18,102  19,510  20,497 
Total Walmart shareholders' equity (adjusted) 59,627  60,761  63,851  63,292  56,745  55,846 

Based on: 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01), 10-K (filing date: 2014-03-21), 10-K (filing date: 2013-03-26).


Adjusted Ratios: Removal of Goodwill (Summary)

Walmart Inc., adjusted ratios

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Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015 Jan 31, 2014 Jan 31, 2013
Total Asset Turnover
Reported total asset turnover 2.42 2.42 2.40 2.37 2.31 2.29
Adjusted total asset turnover 2.66 2.65 2.62 2.60 2.55 2.55
Financial Leverage
Reported financial leverage 2.63 2.56 2.48 2.50 2.69 2.66
Adjusted financial leverage 3.12 2.99 2.86 2.93 3.26 3.27
Return on Equity (ROE)
Reported ROE 12.66% 17.54% 18.24% 20.10% 21.01% 22.27%
Adjusted ROE 16.54% 22.45% 23.01% 25.85% 28.24% 30.44%
Return on Assets (ROA)
Reported ROA 4.82% 6.86% 7.36% 8.03% 7.83% 8.37%
Adjusted ROA 5.29% 7.50% 8.03% 8.82% 8.65% 9.31%

Based on: 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01), 10-K (filing date: 2014-03-21), 10-K (filing date: 2013-03-26).

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Walmart Inc.'s adjusted total asset turnover improved from 2016 to 2017 and 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.
Walmart Inc.'s adjusted financial leverage increased from 2016 to 2017 and from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Walmart Inc.'s adjusted ROE deteriorated from 2016 to 2017 and from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Walmart Inc.'s adjusted ROA deteriorated from 2016 to 2017 and from 2017 to 2018.

Adjusted Total Asset Turnover

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Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015 Jan 31, 2014 Jan 31, 2013
As Reported
Net sales (USD $ in millions) 495,761  481,317  478,614  482,229  473,076  466,114 
Total assets (USD $ in millions) 204,522  198,825  199,581  203,706  204,751  203,105 
Total asset turnover1 2.42 2.42 2.40 2.37 2.31 2.29
Adjusted for Goodwill
Net sales (USD $ in millions) 495,761  481,317  478,614  482,229  473,076  466,114 
Adjusted total assets (USD $ in millions) 186,280  181,788  182,886  185,604  185,241  182,608 
Adjusted total asset turnover2 2.66 2.65 2.62 2.60 2.55 2.55

Based on: 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01), 10-K (filing date: 2014-03-21), 10-K (filing date: 2013-03-26).

2018 Calculations

1 Total asset turnover = Net sales ÷ Total assets
= 495,761 ÷ 204,522 = 2.42

2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= 495,761 ÷ 186,280 = 2.66

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Walmart Inc.'s adjusted total asset turnover improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

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Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015 Jan 31, 2014 Jan 31, 2013
As Reported
Total assets (USD $ in millions) 204,522  198,825  199,581  203,706  204,751  203,105 
Total Walmart shareholders' equity (USD $ in millions) 77,869  77,798  80,546  81,394  76,255  76,343 
Financial leverage1 2.63 2.56 2.48 2.50 2.69 2.66
Adjusted for Goodwill
Adjusted total assets (USD $ in millions) 186,280  181,788  182,886  185,604  185,241  182,608 
Adjusted total Walmart shareholders' equity (USD $ in millions) 59,627  60,761  63,851  63,292  56,745  55,846 
Adjusted financial leverage2 3.12 2.99 2.86 2.93 3.26 3.27

Based on: 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01), 10-K (filing date: 2014-03-21), 10-K (filing date: 2013-03-26).

2018 Calculations

1 Financial leverage = Total assets ÷ Total Walmart shareholders' equity
= 204,522 ÷ 77,869 = 2.63

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Walmart shareholders' equity
= 186,280 ÷ 59,627 = 3.12

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.
Walmart Inc.'s adjusted financial leverage increased from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Equity (ROE)

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Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015 Jan 31, 2014 Jan 31, 2013
As Reported
Consolidated net income attributable to Walmart (USD $ in millions) 9,862  13,643  14,694  16,363  16,022  16,999 
Total Walmart shareholders' equity (USD $ in millions) 77,869  77,798  80,546  81,394  76,255  76,343 
ROE1 12.66% 17.54% 18.24% 20.10% 21.01% 22.27%
Adjusted for Goodwill
Consolidated net income attributable to Walmart (USD $ in millions) 9,862  13,643  14,694  16,363  16,022  16,999 
Adjusted total Walmart shareholders' equity (USD $ in millions) 59,627  60,761  63,851  63,292  56,745  55,846 
Adjusted ROE2 16.54% 22.45% 23.01% 25.85% 28.24% 30.44%

Based on: 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01), 10-K (filing date: 2014-03-21), 10-K (filing date: 2013-03-26).

2018 Calculations

1 ROE = 100 × Consolidated net income attributable to Walmart ÷ Total Walmart shareholders' equity
= 100 × 9,862 ÷ 77,869 = 12.66%

2 Adjusted ROE = 100 × Consolidated net income attributable to Walmart ÷ Adjusted total Walmart shareholders' equity
= 100 × 9,862 ÷ 59,627 = 16.54%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders' equity. Walmart Inc.'s adjusted ROE deteriorated from 2016 to 2017 and from 2017 to 2018.

Adjusted Return on Assets (ROA)

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Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015 Jan 31, 2014 Jan 31, 2013
As Reported
Consolidated net income attributable to Walmart (USD $ in millions) 9,862  13,643  14,694  16,363  16,022  16,999 
Total assets (USD $ in millions) 204,522  198,825  199,581  203,706  204,751  203,105 
ROA1 4.82% 6.86% 7.36% 8.03% 7.83% 8.37%
Adjusted for Goodwill
Consolidated net income attributable to Walmart (USD $ in millions) 9,862  13,643  14,694  16,363  16,022  16,999 
Adjusted total assets (USD $ in millions) 186,280  181,788  182,886  185,604  185,241  182,608 
Adjusted ROA2 5.29% 7.50% 8.03% 8.82% 8.65% 9.31%

Based on: 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01), 10-K (filing date: 2014-03-21), 10-K (filing date: 2013-03-26).

2018 Calculations

1 ROA = 100 × Consolidated net income attributable to Walmart ÷ Total assets
= 100 × 9,862 ÷ 204,522 = 4.82%

2 Adjusted ROA = 100 × Consolidated net income attributable to Walmart ÷ Adjusted total assets
= 100 × 9,862 ÷ 186,280 = 5.29%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Walmart Inc.'s adjusted ROA deteriorated from 2016 to 2017 and from 2017 to 2018.