goodwill adjustments - RI and EVA

CFA Level II
#1

Is goodwill ammortization added back to Net Income in Residual Income valuations? I know it is added back to NOPAT in EVA valuations, but Schweser is a bit opaque on RI valuations. Thanks. Mike

#2

Goodwill isn’t amortized, I hope…

#3

not added back in case of RI calculations that was on question 5 of self test equity investment book 3 page 346 schweser notes. since i got that answer wrong. but why???

#4

goodwill is NOT amortized and not added to find RI (its not even on I/S), the only way I could see it being added back was if it was originally understated and needed to be written up

#5

Good point. There is some text in Schweser about adding back goodwill ammortization, but that doesnt make any sense given that goodwill is tested for impairment and not ammortized. Instead the reference should be to add back the ammortization expense of definite life intangible assets, which could include a capitalized excess purchase price over book value of a subsidiary. Mike

#6

Also, for RI valuations is the LIFO to FIFO adjustment just a balance sheet adjustment or does net income have to be adjusted to reflect different cogs?

#7

I believe so as LIFO is not allowed under IFRS

#8

thanks…

#9

i remember that in some calculation,goodwill is excluded can anyone specify?

#10

Yep, that’s the equation in determining what amount above the book value of the acquisition is to be depreciated and amortized. This is in regards to acquiring assets well above their book values. Anything above the fair value of “net identifiable assets” is considered goodwill, and cannot be depreciated nor amortized, but is tested for impairment annually.

#11

awesome,David.