Today we continue our exploration of non-GAAP adjustments to net income, prompted by the in-depth report Calcbench released last week examining the extent and dollar volume of non-GAAP adjustments made among S&P 500 companies.

First up: amortization of intangible assets.

Why that category? Because it is both one of the most common non-GAAP adjustments and one of the largest categories of non-GAAP adjustment in dollar terms. Plus it’s really easy to find amortization costs in the Calcbench data archives.

Let’s first have a quick review of what intangibles amortization is all about. When companies report intangible assets on the balance sheet and those assets have a definite life span, U.S. Generally Accepted Accounting Principles require companies to amortize the value of those assets every year, until the value reaches zero.

Important point: only intangible assets with a definite lifespan need to be amortized. That includes items such as patents, copyrights, exclusive licensing deals, and so forth. Intangible assets that have an indefinite lifespan, such as trademarks or goodwill from an acquisition, need to be tested for impairment annually — but if the company decides that no impairment is necessary, then in theory those indefinite-lived intangible assets could hold their value forever.

Now back to our non-GAAP adjustment report. We reviewed the non-GAAP disclosures of 200 randomly selected S&P 500 firms. Those companies made a total of 1,188 adjustments to net income, worth a collective $218.97 billion.

Within that haystack of non-GAAP adjustments, we found 88 adjustments relating to amortization of intangible assets worth a collective $59.4 billion, or an average of $675 million per firm. That makes intangibles amortization the second-largest category of adjustment. (Impairments were the largest; we’ll get to those another day.)

Clearly this is an important and influential non-GAAP adjustment to net income. So how can Calcbench users find out more about it, both for specific companies and for large groups overall?

Researching Amortization Costs

To study amortization costs for large populations of companies, start with our Multi-Company database. You can use the standardized search metrics field on the left side of the page to search for, you guessed it, “amortization of intangible assets.”

We did exactly that, and found that S&P 500 firms reported a total of $144.33 billion in intangibles amortization in 2022. Moreover, we then compared that amount to previous years. Figure 1, below, shows the total intangible asset costs for the last five years. (Up 27.8 percent, from $112.9 billion to $144.33 billion.)

OK, cool enough; but we were talking about amortization costs as a non-GAAP adjustment to net income. Calcbench can help there, too. Simply search for net income (which all companies report) and non-GAAP net income (which most large companies also report), and you can compare all of that in one display on the Multi-Company page.

Figure 2, below, shows that lineup, ranking companies starting with the largest intangibles amortization costs.

Look closely. The company with the largest intangibles amortization cost was Bristol Myers Squibb ($BMY), which reported a $9.7 billion expense. BMY also reported non-GAAP net income of $16.53 billion. If you subtract that $9.7 billion amortization expense from non-GAAP net income, you arrive at $6.83 billion — which is within spitting distance of BMY’s actual, GAAP-approved net income of $6.34 billion.

Obviously, then, Bristol Myers Squibb’s adjusted, non-GAAP net income is almost entirely due to excluding the GAAP-required amortization of intangible assets.

It’s not our place to say whether such adjustments are good or bad, but knowing that fact about BMY’s non-GAAP net income can help inform a financial analyst’s understanding of the company’s earnings quality. You might even be able to estimate future adjustments, because most companies typically amortize intangibles on a straight-line basis. So if Bristol Myers Squibb (or any other company) acquired no new definite-lived intangible assets (unlikely, but anything can happen in a hypothetical), you could model what future amortization expenses might be.

Indeed, when we used our world-famous Trace feature to find the exact footnote reference for BMY’s $9.7 billion disclosure, we found that the company itself had done exactly that:

Amortization expense of other intangible assets was $9.7 billion in 2022, $10.2 billion in 2021 and $9.9 billion in 2020. Future annual amortization expense of other intangible assets is expected to be approximately $9.2 billion in 2023, $8.4 billion in 2024, $2.9 billion in 2025, $1.4 billion in 2026 and $1.3 billion in 2027.

Notice that there’s a steep drop, from $8.4 billion in 2024 to only $2.9 billion in 2025. Presumably that means several large intangible assets will reach the end of their useful life, and the value goes to zero. Does that mean BMY needs to find new assets to succeed the old ones? Are certain drug-related patents expiring? Does the company have other cards up its sleeve, that it will pop out at a 10-Q filing sometime soon?

Again, Calcbench doesn’t know. But we do have the all data to help you start looking for your own answers.

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