Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Note 5. Goodwill and Intangible Assets

Goodwill by segment was:



	As of June 30, 2020		As of December 31, 2019
	(in millions)
Latin America	$	653	$	818
AMEA	3,074		3,151
Europe	7,416		7,523
North America	9,854		9,356
Goodwill	$	20,997	$	20,848

Intangible assets consisted of the following:



	As of June 30, 2020			As of December 31, 2019
	(in millions)
Non-amortizable intangible assets	$	16,817		$	17,296
Amortizable intangible assets	2,790			2,374
	19,607			19,670
Accumulated amortization	(1,730		)	(1,713		)
Intangible assets, net	$	17,877		$	17,957

Non-amortizable intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the Spanish and Portuguese operations of United Biscuits, the global LU biscuit business of Groupe Danone S.A. and Cadbury Limited. Amortizable intangible assets consist primarily of brands, customer-related intangibles, process technology, licenses and non-compete agreements.

Amortization expense for intangible assets was $50 million for the three months and $93 million for the six months ended June 30, 2020 and $43 million for the three months and $87 million for the six months ended June 30, 2019. For the next five years, we currently estimate annual amortization expense of approximately $190 million in 2020, approximately $120 million in 2021 and approximately $110 million in 2022-2024 (reflecting June 30, 2020 exchange rates).

Changes in goodwill and intangible assets consisted of:



	Goodwill			Intangible Assets, at cost
	(in millions)
Balance at January 1, 2020	$	20,848		$	19,670
Currency	(381		)	(526		)
Acquisition	530			553
Asset impairments	—			(90		)
Balance at June 30, 2020	$	20,997		$	19,607

Changes to goodwill and intangibles were:


•	Acquisition – In connection with our acquisition of a majority interest in Give & Go during the second quarter of 2020, we recorded a preliminary purchase price allocation of $530 million to goodwill and $553 million to intangible assets. See Note 2, Acquisitions and Divestitures, for additional information.


•	Asset impairments – As further described below, during the second quarter of 2020, we recorded $90 million of intangible asset impairments resulting primarily from the impacts of COVID-19 that led to lower than expected growth for six brands across our segments.

During the first six months of 2020, we evaluated our goodwill and intangible asset impairment risk using both qualitative and quantitative analysis and in light of the ongoing COVID-19 global pandemic. We will continue to monitor the potential for asset impairment risk over coming quarters.


•	Goodwill – Based on the financial performance of our goodwill reporting units during the first half of 2020 and review of other significant fair value assumptions and qualitative factors, we concluded that no goodwill impairment indicators were present that would require additional goodwill impairment evaluation and that our goodwill as of June 30, 2020 is fairly stated.

•

Intangible Assets – In connection with the ongoing COVID-19 global pandemic, during the second quarter of 2020, we identified a decline in demand for certain of our brands, primarily in the gum category, that prompted additional evaluation of our indefinite-life (non-amortizable) intangible assets. We estimated the fair value of the brands using several acceptable valuation methods, including relief of royalty, excess earnings and excess margin models. Those models required us to make assumptions related to the future sales and earnings growth rates for the brands, as well as royalty rates and discount rates. We made our best estimate of those assumptions using the information available; however, given the uncertainty of the global economic environment and the impact of COVID-19, those estimates could be significantly different than future performance. In certain instances, the estimated fair value of the brand was below the carrying value, which resulted in four gum brands, a small biscuit brand and a small candy brand being impaired as a result of lower than originally expected sales growth. We recorded $90 million of impairment charges: $50 million in Europe, $36 million in North America and $4 million in AMEA. The impairment charges were calculated as the excess of the carrying value over the estimated fair value of the intangible assets on a global basis and were recorded within asset impairment and exit costs.

During our 2019 annual testing of non-amortizable intangible assets, we recorded $57 million of impairment charges in the third quarter of 2019 related to nine gum, chocolate, biscuits and candy brands: $39 million in Europe, $15 million in AMEA and $3 million in Latin America.

Following our 2019 and 2020 impairment testing to date, we identified eight brands with fair value in excess of book value of 10% or less that totaled $576 million of aggregate book value as of June 30, 2020. We continue to monitor our brand performance, particularly in light of the COVID-19 pandemic and related impacts to our business. While we did not identify impairment triggers for our other brands, there is significant uncertainty due to the pandemic. If the brand earnings expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then a brand or brands could become impaired in the future.