Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Note 5. Goodwill and Intangible Assets

Goodwill by segment was:


	As of September 30, 2020		As of December 31, 2019
	(in millions)
Latin America	$	654	$	818
AMEA	3,147		3,151
Europe	7,668		7,523
North America	9,866		9,356
Goodwill	$	21,335	$	20,848

Intangible assets consisted of the following:


	As of September 30, 2020		As of December 31, 2019
	(in millions)
Non-amortizable intangible assets	$	17,032	$	17,296
Amortizable intangible assets	2,831		2,374
	19,863		19,670
Accumulated amortization	(1,807)		(1,713)
Intangible assets, net	$	18,056	$	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 $143 million for the nine months ended September 30, 2020 and $43 million for the three months and $130 million for the nine months ended September 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 $115 million in 2022-2024 (reflecting September 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	(42)		(216)

Acquisition	529		553
Asset impairments	—		(144)
Balance at September 30, 2020	$	21,335	$	19,863

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 $529 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 nine months ended September 30, 2020, we recorded $144 million of intangible asset impairments resulting primarily from the impacts of COVID-19 that led to lower than expected growth for eight brands across our segments.

During the first six months of 2020, we evaluated our goodwill and intangible asset impairment risk using qualitative analysis. In light of the ongoing COVID-19 global pandemic, we performed further quantitative analysis over non-amortizable intangible assets during the second quarter of 2020, resulting in approximately $90 million of intangible asset impairment charges.

During the third quarter of 2020, we performed our annual impairment assessment test for goodwill and non-amortizable intangible assets as of July 1, 2020.

Our 2020 annual testing of goodwill resulted in no impairments as each reporting unit had sufficient fair value in excess of its carrying value. As part of our goodwill quantitative annual impairment testing, we compare a reporting unit's estimated fair value with its carrying value. If the carrying value of a reporting unit's net assets exceeds its fair value, we would record an impairment based on the difference between the carrying value and fair value of the reporting unit. We estimate a reporting unit's fair value using a discounted cash flow method that incorporates planned growth rates, market-based discount rates and estimates of residual value. This year, for our Europe and North America reporting units, we used a market based, weighted-average cost of capital of 6.1% to discount the projected cash flows of those operations. For our Latin America and AMEA reporting units, we used a risk-rated discount rate of 9.1%. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans and industry and economic conditions based on available information. Given the uncertainty of the global economic environment and the impact of COVID-19, those estimates could be significantly different than future performance. While all reporting units passed our annual impairment testing, if planned business performance expectations are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then the estimated fair values of a reporting unit or reporting units might decline and lead to a goodwill impairment in the future.

During our 2020 annual testing of non-amortizable intangible assets, we recorded approximately $54 million of impairment charges in the third quarter of 2020 related to three gum and chocolate brands. The ongoing impact of the pandemic resulted in greater declines in the sales and earnings for certain brands, particularly our gum brands. We have incorporated the latest results and a slower expected recovery for these brands in the revenue and earnings projections incorporated in our annual impairment testing. We recorded charges of $47 million in North America, $3 million in Europe and $3 million in Latin America. 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. We use several accepted valuation methods, including relief of royalty, excess earnings and excess margin, that utilize estimates of future sales, earnings growth rates, royalty rates and discount rates in determining a brand's global fair value. We also identified nine brands, including the three brands impaired in third quarter of 2020, with $712 million of aggregate book value as of September 30, 2020, that each had a fair value in excess of book value of 10% or less. We continue to monitor our brand performance, particularly in light of the significant uncertainty due to the COVID-19 pandemic and related impacts to our business. 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.