Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Note 5. Goodwill and Intangible Assets

Goodwill by segment was:


	As of September 30, 2022		As of December 31, 2021
	(in millions)
Latin America	$	680	$	674
AMEA	3,067		3,365
Europe	7,542		7,830
North America	11,098		10,109
Goodwill	$	22,387	$	21,978

Intangible assets consisted of the following:


	As of September 30, 2022		As of December 31, 2021
	(in millions)
Indefinite-life intangible assets	$	18,223	$	17,299
Definite-life intangible assets	3,051		2,991
	21,274		20,290
Accumulated amortization	(1,961)		(1,999)
Intangible assets, net	$	19,313	$	18,291

Indefinite-life intangible assets consist principally of brand names purchased through our acquisitions of Nabisco Holdings Corp., the global LU biscuit business of Groupe Danone S.A., Cadbury Limited and Clif Bar. Definite-life intangible assets consist primarily of brands, customer-related intangibles, process technology, licenses and non-compete agreements.

Amortization expense for intangible assets was $32 million for the three months and $96 million for the nine months ended September 30, 2022 and $32 million for the three months and $102 million for the nine months ended September 30, 2021. For the next five years, we currently estimate annual amortization expense of approximately $130 million in 2022-2024, approximately $110 million in 2025 and approximately $75 million in 2026 (reflecting September 30, 2022 exchange rates).

Changes in goodwill and intangible assets consisted of:


	Goodwill		Intangible Assets, at cost
	(in millions)
Balance at January 1, 2022	$	21,978	$	20,290
Currency	(1,391)		(1,301)
Divestiture	(8)		—
Acquisitions	1,808		2,386
Asset impairments	—		(101)
Balance at September 30, 2022	$	22,387	$	21,274

Changes to goodwill and intangibles were:

•Acquisitions - In connection with our 2022 acquisitions, we recorded preliminary purchase price allocations of $1 billion to goodwill and $1.7 billion to intangible assets for Clif Bar and $791 million to goodwill and $734 million to intangible assets for Chipita. See Note 2, Acquisitions and Divestitures, for additional information.

•Asset impairment - As further described below, we recorded a $78 million and $23 million intangible asset impairment, during the first and third quarters of 2022, respectively, in Asia, Middle East and Africa ("AMEA") due to lower than expected growth and profitability of two local biscuit brands sold in select markets in AMEA and Europe.

During the third quarter of 2022, we performed our annual impairment assessment test for goodwill and indefinite-life intangible assets as of July 1, 2022.

Our 2022 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 6.8% 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 9.8%. 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, 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 2022 annual testing of indefinite-life intangible assets, we recorded a $23 million impairment charge in the third quarter of 2022 related to one brand. The impairment arose due to lower than expected growth and profitability in a local biscuit brand in AMEA. The impairment charge was 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 annual testing, we use several accepted valuation methods, including relief from 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 identified eight brands, including the one brand impaired during the third quarter of 2022, that each had a fair value in excess of book value of 10% or less. The aggregate book value of the eight brands was $1.4 billion as of September 30, 2022. We continue to monitor our brand performance, particularly in light of the significant global economic uncertainties and related impacts to our business. If a brand's earnings expectations, including the timing of the expected recovery from the war and pandemic, 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.

During interim periods, we evaluate our goodwill and intangible asset impairment risk through an assessment of potential triggering events. During the first quarter of 2022, we determined a local biscuit brand in AMEA was impaired. We recorded a $78 million impairment charge for the brand within asset impairment and exit costs based on the excess carrying value over its estimated fair value.