Case study on annual reporting for intangible assets
Merck & Johnson are two leading producers of health care products.
Each has considerable assets, and each expends considerable funds
each year toward the development of new products.
The development of new health care products is often very expensive,
and risky. New products frequently must undergo considerable
testing before approved for distribution to public. For example，it
took Johnson 4 years and $200 millions to develop its one type of new
products. Below are some of the basis data compiled from the
financial statements of these two companies.
Table 1-1, Johnson & Merck financial data
Accounts (All amount in millions)
Johnson
Merck
Total assets
15668
21857
Total revenue
15734
14970
Net income
2006
2997
R & D expense
1278
1230
Intangible assets
2403
7212
Based on the information above, please answer the following
questions:
(1) What kinds of intangible assets might a health care products
company have? Does the composition of these intangibles matter
to investors—that is, would it be perceived differently if all of
Merck’s intangibles were goodwill, than if all of its intangible
were patents?
(2) Suppose the president of Merck has come to you for advice. He
has notes that by eliminating research and development
expenditures the company could have reported $1.3billion more
in net income. He is frustrated because much of the research
never results in a product, he says shareholders are eager for
higher returns, so he is considering eliminating research and
development expenditures for at least a couple of years. What
would you advise?
(3) The notes to Merck’s financial statements note that Merck has
goodwill of $4.1 million. Where does recorded goodwill come
from? Is it necessarily a good thing to have a lot of goodwill on
your account books?