432 NoNoperatiNg items, provisioNs, aNd reserves
 amortization of acquired intangibles Although accounting standards re-
quire amortization of acquired intangibles, in most circumstances you should 
not deduct amortization from operating profi t to determine NOPAT. As an al-
ternative to expensing amortization, use EBITA (not EBIT) to determine oper-
ating profi ts. Since amortization is excluded from operating profi t, remember 
to include the cumulative excluded amortization in your total for intangible 
assets on the balance sheet. A corresponding entry should be made to equity 
(titled “cumulative amortization”) to balance total funds invested. 
 Why not amortize intangibles, particularly since we include depreciation 
in our calculation of ROIC? The idea of recognizing an intangible asset and 
then amortizing its use over a useful life is a good one. Yet current accounting 
standards do not allow companies to take this approach consistently across 
all intangibles. Today, only acquired intangibles are capitalized and amortized, 
while internally generated intangible assets, such as brand and distribution net-
works, are expensed when they are created. Thus, the EBIT of a company 
that acquires an intangible asset and then replenishes the asset through in-
ternal investment will be penalized twice on its fi nancial statements, once 
through SG&A expenses and again through amortization. In fact, expensing 
the creation of new intangible assets while amortizing old intangibles would 
be tantamount to including both capital expenditures and depreciation on the 
income statement, a clearly undesirable characteristic. For valuation purposes, 
avoid mixing amortization and expensing by maintaining goodwill and ac-
quired intangibles at their original values. To do this, compute operating profi t 
before amortization, and add cumulative amortization to the current value of 
goodwill and intangible assets. 
 Exhibit 21.3 demonstrates the effect of amortizing acquired intangibles 
on margins for three companies in the pharmaceuticals industry. Based 
on EBIT margin, it appears as if the three companies have nearly identical 
 performance. The amortization of acquired intangibles, however, is distorting 
our perspective. Pfi zer has been extremely active in acquiring companies and 
EXHIBIT 21.3 EBIT and EBITA Margins in the Pharmaceuticals Industry, 2018
%
Pfizer
EBIT margin
28.3
GlaxoSmithKline
27.7
Bristol-Myers Squibb
28.7
EBITA margin
37.4
30.6
29.6 
Source: Annual reports.

Nonoperating Expenses and One-Time Charges  433
products, including the 2016 purchases of Medivation and Anacor. Stripping 
out amortization from these and other acquisitions reveals that Pfizer outper-
formed these peers by roughly seven percentage points.
One situation in which it is appropriate to deduct amortization is when 
intangibles can be capitalized (versus expensed) consistently. Consider a com-
pany that has no sales force and instead purchases customer contacts from a 
third party. Since sales outlays are never expensed via SG&A, they should be 
amortized to arrive at a meaningful measure of operating profitability. Oth-
erwise, the income statement would not accurately reflect the cost of selling. 
Another example is the purchase of frequency rights by telecom companies. 
Since these assets can be capitalized and amortized without exception, treat 
them no differently than fixed equipment and depreciation.
Asset Write-Offs  If the value of an asset falls below its book value, accounting 
standards dictate that the asset should be written down (sometimes entirely) 
to its fair value. Although write-downs and write-offs give lenders insight 
into the diminished value of their collateral, the resulting balance sheet value 
understates the historical investment made by shareholders. Thus, ROIC can 
artificially rise following a write-down. To counteract this effect, treat asset 
write-downs and write-offs as nonoperating, and add cumulative write-downs 
to invested capital. To balance total funds invested, create a corresponding 
equity equivalent.
Two categories of asset write-offs are common:
1. Asset write-offs. In general, treat an asset write-off as nonoperating. In 
the rare cases when they occur systematically, treat them as operating. 
Add back write-downs to the asset, except when you are estimating 
capital turnover to project future capital needs. In this case, compute the 
ratio in a manner that best reflects future capital needs.
2. Goodwill and intangibles impairments. Treat goodwill and other intan-
gibles impairments as nonoperating and add back cumulative im-
pairments to goodwill on the balance sheet. Since the purpose of 
computing ROIC with goodwill is to measure historical performance 
including all past acquisition premiums, goodwill should remain at its 
original level.
Restructuring Charges  As business changes, companies must adapt. Major 
changes often require plant closures, employee layoffs, inventory write-downs, 
asset write-offs, and other restructuring charges. If a restructuring charge is 
unlikely to recur, treat the charge as nonoperating. If, however, a pattern of on-
going restructuring charges emerges, further analysis is required. Exhibit 21.4 
presents the restructuring charges for Boston Scientific between 2009 and 
2018. During this period, Boston Scientific’s restructuring charges averaged