Goodwill

Goodwill can be written off directly against equity at the time of the acquisition or it is
capitalized and amortized
ROIC should calculate both with and without goodwill.
Excluding goodwill- measure the operating performance of the company and useful for
comparing operating performance across companies and analyzing trends.
Include goodwill- measure how well company has used investors funds, whether the
company has earned its cost of capital by considering the actual cost paid for fixed assets.
Proper way include goodwill in the ROIC calculation is add to invested capital the total
amount of goodwill before cumulative amortization of goodwill.
Not amortizing goodwill for economic analysis is that goodwill, unlike other fixed assets,
does not wear our and does not have to be replace.
Companies that have written off goodwill against equity, simply add the cumulative
goodwill written off to invested capitals calculate ROIC including goodwill.

Fixed-asset revolution
Asset revalued to take into account the impact of inflation or other price changes.
Revaluation takes the form of an increased in fixed asset and a corresponding increase in
an equity account to show the result of the company on the basis of current costs.
Netherlands, assets revalued every year to reflect resizable value.
Italy, Spain and Portugal, assets revalued only under special circumstances.
USA and Germany cannot be revalued because assets always reflect historical cost.
The way to take revaluation into account is to annually adjust NOPLAT and invested
capital to reflect the annual increase of market value.
When calculating free cash flow, capital spending should be determined as this income in
net fixed assets plus depreciation, less the increase in the revaluation reserve. Otherwise
investments would be overstated.

Deferred taxation
Arise from differences between a companys published financial statement and its tax
account.
In Germany, Switzerland and Italy, deferred taxes normally do not arise in the account of
individuals companies because financial statements are the same as the tax accounts.
Deferred taxes may arise in consolidated account.
In some countries, deferred taxes could be substantial because of items such as assets
revaluation and accelerated depreciation.
To calculate NOPLAT, invested capital and ROIS, income taxes should be stated on a
cash basis. For NOPLAT, the increase in deferred taxes should be subtracted from the
amount of taxes on the income statement to calculate taxes on earning before interests
and taxes.
For invested capital, deferred taxes should be treated as an equity item.