EVA

Hi,
The adjustment for items relating to goodwill involves adding back any amortisation or goodwill which is written off. This is because these adjustments are due to the accounting treatments Instead EVA wishes to reflect a true value of the goodwill which can be adjusted in value if some impairment has occurred.

The technique requires all the intangible assets to be recognised and added back – so that includes R&D, goodwill and marketing.

If goodwill is mentioned as being written off, not-capitalised or amortised then the amounts written off need to be added back in the same way as accounting depreciation is added back to tangible assets.

Hope that helps.

Hi – When calculating EVA there are potentially 160 adjustments that can be made. It is a common criticism that EVA is rather a new and unregulated method – so in real life there can be a lack of consistent rules regarding its calculation.

It’s also hard give a rule for sure without seeing actual facts regarding each adjustment.

I believe that any goodwill mentioned in the question should be added back if it is is related to creation of value and building future assets for the company.

In terms of over investing in high value projects – it depends on the composition/ nature of the high value projects. There is definitely no dis-incentive to spend on projects which involve R&D, advertising and staff training etc because these expenses can be added back to increase economic profit.
However, any part of the investment that increases the capital employed will cause a slightly bigger deduction (capital employed x Wacc %) when calculating final EVA figure. This is not likely to net off the effect of the increases in economic profit but will reduce the EVA surplus in some respect.

So although EVA doesn’t provide a disincentive to investment in the same way as ROI can do – Im not sure that I would support the idea that the bigger spend is better.

Hope thats some help 🙂

You’re welcome 🙂