#7 – Long-Lived Assets Flashcards
Intangible Assets
Intangible Assets are long-lived legal rights and competitive advantages developed or acquired by a business enterprise.
Sections Covered in Long-Lived Assets
- 4
- 5
- 3
- 1 – Intangibles Assets
Intangible Assets – Classification: Identifiability
Specifically Identifiable intangible assets – Patents – Copyrights – Franchises – Trademarks
Not specifically Identifiable intangible assets
– Goodwill
Intangible Assets – Classification: Manner of Acquisition
Purchased intangible assets
– Recorded at cost
– Capitalize Legal and registration fees incurred to obtain assets
Internally developed intangible assets
– expense against income when incurred
– Exceptions: the following are capitalized
– legal fees and other costs related to a successful defense of the asset
– registration or consulting fees
– design costs (e.g.of a trademark)
– other direct costs to secure the asset
Intangible Assets – Classification: Expected Period of benefit, Separability
Classification of the intangible asset depends upon whether the economic life can be determined or is indeterminable
Separability = whether separable form entity (e.g patent) or is significantly inseparable from entity (e.g goodwill, trade name)
Intangible Assets – Internally Developed Intangible Assets: IFRS vs GAAP
US GAAP = expense costs of internally developed intangible assets when incurred because US GAAP prohibits the capitalization of research and development costs
IFRS
– Expense research costs
– Capitalize development costs if:
– Technological viability has been established
– Entity intends to complete the intangible asset
– Entity has the ability to use or sell the intangible asset
– Intangible assets will generate future economic benefits
– Adequate resources are available to complete the development and sell or use the asset
– Entity can reliably measure the expenditure attributable to the development of the intangible asset
Intangible Assets – Capitalization of Costs
Cost may be determined either by the fair value of the consideration given all by the fair value of the property acquired, which ever is more clearly evident
The cost of unidentifiable intangible assets
= Cost of the assets/enterprise acquired
– Costs assigned to identifiable assets acquired
– Liabilities assumed
Intangible Assets – Amortization
The cost of intangible assets with definite lives should be amortized over the expected useful life
– Straight line method typically used
The cost of goodwill and other intangible assets with indefinite lives is not amortized. Instead they are tested for impairment at least annually.
– write down the intangible asset and recognize an impairment loss if the intangible asset becomes impaired
Intangible asset becomes worthless – write off the entire remaining cost to expense
Change in useful life – remaining net book value amortized over the new remaining life
Sale of asset – compare carrying value at date of sale with the selling price to determine gain or loss
Income text effect – Amortization of acquired intangible assets that are not specifically identifiable deductible over 15 years in computing income taxes payable
– May create a temporary difference, and interperiod allocation of income taxes is needed.
Intangible Assets – Valuation: US GAAP
Finite life intangible assets are reported at cost less amortization and impairment
Indefinite life intangible assets are reported at cost less impairment
Intangible Assets – Valuation: IFRS
Intangible assets reported under either the (1) cost model (2) revaluation model
Intangible Assets – Valuation: IFRS»_space;> Cost Model
For finite life intangible assets only
Intangible assets are reported at cost adjusted for amortization and impairment
Intangible Assets – Valuation: IFRS»_space;> Revaluation Model
Tangible assets are initially recognized at cost and then reevaluated to fair value at a subsequent reevaluation date
Reevaluated intangible assets of reported at fair value on to the evaluation date adjusted for subsequent amortization (finite life intangible assets only) and subsequent impairment
Revaluation model carrying value
= Fair value on revaluation date
– Subsequent amortize nation
– Subsequent impairment
Revaluations must be performed regularly
Intangible Assets – Valuation: IFRS»_space;> Revaluation Model – Losses, Gains & Impairment
Revaluation losses are reported on the income statement, unless the revaluation loss reverses a previously recognized reevaluation game
– A revaluation lost that reverses a previously recognized revaluation gain is recognized in other comprehensive income and reduces the revaluation surplus in accumulated other comprehensive income
Revaluation gains are reported in other comprehensive income and accumulated in equity as reevaluation surplus, unless the reevaluation gain reverses a previously recognized revaluation loss
– Revaluation gains are reported on the income statement to the extent that they reverse a previously recognized revaluation loss
If revalued intangible assets subsequently become impaired, the impairment is recorded as follows
- Reduce revaluation surplus in equity to zero
- Report Any further impairment loss on the income statement
Intangible Assets – Franchisee Accounting
Initial franchise fee
– Record present value as an intangible asset on the balance sheet and amortize over the expected life of the franchise
Continuing franchise fees
– Report as expense for franchisee in
– Report as revenue for franchisee
Intangible Assets – Start-up Costs
One time activities associated with:
– Organizing a new entity (legal fees for preparing a charter, partnership agreement, bylaws, original stock certificates certifications, filing fees)
– Opening a new facility
– Introducing a new product or service
– Conducting business in a new territory over with a new class of customer
– Initiating a new process in an existing facility
Does not include costs associated with:
– Routine, ongoing efforts to refine, and enrich, or improve the quality of existing products, services, processes, or facilities
– Business mergers or acquisitions
– Ongoing customer acquisition
Intangible Assets – Start-up Costs: Financial Statements Treatment vs. Tax Treatment
Financial statement
– Start-up costs, including organizational costs, should be expensed when incurred
Text treatment
– Deduct up to $5000 each of organizational expenditures and start up costs
– Each $5000 amount is reduced by the amount by which the organization expenditures or start up costs exceed $50,000
– Any excess organizational expenditures or start up costs I monetized of 180 months
– This may create a temporary difference, and interperiod allocation of income taxes maybe needed
Intangible Assets – Goodwill
Goodwill is the representation of intangible resources and elements connected with an entity. Goodwill means capitalized excess earning power
Goodwill is calculated using either (1) the acquisition method, or (2) the equity method
Acquisition method = Goodwill is the excess of an acquired entity’s fair value over the fair value of the entity’s net assets, including identifiable intangible assets.
Equity method involves the purchase of a company’s capital stock. Goodwill is the excess of the stock purchase price over the fair value of net assets acquired
Costs associated with containing, developing, or restoring good bro I’m not capitalize as goodwill, there expensed
Goodwill generated internally or not purchased in arm’s-length transaction is not capitalized as goodwill
Intangible Assets – Research and Development Costs
Research is the planned efforts of a company to discover new information that will help either create a new product, service, process, or technique or slightly improve the one in current use.
Development takes the findings generated by research and formulate a plan to create the desired item or to improve significantly the existing one
Not considered research and development – Routine periodic design changes to old products or troubleshooting in production stage (these are manufacturing costs) – Marketing research – Quality control testing – Reformulation of a chemical compound
Intangible Assets – Research and Development Costs: US GAAP
Research and development costs are expensed
– Exception: materials, equipment, or facilities that have alternate future uses capitalized undepreciated over their useful lives
– Note: costs incurred to actually produce the product are product costs charged to inventory
Research and development costs undertaking on behalf of others on under a contractual arrangement
– The purchaser will expense as research and development the amount paid
– The provider will expense the costs incurred as cost of sales
– Disclosure is required in the financial statements or notes of the amount of R&D charged to expense for the period.
Intangible Assets – Research and Development Costs: IFRS
Research costs are expensed
Development costs may be capitalized if certain criteria are met:
– Technological viability has been established
– Entity intends to complete the intangible asset
– Entity has the ability to use or sell the intangible asset
– Intangible assets will generate future economic benefits
– Adequate resources are available to complete the development and sell or use the asset
– Entity can reliably measure the expenditure attributable to the development of the intangible asset
Intangible Assets – Computer Software Development Costs: Computer Software Developed to be Sold, Leased or Licensed
Technological feasibility is established upon completion of
– Detailed program design, or
– Completion of the working model
Expenses costs incurred on till technological feasibility has been established for the product
Capitalize costs incurred after technological feasibility has been established up to the point that the product is released for sale
Intangible Assets – Computer Software Development Costs: Computer Software Developed to be Sold, Leased or Licensed»_space;> Amortisation of Capitalised Software Costs
Amortisation is only product by product basis
Amortisation is the greater of (1) % of revenue method or (2) straight line method
% of revenue method
Annual amortization expense
= Total capitalised amount
x Current gross revenue for period
÷ Total projected gross revenue for product
Straight-line method
Annual amortization expense
= Total capitalised amount
÷ Estimate of economic life
Balance sheet – Capitalized software costs are reported at the lower of cost or market
– Market = net realisable value
Intangible Assets – Computer Software Development Costs: Computer Software Developed internally or Obtained for Internal Use Only
Expenses costs incurred for the preliminary project state and costs incurred for training and maintenance
Capitalize costs incurred after the preliminary project state and for upgrades and enhancements including
– Direct costs all materials and services
– Costs of employees directly associated with the project, and
– Interest costs incurred for the project
Amortize capitalised costs on a straight-line basis
If software subsequently sold, proceeds received should be applied first to carrying amour of software, with balance recognised as revenue.
Intangible Assets – Computer Software Development Costs: IFRS
No separate guidance regarding computer software development costs — computer software development costs are considered internally generated intangibles
Research costs are expensed
Development costs may be capitalized if certain criteria are met:
– Technological viability has been established
– Entity intends to complete the intangible asset
– Entity has the ability to use or sell the intangible asset
– Intangible assets will generate future economic benefits
– Adequate resources are available to complete the development and sell or use the asset
– Entity can reliably measure the expenditure attributable to the development of the intangible asset
Intangible Assets – Impairment of Intangible Assets other than Goodwill: Intangible Assets with Finite Lives
2-step impairment test
Step 1: Compare carrying amount to sum of UNDISCOUNTED future cash flows
– If carrying amount less greater = impairment
Step 2: Calculate amount of impairment
– Impairment loss is difference between carrying amount of the asset and it’s FAIR VALUE
Intangible Assets – Impairment of Intangible Assets other than Goodwill: Intangible Assets with Indefinte Lives
1-step impairment test
Compare carrying value with fair value
– impairment loss recognized if fair value is less than its carrying value
Don’t need to do this test if management’s consideration of relevant qualitative factors leads to a determination that it is not more likely than not that the fair value of the indefinite life intangible asset is less than it’s carrying amount
Intangible Assets – Impairment of Intangible Assets other than Goodwill: Intangible Assets with Indefinte Lives»_space;> Management’s consideration of relevant qualitative factors
Qualitative factors include:
– Macroeconomic conditions
– Overall financial performance
– Entity-specific events such as bankruptcy, litigation, or changes in management, strategy, or customers
– Industry and market conditions
– Sustained decreases in share price
– Cost factors that could have a negative effect on earnings and cash flows
Intangible Assets – Reporting an Impairment Loss
Impairment loss reported in income from continuing operations before income taxes, unless the impairment losses related to discontinued operations
The carrying amount of the asset is reduced by the amount of the impairment loss
Restoration of previously recognised impairment losses is prohibited unless the asset is held for disposal
Intangible Assets – Impairment of Intangible Assets other than Goodwill: IFRS
Impairment loss for intangible assets other than goodwill is calculated using a 1 step model
– carrying value is compared to asset’s recoverable amount
Recoverable amount = the greater of
- asset’s fair value less cost to sell
- asset’s value in use
Value in use = the present value of the future cash flows expected from the intangible assets
IRRS allows the reversal of impairment losses
Intangible Assets – Goodwill Impairment
Goodwill impairment is calculated at a reporting unit level
– Reporting unit = operating segment, or one level below and operating segment
Impairment exist when the carrying amount of the reporting unit goodwill exceeds its fair value
Evaluating goodwill impairment
Step 1: compare fair value of each reporting unit with its carrying amount, including goodwill
– if fair value of the unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit’s goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for.
Step 2: measure goodwill impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that could well
– allocate fair value of the reporting units or assets and liabilities. Any fair value that cannot be assigned to specific assets and liabilities is the implied good will of the reporting unit
Once goodwill impairment loss has been fully recognized, it cannot be reversed
Don’t need to do this test if management’s consideration of relevant qualitative factors leads to a determination that it is not more likely than not that the fair value of the indefinite life intangible asset is less than it’s carrying amount
Intangible Assets – Goodwill Impairment: IFRS
Goodwill impairment testing is done at the cash-generating unit level
– A cash generating unit is defined as the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets all groups are assets
1-step impairment tests: carrying value of the cash generating unit is compared to its recoverable amount
– Recoverable amount = greater of (1) fair value less cost to sell and (3) value in use
– Value in use = present value of the future cash flows expected from the cash generating unit
Impairment loss recognised to the extent that the carrying value exceeds the recoverable amount
– Impairment loss is first allocated to goodwill and then allocated on pro rata basis to the other assets of the cash generating unit
