B Compare the financial reporting of the following types of intablible assets: purchased, internally developed, acquired in a business combination

Question 1

What are intangible assets?

Answer 1

Intangible assets are long-term assets (rather, assets a company owns for a period longer than 1 year which yields some economic potential benefit) that lack physical substance. Examples include patents, brand names, copyrights, and franchises - and some are finite in lifespan, and others live infinitely.

Finite intangible assets are amortized over their useful life.

Infinite intangible lives are tested for impairment, or a reduction in value, which is recognized in the income statement as a loss in the period in which the impairment is recognized.

Intangible assets are identifiable (IFRS: Capable of separation from the firm, or arise from a contractual or legal right, are controlled by the irm and provide future economic benefits which should be probable and the costs, measurable.)

Unidentifiable Intangible Assets (think Goodwill), Goodwill cannot be purchased, and may have an indefinite life. Goodwill is the excess of purchase price over the fair value of the identifiable assets (net of liabilities) acquired in a business combination.

Question 2

The Financial Reporting of an intangible asset which is purchased…

Answer 2

…from another party is recored on the BS at cost, at fair value at acquisiton (much like and LT-A) However, if purcahsed as a part of a group, the total purcahse price is allocated to each asset on the basis of its fair value. However, an analyst is more converned with the type of asset aquired rather than the value of the balance sheet, as the type of asset aquired may provide insight into the firms future operating performance and at that point, allocation of cost isn’t so important.

FS effects of capitalizing intangible assets are the same as capitalizing other expenditures - that is, capitalizing = higher NI today, lower NI tomorrow, higher A, Eq, and op CF

Question 3

The Financial Reporting of an intangible asset which is internally developed…(Focus: Software development costs)

Answer 3

Except for R&D, and Software development costs, costs to create intangible assets are expensed as incurred

R&D costs - Reasearch costs ( costs aimed at the discovery of new scientific or technical knowledge and understanding are expensed as incurred. Development costs may be capitalized as incurred to translate research findings into a plan or design of a new product or process. To rec. an intangible asset in dev. - firm must show that is can complete the asset and intends to use or sell the completed asset.

Software Development Costs are incurred to develop software for sale to others and are expensed as incurred until the products technological feasability has been established, and which costs are capitalized.

Software costs under IFRS: only capitalize the software expenditures that meet the capitalization criteria. So, IFRS capitalizes software based on econ benefits

GAAP capitalizes all software expenditures.

Question 4

The Financial Reporting of an intangible asset which are obtained in a Business Combination…

Answer 4

Use ‘aquisition method’ for business combinations - allocate the price to the identifiable assets and the L’s of the acquired firm on the basis of fair value…any remaining amount of the purchase price is recorded as goodwill

Goodwill, only when created in a business combo is capitalized on the BS. Otherwise, its costs are generally internal thus expensed in the period incurred, as goodwill is unidentifiable.