Balance Sheet Flashcards
What are intangible assets?
Identifiable non-monetary assets without physical substance such as patents or goodwill.
What are two models to report intangibles and which ones are allowed by GAAP and IFRS?
Cost model (IFRS & GAAP)
Revaluation model (only IFRS)
What is a requirement for the revaluation model to work?
There has to be an active market for that intangible asset
An intangible asset with a finite useful life is amortized on a systematic basis over the best estimate of its useful life.
How to handle an intangible asset with an indefinite life?
Not amortized, but instead the reasonableness of assuming an indefinite useful life is reviewed and the asset is tested for impairment.
What is impairment?
Permanent reduction in the value of an asset
A company may have developed intangible assets internally that can be recognized only in certain circumstances. Companies may also have assets that are never recorded on a balance sheet because they are non-identifiable and the company does not have sufficient control over their future economic benefits. These assets might include management and technical skills of employees, market share, name recognition, a good reputation etc. Such assets are valuable and are reflected in the price at which the company’s equity securities trade in the market. Such assets may be recognized as goodwill by an acquirer if the company is sold.
When are identifiable intangible assets recognized on the balance sheet?
If it is probable that future economic benefits will flow to the company and the cost of the asset can be measured reliably, such as patents, trademarks, copyrights, licenses etc.
Since the cost of internally created intangible assets can be difficult to determine, these intangibles must be expensed.
How do IFRS and US GAAP treat R&D costs in the context of capitalizing and expensing?
According to IFRS, research costs have to be expensed but development costs can be capitalized if it meets certain requirements.
According to US GAAP, all R&D costs have to be expensed.
Acquired or purchased intangible assets are capitalized if they arise from contractual rights!
What is goodwill?
When one company acquires another, the purchase price is allocated to all of the identifiable assets and liabilities acquired, based on fair value. If the purchase price is higher than the fair value of identifiable assets and liabilities, the excess amount is recognized as an asset called goodwill.
Why would an acquirer pay more to purchase a company than the fair value of the target company’s assets net of liabilities? Three reasons
- Certain items are not recognized in the financial statements (reputation, skills etc.)
- A company’s R&D expenditures may have not resulted in a separately identifiable asset that meets the requirements for recognition but stills holds some value.
- Part of the value of of an acquisition may arise from improved strategic positioning versus a competitor or from perceived synergies such as operating cost-saving opportunities after acquisition.
What is the difference between accounting goodwill and economic goodwill?
Economic goodwill is based on the economic performance of the entity, whereas accounting goodwill is based on accounting standards and is reported only in the case of acquisitions. Economic goodwill is not shown on the balance sheet but rather in the stock price.
Accounting goodwill is capitalized and tested for impairment annually
How to calculate goodwill?
- Determine the total costs to purchase the target company.
- Measure the fair value of net identifiable assets
- Goodwill is the the difference between total price of the company and the fair value of net assets
What are two ways in which financial instruments are measured?
Fair value
Amortized costs
What is the amortized costs method to value financial instruments?
The amount at which it was initially recognized, minus any principal payments, plus or minus any amortization of discount or premium, and minus any reduction for impairment.
What are deferred tax liabilities?
The amounts of income taxes payable in future periods in respect of taxable temporary differences.
For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders’ equity?
Other comprehensive income
For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders’ equity?
Through income to retained earnings
What are liquidity and solvency?
Liquidity is a company’s ability to meet its short-term obligations.
Solvency is a company’s ability to meet its long-term obligations.
