Ch 12 Flashcards
ESG
Sustainability report
Has 3 major categories: environmental, social and
Corporate governance
Integrated report
Report where company discloses data on dozens of metrics
Beyond conventional balance sheet accounting
2 main characteristics of intangible assets?
1 they lack physical existence
2 they aren’t financial instruments
Intangible assets derive their value from…
The rights and privileges granted to the company using them
How are purchased intangibles recorded?
Companies record at cost intangibles purchased from
Another party
What are 5 typical costs included in the valuation of intangible assets?
1 all acquisition costs 2 expenditures to make intangible asset ready for intended use 3 purchase price 4 legal fees 5 incidental expenses
How is the cost of the intangible determined when it is acquired in an exchange for stock or other assets? 2 possibilities
Fair value of the consideration given
Or fair value of intangible received (whichever is more evident)
Business combination
Transaction where purchaser obtains control of 1 or more businesses
What do companies only capitalize when developing the intangible?
Only direct costs incurred such as legal fees
The rest is expensed
Amortization
Allocation of cost of intangible assets in systematic way
Which types of intangibles are and are not amortized?
Limited useful life intangibles are amortized
Indefinite useful life intangibles are not amortized
Evaluating limited life intangibles for impairment
Impairment loss should be recognized if carrying amount
Of intangible is not recoverable and exceeds its fair value
Indefinite life intangibles
If no factors legal, regulatory, contractual or competitive
Limit useful life of intangible
No foreseeable limit in period of time intangible is expected
To provide cash flow
Impairment test for limited life intangibles? How often should it be performed?
Only fair value test is performed, not the recoverability test
Should be performed annually
6 major categories of intangible assets?
1 marketing related intangible assets 2 customer related intangible assets 3 artistic related intangible assets 4 contract related intangible assets 5 technology related intangible assets 6 goodwill
Marketing related intangible assets, give examples
Used in marketing or promotion of products or services
Ex. Trademarks, newspaper mastheads,
Internet domain names and noncompetition agreements
Trademark AKA Trade name
Word, phrase or symbol that distinguishes or identifies
A particular company or product
Registration with the US Patent and Trademark Office provides legal protection for an…
Indefinite number of renewals for periods of 10 years each
Customer related intangible assets, examples
Result from interaction with outside parties
Ex. Customer lists, order or protection backlogs,
Contractual and noncontractual customer relationships
Artistic-related intangible assets
Involve ownership rights to plays, literary works, musical
Works, pictures, photographs, video and audiovisual material
Copyrights protect these ownership rights
Copyright, how long are they granted for?
Federally granted right that all authors, painters, musicians,
Sculptors and other artists have in their creations and
Expressions
For the life of the creator plus 70 years
Contract related intangible assets, examples
Represent value of rights that arise from contractual arrangements
Ex. Franchise, liscensing agreements, construction permits,
Broadcast rights, service or supply contracts
Franchise
Contractual arrangement where franchiser grants franchisee
The right to sell products or services, use certain trademarks,
Or perform certain functions in designated geographic region
Liscences or permits, examples
Operating rights
Ex. Fox, CBS, NBC paid $27.9 billion for the right to
Broadcast the NFL over 8 years
A company should amortize the cost of a franchise or liscense with a…
Limited life as an operating expense over the life of the
Franchise
Technology-related intangible assets, examples
Relate to innovations or technological advances
Ex. Patented technology, trade secrets granted by US
Trademark and Patent Office
Patent
Gives holder exclusive right to use, manufacture and sell
Product or process for period of 20 years without
Interference by others
1 Product patents, 2 process patents
1 Cover actual physical products
2 Govern process of making products
When protecting a patent a company must expense as incurred…
Any R&D costs related to development of product, process,
Or idea that it subsequently patents
Amortization: patents
Companies should amortize cost of patent over its legal
Life or it’s useful life (period where benefits are received)
Whichever is shorter
Goodwill AKA plug, gap filler, master valuation account
Excess of cost of purchase over fair value of identifiable Net assets (assets less liabilities) acquired
Internally created goodwill
Should not be capitalized in accounts
Capitalizing goodwill only when it is purchased in an arms length transaction and not capitalizing any goodwill generated internally is another example of…
Faithful representation winning out over relevance
Master valuation approach: goodwill
Difference btw [(cost of assets or enterprise acquired) +
fair value of net identifiable assets)] - (liabilities
Companies that recognize goodwill in a business combination consider it to have an…
Indefinite life and should not amortize it
Companies adjust goodwill’s carrying value only when…
Goodwill is impaired
Bargain purchase
When purchaser pays less than fair value of the net
Identifiable assets
Recorded As a gain for purchaser
Impairment, what do they apply to?
Carrying amount of long lived asset (property, plant, equip.
Or intangible asset) is not recoverable
Therefore write-off needs to be recorded
Apply to property, plant and equip. And limited life intangibles
Recoverability test
Company estimates future cash flows expected from use
Of asset and eventual disposal
Fair value test
Test measures the impairment loss by comparing the
Asset’s fair value with it’s carrying amount
Impairment loss = carrying amount of asset
- fair value of impaired asset
Restoration of impairment losses
Companies may not recognize restoration of previously
Recognized impairment loss
Research and Development Costs
Frequently result in development of patents and copyrights
Companies must expense all R&D costs when incurred
IFRS VS GAAP: Research and Development
IFRS requires capitalization of appropriate development
Expenditures, this conflicts with GAAP
5 costs associated with R&D activities
1 materials, equipment and facilities 2 personnel 3 purchased intangibles 4 contract services 5 indirect costs
Research and Development accounting treatment: materials, equipment and facilities
Expense entire costs unless items have alternative future
Uses
If alt. future uses, carry items as inventory + allocate as
Consumed or capitalize and depreciate as used
Research and Development accounting treatment: personnel
Expense as incurred salaries, wages and other related
Personnel costs in R&D
Research and Development accounting treatment: purchased intangibles
Recognize and measure at fair value
Account with respect to limited or unlimited life of intangible
Research and Development accounting treatment: Contract services
Expense costs with services performed by others in
connection with R&D
Research and Development accounting treatment: indirect costs
Include reasonable allocation of indirect costs in R&D
Costs
except general and administrative cost which must be clearly
Linked
Startup costs, examples
Incurred for one-time activities to start new operation
Ex. Open new plant, introduce new product or service,
Conduct business in new territory
Organizational costs
Legal and state fees incurred to organize a new business
Entity
Presentation of intangibles on the balance sheet?
The balance sheet should present all intangible items
separately except goodwill
