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ACG3141 > Ch 12 Intangible Assets > Flashcards

Ch 12 Intangible Assets Flashcards

1
Q

LO1

Describe the characteristics of intangible assets.

A
  1. lack physical existence
  2. they are not financial instruments

In most cases, intangible assets provide services over a period of years so normally classified as long-term assets.

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2
Q

LO2

Identify the costs to include in the initial valuation of intangible assets.

A

Recorded at cost. Includes:

  • all acquisition costs and expenditures needed to make ready for intended use
  • if acquired in exchange for stock/other assets, the cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.
  • basket purchase of several intangibles or a combination of intangibles and tangibles, it should allocate the cost of the basis of fair values.
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3
Q

LO3

Explain the procedure for amortizing intangible assets.

A

Either limited useful life or indefinite useful life.
Amortize limited-life intangibles by systematic charges to expense over their useful life. Useful life should reflect the period over which these assets will contribute to cash flows. The amount to report should reflect the pattern in which a company consumes or uses up the asset, if it can reliably determine the pattern. Otherwise use straight-line.
Do not amortize indefinite life intangibles.

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4
Q

LO4

Describe the types of intangible assets.

A
  1. marketing-related - used in the marketing or promotion of products/services
  2. customer-related - resulting from interactions with outside parties
  3. artistic-related - giving ownership rights to such items as plays and literary works
  4. contract-related - representing the value of rights that arise from contractual arrangements
  5. technology-related - relating to innovations or technological advances
  6. goodwill - arising from business combinations
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5
Q

LO5

Explain the accounting issues for recording goodwill.

A
  • is a going concern valuation and only recorded when an entire business is purchased
  • a company should not capitalize goodwill created internally
  • future benefits of goodwill may have no relationship to the costs incurred in the development of that goodwill
  • goodwill may exist even in the absence of specific costs to develop it
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6
Q

LO6

Explain the accounting issues related to intangible-asset impairments.

A
  • impairment occurs when the carrying amount of the intangible asset is not recoverable
  • limited life intangibles - recoverability then fair value test
  • indefinite life intangibles - fair value test only
  • goodwill impairments - fair value of the reporting unit, then do the fair value test on implied goodwill
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7
Q

LO7

Identify the conceptual issues related to research and development.

A
  • R&D costs are not intangible assets but may result in the development of something a company patents or copyrights.
  • Difficulties for accounting for R&D:
    1. identifying the costs associated with particular activities
    2. determining the magnitude of the future benefits and length of time over which a company may realize such benefits
  • due to difficulties companies are required to expense all R&D costs when incurred.
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8
Q

LO8

Describe the accounting for R&D and similar costs.

A
  • acquisition of machinery for use on current and future R&D projects - capitalize and depreciate to R&D projects (b/c has alternative future use)
  • legal fees to obtain patent on new R&D project - capitalize as patent & amortize to OH as part of cost of goods manufactured ( direct cost of patent)
  • research costs incurred under contract with a company, billable monthly - record as receivable (reimbursable expense)
  • cost of marketing to promote new R&D project - expense as operating expense (selling expense)
  • commissions to sales staff marketing new R&D project - expense as operating expense (selling expense)
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9
Q

LO9

Indicate the presentation of intangible assets and related items.

A
  • report all intangible asset, except goodwill, on balance sheet.
  • report goodwill as a separate item on balance sheet.
  • contra accounts are not normally shown.
  • report amortization expense and impairment losses in continuing operations section of income statement.
  • notes to the financial statements should have additional detailed info.
  • financial statements must disclose the total R&D costs charged to expense each period for which an income statement is present.
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10
Q

Integrated Report

A

Non-financial info with mandated disclosures that reports R&D expenses and other intangible assets that don’t show up on a balance sheet or income statement.

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11
Q

ESG

A

Sustainability reporting:

  • environmental
  • social
  • corporate governance
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12
Q

Intangible assets purchased from another party are recorded…

A

At cost.

Includes all acquisition costs plus expenditures to make the intangible asset ready for its intended use. Purchase price, legal fees, & other incidental expenses.

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13
Q

Intangible assets are classified as ____ assets.

A

Long term (in most cases b/c they provide benefits over a period of years)

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14
Q

When an intangible asset is acquired in exchange for stock or other assets.

A

The cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.

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15
Q

Basket Purchase

A

When a company buys several intangibles, or combination or intangibles and tangibles.

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16
Q

Accounting For A Basket Purchase

A

Should allocate the cost on the basis of fair values. Closely parallels that for purchased tangible assets.

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17
Q

Capitalizing Costs For Internally Created Intangibles

A

Capitalize only direct costs incurred in developing the intangible - such as legal costs, expense the rest.

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18
Q

Limited-Life Intangibles

A
  • Amortize their limited-life intangibles by systematic charges to expense over their useful life.
  • Useful life should reflect the periods over which these assets will contribute to cash flows.
  • Amount of amortization expense should reflect the pattern in which the company consumes the asset, if the company can reliably determine the pattern. If no pattern is discernible, use straight-line.
  • Amount of intangible asset should be its cost less residual value.
  • Residual value is assumed to be zero at the end of its useful life unless it has value to another company.
  • If the life changes, the remaining carrying amount should be amortized over the revised remaining useful life.
  • Should be evaluated on regular basis for impairments.
  • Recoverability test, then fair value test.
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19
Q

Indefinite-Life Intangibles

A
  • Means there is no foreseeable limit on the period of time over which the intangible asset is expected to provide cash flows.
  • Occurs when no factors (legal, regulatory, contractual, competitive, etc.) limit the useful life.
  • Is NOT amortized.
  • Should be tested for impairments at least annually.
  • Only a fair value test.
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20
Q

Types Of Intangible Assets (6)

A
  1. Marketing
  2. Customer
  3. Artistic
  4. Contract
  5. Technology
  6. Goodwill
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21
Q

Marketing-Related Intangibles

A
  • Used in the marketing or promotion of products/services

- Examples: trademarks, trade names, newspaper mastheads, internet domain names, non-competition agreements.

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22
Q

Trademark/Trade Name

A
  • A word, phrase, or symbol that distinguishes or identifies a particular company or product.
  • US Patent & Trademark Office provides for legal protection for an indefinite number of renewals for periods of 10 years each.
  • Considered an indefinite life intangible.
  • If a company buys a trademark/trade name, it capitalizes the cost at purchase.
  • If a company develops a trademark/name, it capitalizes the costs related to securing it - attorney fees, registration fees, design costs, consulting fees, and successful legal defense costs. Excludes R&D costs. Or if costs are insignificant - expenses it.
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23
Q

Customer-Related Intangibles

A
  • Result from interactions with outside parties.
  • Examples: customer lists, order or production backlogs, and both contractual and non-contractual customer relationships.
  • Companies should assume zero residual value unless the asset’s useful life is less than the economic life and reliable evidence is available concerning the residual value.
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24
Q

Artistic-Related Intangibles

A
  • Involve ownership rights to plays, literary works, musical works, pictures, photographs, and video and audiovisual material.
  • Protected by copyrights.
  • Capitalize the cost of acquiring and defending a copyright.
  • Amortize any capitalized costs over the useful life of the copyright if less than its legal life.
  • Must expense R&D costs that lead to a copyright as those costs are incurred.
25
Q

Copyright

A
  • A federally granted right that all authors, painters, musicians, sculptors, and other artists have in their creations and expressions.
  • Legal life = Granted for the life of the creator plus 70 years.
  • Are not renewable.
26
Q

Contract-Related Intangibles

A
  • Represent the value of rights that arise from contractual arrangements.
  • Examples: franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.
  • May be for a definite, indefinite, or perpetual period of time.
  • Should amortize the cost of a franchise/license with a limited life as an operating expense over the life of the franchise.
  • Should not amortize a franchise with an indefinite life nor a perpetual franchise, instead carry such franchises at cost.
  • Annual pymts made under a franchise agreement should be treated as operating expenses in the period in which they are incurred b/c they don’t represent an asset since they do not relate to future rights to use the property.
27
Q

Franchise

A

-Contractual arrangement under which the franchisor grants the franchisee the right to sell certain products or services, to use certain trademarks/trade names, or to perform certain functions, usually within a designated geographical area.

28
Q

Licenses/Permits

A

Another type of franchise, granted by a governmental body that permits the business to use public property in performing services.

29
Q

Technology-Related Intangibles

A
  • Relate to innovations or technological advances.
  • Examples: patented technology and trade secrets granted by the US Patent & Trademark office.
  • If a company purchases a patent from an inventor it should capitalize purchase price, attorney’s fees, and unrecoverable costs of a successful legal suit to protect the patent.
  • Must expense as incurred R&D costs related to the product, process, or idea that it subsequently patents.
  • Should amortize costs over its legal life or its useful life, whichever is shorter.
  • Changing demand, new inventions superseding old ones can limit useful life to less than the legal life.
  • Amortization expense should reflect the pattern, if reliably determined, in which a company uses up the patent.
  • Companies can make small modifications/additions that lead to new patents. Can extend the life of an old patent or apply unamortized costs of the old patent to the new patent.
  • If a patent becomes impaired b/c demand drops, asset should be written down or written off immediately to expense.
30
Q

Patent

A
  • Gives the holder exclusive right to use, manufacture, and sell a product or process for a period of 20 years w/o interference or infringement by others.
  • 2 types: product & process
31
Q

Product Patent

A

Cover actual physical products

32
Q

Process Patent

A

Govern the process of making products

33
Q

Useful Life

A

The period in which benefits are received.

34
Q

Goodwill

A
  • Is measured as the excess of the cost of the purchase over the fair value of the identifiable net assets (assets less liabilities) purchased.
  • Also referred to as a plug, gap filler, or a master valuation account.
  • The only way to sell goodwill is to sell the business.
  • Goodwill represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized.
  • Internally created goodwill should not be capitalized.
35
Q

Goodwill Write-Off

A
  • Goodwill is considered to have an indefinite life.
  • Companies adjust its carrying value only when goodwill is impaired.
  • Can significantly impact income statements
36
Q

Bargain Purchase

A
  • When a purchaser in a business combination pays LESS than the fair value of the identifiable net assets.
  • Results from a market imperfection.
  • Excess amount is recorded as a gain by the purchaser.
  • FASB requires companies to disclose the nature of the gain to help users better evaluate the quality of the earnings reported.
37
Q

Impairment Of Limited-Life Intangibles

A
  • Same rules that apply to PP&E.
  • First perform a recoverability test.
  • Second perform a fair value test.
  • Reported as a loss on the income statement in the continuing operations section. Identified as “Other expenses and losses.”
  • After recognizing the impairment, the reduced carrying amount is the new cost basis.
  • May not recognize restoration of the previously recognized impairment loss (cannot reverse impairment)..
38
Q

Recoverability Test

A

The company estimates the future cash flows expected from the use of the asset and its eventual disposal. If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset - recognize and measure an impairment loss.

39
Q

Fair Value Test

A
  • This test measures the impairment loss by comparing the asset’s fair value with its carrying amount.
  • Impairment loss amount = carrying amount - fair value
40
Q

Impairment Of Indefinite-Life Intangibles Other Than Goodwill

A
  • Should be tested at least annually.
  • Use a fair value test- compares the fair value of the intangible asset with the asset’s carrying amount. If less than carrying amount then recognize an impairment.
  • Do not use a recoverability test b/c indefinite life assets easily meets it (cash flows may extend many years into the future).
  • Have the option of performing a qualitative test to determine more than 50% likely the asset is impaired. Qualitative test - fair value of reporting unit is more likely than not to be greater than the carrying value - no need to continue w/ a fair value test.
  • Qualitative test should reduce both the cost and complexity of performing the impairment test.
41
Q

Impairment Of Goodwill

A

-Goodwill must be tested for impairment at least annually.
-2 step process.
-1st compare fair value of the reporting unit to its carrying amount, including goodwill. If fair value exceeds carrying value - no impairment.
2nd - If carrying value exceeds fair value, determine fair value (implied value) of goodwill and compare to carrying amount.
-May perform a qualitative test.
-The qualitative assessment examines similar factors as those used in the optional qualitative test for other indefinite-life intangibles but are based on events and circumstances related to the reporting unit.

42
Q

R&D Costs

A
  • NOT intangible assets but frequently result in the development of an intangible asset (patents, copyrights) that will provide future value.
  • 2 difficulties:
    1) identifying the costs associated w/ the particular activities, projects, achievements
    2) determining the magnitude of future benefits and length of time over which such benefits may be realized.
  • Companies expense all R&D costs when incurred, with a few exceptions.
  • Do not include routine/periodic alterations to existing products, production lines, manufacturing processes, & other ongoing operations, even though these alterations may represent improvements.
43
Q

Research Activities

A

Planned search or critical investigation aimed at discovery of new knowledge.

44
Q

Development Activities

A

Translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

45
Q

Accounting For R&D Activities:

Materials, Equipment, & Facilities

A

Expense ENTIRE cost unless the items have alternative future uses (in other R&D projects or otherwise). Carry as inventory and allocate as consumed, or capitalize and depreciate as used.

46
Q

Accounting For R&D Activities:

Personnel

A

Expense as incurred salaries, wages, and other related costs of personnel engaged in R&D.

47
Q

Accounting For R&D Activities:

Purchased Intangibles

A

Recognize & measure at fair value, then account IAW their nature (limited-life or indefinite-life).

48
Q

Accounting For R&D Activities:

Contract Services

A

Expense with costs of services performed by others in connection with R&D as incurred.

49
Q

Accounting For R&D Activities:

Indirect Costs

A

Include a reasonable allocation of indirect costs to R&D costs, except G&A - must be clearly related in order to be include in R&D.

50
Q

Costs Similar to R&D Costs (4)

A
  1. Start-up costs for a new operation
  2. Initial operating losses
  3. Advertising costs
  4. Computer software costs
51
Q

Start-Up Costs

A
  • Incurred for one-time activities to start a new operation
  • Expense all as incurred.
  • Examples: travel, training, recruiting.
  • Occur at the same time as acquiring assets, should be reported on the balance sheet using appropriate GAAP reporting guidelines.
52
Q

Initial Operating Losses

A
  • Sometimes unavoidable cost of starting up a business.

- GAAP requires that operating losses during the early years should NOT be capitalized.

53
Q

Advertising Costs

A
  • Expense advertising costs as incurred or the first time the advertising takes place.
  • Can record as tangible assets when billboards, blimps, etc. are used AND have future use.
54
Q

Computer Software Costs

A

Example: software costs incurred by an airline in improving its computerized reservation system or the costs incurred in developing a company’s mgmt info system are NOT R&D costs.

55
Q

Presentation Of Intangible Assets

A
  • Similar to PP&E reporting, however contra asset accounts are not normally shown for intangibles on the balance sheet.
  • Report all intangible assets as a separate item, except goodwill. Goodwill has it’s own line.
  • On income statement, under continuing operations, amortization expense and impairment losses for intangible assets other than goodwill. Goodwill has it’s own line, unless it’s associated with discontinued operations.
  • The notes to the financial statements should include info about acquired intangible assets, including aggregate amortization expense for each of the succeeding 5 years.
  • If separate accumulated amortization accounts are not used, accumulated amortization should be disclosed in the notes. Should also include info about changes in the carrying amount of goodwill during the period.
56
Q

Presentation of R&D Costs

A

Should disclose in the financial statements (generally in the notes) the total R&D costs charged to expense each period for which an income statement is presented.

57
Q

Business Combination

A

Transaction in which the purchaser obtains control of one or more businesses.

58
Q

Organizational Costs

A

Start up costs such as legal and state fees incurred to organize a new business entity.

ACG3141 (9 decks)

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