Ch. Goodwill and Intangible Assets Flashcards
Intangible assets
Examples of intangible assets include: • copyrights • patents • franchise rights • trademarks • customer lists
Recognition and measurement of intangible assets
To meet the definition of an intangible, all of the following criteria must be met:
1. The asset is identifiable, which is illustrated as either:
a. being separable such that it can be transferred / sold to another entity
b. arising from contractual or other legal rights
2. The entity controls the future economic benefits of the asset.
3. The asset will generate future economic benefits.
Further, an intangible is recognized when both of the following criteria are met:
1. It is probable that the expected future economic benefit of the asset flows to the entity.
2. Its cost can be measured reliably.
Costs in at acquisition
Costs that can be included are direct costs of the purchase (such as purchase price and non-refundable taxes) as well as any directly attributable costs of preparing the asset for its intended use (such as costs of testing).
Intangible assets - part of bus combo
cost of an intangible acquired as part of a business combination is its fair value at the acquisition date
standard assumes that both the probability of future benefits and the measurement of the costs are met simply by the facts that the entity was willing to purchase the asset and a fair value has been established. The asset would be recorded at the value determined in the purchase price allocation.
Goodwill
deemed to have future value and does not have a physical substance
not considered to be an identifiable asset and, therefore, is only allowed to be recognized when it is acquired in a business combination.
Internally generated goodwill
eg. brand rep or rep in market
Internally generated goodwill is never recognized on the financial statements, as it is not able to be measured reliably and is not an identifiable resource.
Acquired by way of government grant
provide a company with an intangible that is either free of charge or of a nominal amount eg airport landing right
measuring these intangibles, the entity can choose to record the asset and the grant at fair value initially. If this is not done, the asset is still recognized, but at a nominal value, plus direct expenses to prepare for use.
Exchange of assets
intangible is acquired in exchange for a non-monetary asset or a combination of non-monetary and monetary assets, then the cost is the fair value unless:
• The transaction lacks commercial substance.
OR
• The fair value of the asset received or given up can’t be measured reliably.
If this happens, then the intangible is measured at the carrying value of the asset that is given up.
Internally generated intangible assets
new technology that a company has created or a new drug that has been developed for sale on the market
Expenditures capitalized only once specific criteria are met
Note that IAS 38.63 specifically excludes internally generated brands, publishing titles, customer lists, and similar items from being capitalized.
The generation of an internally generated intangible asset can be classified in two phases:
1. Research
2. Development
Research
costs from this phase are expensed because during the research phase, an entity cannot demonstrate that the expenditures will result in a future economic benefit
obtaining new knowledge of a market; looking for, evaluating, and selecting research findings; and determining alternatives for new processes or techniques
Development
order to determine whether an entity is in this phase, specific criteria have been defined
Per IAS 38, the entity must be able to demonstrate:
1) the technical feasibility of completing the intangible asset so that it will be available for use or sale
2) its intention to complete the intangible asset and use or sell it
3) its ability to use or sell the intangible asset
4) how the intangible asset will generate probable future economic benefits — among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset
5) the availability of adequate technical, financial, and other resources to complete the development and use or sell the intangible asset
6) its ability to measure reliably the expenditure attributable to the intangible asset during its development
If all six criteria are met, then the entity has supported that the asset will bring future economic benefit, and can be reliably measured.
the entity may defer development expenditures. Therefore, the first step is to determine when the six deferral criteria are met. The next step is to assess the expenditures and determine whether they are eligible to be deferred.
In addition to research expenditures, the following costs are not eligible to be deferred as development costs:
• selling, administrative, and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use
• identified inefficiencies and initial operating losses incurred before the asset achieves planned performance
• expenditure on training staff to operate the asset
Subsequent measurement
finite life is amortized over its useful life, while an indefinite-life intangible is not amortized. cost model and the revaluation model. Once a model is selected, it is applied to an entire class of assets.
Under the cost model, an intangible is carried at cost less accumulated amortization and impairment losses.revaluation model requires that an intangible be valued at its fair value less accumulated amortization and impairment losses.
Assets with an indefinite useful life are not amortized but are assessed annually for impairment.
