Chapter 12 Flashcards
Master Valuation Approach
Goodwill
goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized; goodwill is the difference between the fair value of the consideration transferred to acquire a business and the fair value assigned to the net tangible assets of the acquired business (assets - liabilities)
* unlike intangibles, goodwill that is internally generated is not capitalized in the accounts due to the complexity of measuring costs and benefits
Intangible Assets
inteangible assets:
(1) are identifiable: result from contractual or other legal rights and can be sold separately from the entity
(2) have no physical substance
(3) are nonmonetary
Recognition Requirements for Purchased Intangible Assets (update this card)
identical to those for PP&E assets in chapter 10, and both are measured at cost at acquisition
must meet two recognition criteria:
(1) it is probable that the entity will receive future economic benefits
(2) the assets cost can be reliably measured
INCLUDED in cost is:
(a) cost and expenditures directly associated with readying intangible for its intended use (legal, etc)
(b) additions after acquisition possible but uncommon
EXCLUDED is:
(i) product promotions
(ii) conducting business in a new location
(iii) initial operating losses
(iv) general admin and overhead
(v) same as chapter 10 asset measurement
Intangibles Purchased in a Business Combination
only those intangibles that are identifiable can be separately recognized, although this included internally generated intangibles of the acquired business; intangibles that cannot be identified are considered part of goodwill
Capitalization of Prepayment
prepayment is recognized as an asset only when an entity pays for goods before their delivery or for services before receiving those services; the asset is the right to receive the goods or services; when received, if the “right” no longer exists, the costs are expensed
Recognition of Internally-Genereated Intangible Assets
[IFRS]
all six of the following conditions must be demonstrated to capitalize development phase costs:
(1) technical feasibility of completing the intangible asset
(2) the entity’s intention to copmlete the asset for use or sale
(3) the entity’s ability to use or sell it
(4) availability of the resources needed to complete it, and use or sell it
(5) how future economic benefits will be generated
(6) the ability to reliably measure the associated development costs
* specifically excluded from being recognized: brands, masteheads, publishing titles, customer list, and other similar
* physical R&D (buildings, labs, equipment) are capitalized and depreciated to R&D expense
* costs that cannot be directly linked to the asset are excluded (selling, initial losses, admin)
[ASPE]
the same treatment as IFRS is available, but also allowed is expensing all R&D costs
Account for Intangibles After Acquisition
[ASPE]
only the cost model is allowed
[IFRS]
cost or revaluation model is allowed, although not widely used due to a lack of active markets for intangibles
* accounting is the same as for ther asssets at cost and fair value (ch 10 & 11)
* no amortization is taken on indefinite-life intangibles until the assit is determined to be impaired or its life becomes limited [ASPE] possible impairment reviewed when circumstances indicate [IFRS] reviewed every accounting period
*limited-life intangible amortized over its useful life for cost and revaluation models to accumulated amortization accounts
* residual value assumed to be zero unless active market exists or third party commits to buy
Identify Specific Types of Intangible Assets
(1) marketing-related intangibles
- trademarks and trade names (word/symbol/design)
- limited or indefinite life (renewable in Canada every 10 years at reasonable price)
(2) customer-related intangibles
- customer contracts, customer lists
- value from ability to sell or legal contractual rights
(3) artistic-related intangibles
- ownership rights to plays, music, literary works
- copyrights granted for life of the creator plus 50 years, not renewable
(4) contract-based intangibles
- franchise rights or government license
- amortized over lesser of legal and useful life (franchise could be indefinite)
(5) technology-based intangible
- patents (exclusive rights to a product or process for 20 years)
- amortization consistent with benefits (time or units of production)
Impairment of Limited-Life Intanible
impairment for limited-life intangibles is the same as those for long-lived tangible assets
[ASPE]
assessed for impairment when events indicate carrying value not recoverable, cost recovery impairment model is applied
[IFRS]
assessed for impairment each reporting period, rational entity impariment model is applied
Cost Recovery Impairment Model
[ASPE]
Loss on Impairment [debit]
Accumulated Impairment Losses - Asset Type [credit]
- applies to limited life intangibles and long-lived tangible assets
- model assumes asset will continue to be used - asset is impaired only if carrying amout is less than undiscounted cash flows from use and eventual sale
- loss equal to carrying amount minus fair value (discounted cash flow, market-based concept) is recognized
- useful life and amortization pattern is reviewed
- reversal is not permitted
- where cash flow not attributable to single asset, combine assets into asset group, and allocate loss only to long-lived assets, based on relative carrying amounts
Rational Entity Impairment Model
[IFRS]
Loss on Impairment [debit]
Accumulated Impairment Losses - Intangible Asset Type [credit]
- applies to limited life intangibles and long-lived capital assets
- assumes management will use or dispose of asset depending on higher of value in use and fair value less costs to sell
- impaired when carrying amount is less than those two options
- difference between carrying value and higher of value in use and FV less selling costs is recognized as a loss
- useful life and pattern of amortization are reviewed
- reversal required if recoverable amount changes, but reversal amount is limited to what the book value would have been, net of depreciation, if the original impairment loss had never been recognized
- where cash flows not attributable to single asset, combine assets into cash-generating unit, and allocate loss to assets based on relative carrying amounts
Impairment of Indefinite-Life Intangibles
[ASPE]
Loss on Impairment [debit]
Accumulated Impairment Losses - Asset Type [credit]
tested for impairment only when events and circumstances indicate, but for this asset the test is a fair-value test (discounted cash flow model), which compares the fair value of the intangible asset with its carrying amount, and if fair value is less a loss equal to the difference is recognized
[IFRS]
rules the same as for limited-life intangibles, except assets are tested on an annual basis, regardless of any indications, by comparing carrying value with recoverable amount (higher of value in use less selling costs)
Derecognition of Intangible Assets
an intangible asset is derecognized when it is disposed of or when its continuing use or disposal is not expected to generate any further economic benefits; a gain or loss is recognized at this time, equal to the difference between the asset’s carrying amount and the proceeds of disposal, if any
Purchased Goodwill
(a) goodwill is recognized only when a business combination occurs, because the value of goodwill cannot be separated from a business as a whole
(b) it is considered to have an indefinite life and is no longer amortized
(c) carried on the SFP at the amount for which it was originally recognized less subsequent impairment losses
(d) income statements are not charged with amounts paid for goodwill until the asset is impaired
Bargain Purchase
a bargain purchase, resulting in what is sometimes called negative goodwill, arises when the total of the fair value of the identifiable net assets acquired is higher than the fair value of the consideration transferred for those net assets
* this is a result of market imperfections and results in a goodwill “credit”
* current standards require the excess to be recognized as a gain in net income in the same period that the combination takes place
Impairment of Goodwill
[ASPE]
* goodwill must be assigned to a reporting unit (operating segment or level below) and an impairment teset occurs where circusmstances indicate
* if carrying amount is greater than fair value, a loss is recorded equal to the difference
* loss on impairment is allocated to goodwill, because impairment of other assets in group is done prior to teseting the reporting group
* goodwill impairment is not reversible
[IFRS]
* goodwill is assigned at acquisition to a cash-generating unit (CGU) and tested for impairment annually
* when carrying amount is greater than recoverable amount (higher of value in use and FV less selling costs) a loss equal to the difference is recognized
* the loss is allocated first to goodwill, and the remained is allocated to the other assets on a relative carrying amount basis
* reversal of impairment on goodwill is not permitted
