Chapter 12: Intangible Assets Flashcards
Intangible assets on balance sheet
Similar to PP&E but no contra accounts
Separate out intangible assets & goodwill and use disclosure schedules
Income statement: any goodwill losses also show separately
Accumulated amortization disclosed in notes
`Treatment of research and development IFRS vs GAAP
GAAP: all R&D expensed as incurred
IFRS: certain development expenditures must be capitalized
Research & Development Activities
Research - planned search or critical investigation aimed at discovery of new knowledge
Development- translation of research findings / other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product/ process for sale or use
NOT routine alterations to existing products or procedures
Accounting for R&D Activities
Generally expensed - including a reasonable allocation of overhead costs.
Except:
- inventory / PP&E - if it has alternate future uses, then allocate as consumed or capitalize and depreciate
- purchased intangibles - recognize / measure at fair value & account in accordance with their nature
Accounting for start-up costs
Expense as incurred
Accounting for initial operating losses
Do not capitalize (no future service potential)
Accounting for advertising costs
Generally expensed as incurred or the first time the advertising takes place
Record tangible assets as assets (depending on potential alternative future uses)
Accounting for computer software
Report as selling/ administrative expenses
R&D costs on financial statements
As expense for periods and disclosures
Journaling impairment of Goodwill
Goodwill must be tested for impairment at least annually
Fair value test: check the fair value of the whole reporting unit vs carrying value amount. If fair value < carrying amount = impairment
Loss on impairment is recorded to expenses and losses on income statement
May perform optional qualitative assessment
Impairment of indefinite life intangibles (besides goodwill)
Tested at least annually
Use fair value test only
If fair value of intangible < carrying amount of intangible = impairment
(recovery test is not useful due to life of asset)
No restoration allowed
Alternate: optional qualitative assessment to measure probability of impairment
Goodwill
Measured as the excess of the cost of a purchase (of a business) over the fair value of the net assets
Future economic benefits arising from the assets acquired in a business combination that are not identified and separately recongized
NEVER capitalized when created internally, only when company is purchased
Master valuation approach
Assumes that goodwill covers all the values that cannot be specifically identified with any identifiable tangible or intangible assets
Fair value of assets (tangible and intangible)
less liabilities
= fair value of net identifiable assets
Purchase price less fair value of net identifiable assets = goodwill
Adjustments to goodwill
Not amortized
only adjust carrying value when impaired
(private companies may amortized)
Impairment test for intangibles (limited life)
Recoverability test: same as for tangible assets
if future expected net cash flows (undiscounted) < carrying amount = impaired
Fair value test finds the amount of impairment
- can use the discounted net cash flows as the fair value
Carrying amount less fair value = impairment amount
loss recognized as “other expenses and losses” on income stament
No restoration allowed
Technology related intangible assets
Related to innovation and technological advances
patents - exclusive right to use, manufacture, sell for 20 years (secondary patents can extend life)
(product vs process patents)
Expense - R&D for development of product/process
Capitalize - cost of acquisition, cost of successful legal defense (unrecoverable legal fees)
- then amortize over legal or useful life, whichever is shorter (method to match the pattern of how the patent is used up)
Contract-related intangible assets
Value of rights that arise from contractual arrangements (franchises, licensing, permits)
(permits are a type of franchise)
may be definite, indefinite or perpetual
capitalize identifiable costs from acquisition of the operating right
amortize over useful life only if limited life
any required annual payments are expensed
Artistic-related intangible assets
Copyright: life of the creator + 70 years
Capitalize cost of acquisition + (successful) legal defense
amortizes over useful life if < legal life
useful life: years company expects to receive benefits from the asset
R&D is expensed
Customer-related intangible assets
Result from interaction with customers
- customer lists and relationships
- if limited life then amortize
- capitalize any purchase price
Marketing-related intangible assets
Used for marketing or promotion
- trademarks, tradenames, mastheads, domain names, non-competition agreements
- trademark / tradenames: indefinite life: indefinite number of 10-year renewals
- capitalize costs relating to securing (purchase price, legal fees, registration fees)
- expense any R&D
Major types of intangible assets
- marketing related
- customer related
- artistic related
- contract related
- technology related
- goodwill
Indefinite-life intangible assets
NOT AMORTIZED
- also tested for impairment but only use fair value test, no recoverability test
no factors limitng useful life
- includes renewable trademarks
Limited-life intangible assets
Amortized over the useful life of the asset
- amount should reflect the pattern in which the company uses up the asset if determinable
- may credit asset account directly or an accumulated depreciation account
- residual value is $0 unless would have value to another company at the end of life
- assess for impairment regularly using recoverability test and then fair value test
- revisions to amortization prospective only
Amortization
Allocation of the cost of an intangible asset over its useful life
Valuation of intangible assets
Purchased intangibles:
- historical cost
- maybe fair value of consideration given or fair value of intangible - whichever is more evident
Internally created intangibles:
- costs to create intangibles usually expensed
- only direct costs are capitalized (legal costs)
- value may be understated
intangible assets
- lack physical existence
(value is derived from the rights and privileges granted to the company using them) - not financial instruments
(financial instruments derive value from cash equivalents)
usually long term assets
Integrated report
Report that combines non-financial data with mandated financial disclosures
Implied intangible asset value
Difference between a company’s market value and book value
