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
