Chapter 12: Intangible Assets Flashcards
Intangibles
Lack physical existence and are not financial instruments.
Amortization
Allocation of the cost of intangible assets in a systematic way.
What costs are included in purchased intangibles?
- Purchase Price
- Legal fees
- Incidental expenses
How are internally developed intangibles treated in the financial statements?
- Generally expensed
- Legal costs capitalized
Limited-Life Intangibles
Judged to have a limited useful life, which reflects the periods over which these assets will contribute to cash flows.
- Capitalize, if purchased
- Expense, if created
- Amortize over useful life
- Perform recoverability test and then fair value test
What factors should be considered in determining useful life of a limited-life intangible?
- Expected use of asset
- Legal limitations
- Ability to renew contracts
- Level of maintenance
Indefinite-Life Intangibles
There is no foreseeable limit on the period of time over which they are expected to provide cash flows.
- Capitalize, if purchased
- Expense, if created
- Do not amortize
- Tested for impairment at least annually
- Fair value test only
Marketing related intangibles
- Trademarks and trade names renewal periods 10 years
- Capitalize acquistion costs
- No amortization
Customer related intangibles
- Capitalize acquistion costs
- Amortized to expense over useful life
Artistic related intangibles
- Copyright granted for the life of the creator plus 70 years
- Capitalize costs of acquiring and defending
- Amortized to expense over useful life
Contract related intangibles
- Franchise (or license) with a limited life should be amortized to expense over the life of the franchise
- Franchise with an indefinite life should be carried at cost and not amortized
Technology related intangibles
- Patent gives holder exclusive use for 20 years
- Capitalize costs of purchasing a patent
- Expense any R&D costs in developing a patent
- Amortize over legal life or useful life, whichever is shorter
Goodwill
The excess of cost of a business purchase over fair value of the identifiable net assets acquired.
It represents the future benefits arising from the other assets acquired in a business combination that are not individually identified.
Important Characteristics:
- Has indefinite life
- Not amortized
- Only adjust for impairment
Bargain Purchase
Purchase price < Fair value of net assets acquired
Amount recorded as gain by purchaser
Fair value test
If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference.
What is the process to determine impairment on goodwill?
- Compare the FMV of the reporting unit to its BV
- FMV > BV - no impairment
- FMV < BV - may be impaired
- Determine the fair value of the implied value of goodwill
- Fair Value of reporting unit - Net identifiable assets (excluding goodwill) = Implied value of goodwill
- Compare implied value of goodwill to carrying amount of goodwill
- Implied value > BV - no impairment
- Implied value < BV - impairment
- Implied value of goodwill - Carrying amount of goodwill = Loss on impairment
What are research & development costs?
How are they treated in the financial statements?
Research: Investigation aimed to discover new knowledge
Development: Research is turned into a plan to create a new product or improve a product
All R&D costs are expensed in period incurred because of:
Uncertain benefits
Difficult to match to revenues
What is expensed under R&D costs?
- Materials, equipment, and facilities
- Unless the items have alternative future uses - capitalize
- Depreciation on items are expensed
- Unless the items have alternative future uses - capitalize
- Personnel
- Contract services
- Indirect costs, except G&A unless related
How are purchased R&D treated if:
Developed technology
In-Process R&D
R&D costs after purchase
What type of disclosures are required?
Developed technology: capitalized and amortized
In-Process R&D: capitalized at fair value & considered indefinite
- If successful - amortize
- If unsuccessful - expense
R&D costs after purchase: expensed
Disclosure of total R&D expense incurred during period required.
What are some costs that are similar to R&D?
- Start-up costs for a new operation
- Initial operating losses
- Advertising costs
- Computer software costs
When should you test for impairment for tangible and finite-life tangible assets?
What is the impairment test?
When events or circumstances indicate book value may not be recoverable.
Step 1: An impairment is required only when book value is not recoverable (undiscounted sum of estimated future cash flows less than book value).
Step 2: The impairment loss is the excess of book value over fair value.
When should you test for impairment for indefinite life intangible assets (other than goodwill)?
What is the impairment test?
Test at least annually, or more frequently if indicated.
If book value exceeds fair value, an impairment loss is recognized for the difference.
When should you test for impairment for goodwill?
What is the impairment test?
Tested at least annually, or more frequently if indicated.
Step 1: A loss is indicated when the fair value of the reporting unit is less than its book value.
Step 2: An impairment loss is measured as the excess of book value over implied fair value.
What is the new goodwill impairment guidance?
- Effective 12/15/2019
- Impairment test is done by comparing the FV of a reporting unit with its BV
- Impairment loss = BV of reporting unit - FV of reporting unit
- Loss recognized should not exceed the total amount of goodwill alloated to that reporting unit
