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Financial Accounting > Chapter 12: Intangible Assets > Flashcards

Chapter 12: Intangible Assets Flashcards

1
Q

Intangibles

A

Lack physical existence and are not financial instruments.

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2
Q

Amortization

A

Allocation of the cost of intangible assets in a systematic way.

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3
Q

What costs are included in purchased intangibles?

A
  • Purchase Price
  • Legal fees
  • Incidental expenses
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4
Q

How are internally developed intangibles treated in the financial statements?

A
  • Generally expensed
  • Legal costs capitalized
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5
Q

Limited-Life Intangibles

A

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
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6
Q

What factors should be considered in determining useful life of a limited-life intangible?

A
  • Expected use of asset
  • Legal limitations
  • Ability to renew contracts
  • Level of maintenance
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7
Q

Indefinite-Life Intangibles

A

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
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8
Q

Marketing related intangibles

A
  • Trademarks and trade names renewal periods 10 years
  • Capitalize acquistion costs
  • No amortization
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9
Q

Customer related intangibles

A
  • Capitalize acquistion costs
  • Amortized to expense over useful life
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10
Q

Artistic related intangibles

A
  • Copyright granted for the life of the creator plus 70 years
  • Capitalize costs of acquiring and defending
  • Amortized to expense over useful life
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11
Q

Contract related intangibles

A
  • 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
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12
Q

Technology related intangibles

A
  • 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
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13
Q

Goodwill

A

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
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14
Q

Bargain Purchase

A

Purchase price < Fair value of net assets acquired

Amount recorded as gain by purchaser

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15
Q

Fair value test

A

If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference.

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16
Q

What is the process to determine impairment on goodwill?

A
  1. Compare the FMV of the reporting unit to its BV
    • FMV > BV - no impairment
    • FMV < BV - may be impaired
  2. Determine the fair value of the implied value of goodwill
    • Fair Value of reporting unit - Net identifiable assets (excluding goodwill) = Implied value of goodwill
  3. 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
17
Q

What are research & development costs?

How are they treated in the financial statements?

A

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

18
Q

What is expensed under R&D costs?

A
  1. Materials, equipment, and facilities
    • Unless the items have alternative future uses - capitalize
      • Depreciation on items are expensed
  2. ​Personnel
  3. Contract services
  4. Indirect costs, except G&A unless related
19
Q

How are purchased R&D treated if:

Developed technology

In-Process R&D

R&D costs after purchase

What type of disclosures are required?

A

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.

20
Q

What are some costs that are similar to R&D?

A
  • Start-up costs for a new operation
  • Initial operating losses
  • Advertising costs
  • Computer software costs
21
Q

When should you test for impairment for tangible and finite-life tangible assets?

What is the impairment test?

A

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.

22
Q

When should you test for impairment for indefinite life intangible assets (other than goodwill)?

What is the impairment test?

A

Test at least annually, or more frequently if indicated.

If book value exceeds fair value, an impairment loss is recognized for the difference.

23
Q

When should you test for impairment for goodwill?

What is the impairment test?

A

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.

24
Q

What is the new goodwill impairment guidance?

A
  • 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

Financial Accounting (21 decks)

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