Chapter 7 Flashcards
What are examples of intangible assets?
Goodwill (NOT internally generated) Development costs (NOT Research) Brand names Licenses Patents Computer software Trade marks
What is the cost of an intangible asset?
The purchase price plus any directly attributable costs
What is goodwill?
The excess of the value of the business over its individual assets and liabilities
What is the definition of purchased goodwill?
The amount paid over and above the fair value of the identifiable net assets and liabilities acquired.
Why can’t internally generated goodwill be recognised as an asset?
As it cannot be measured reliably
How to account for research activities?
Expense to the relevant expense account.
How to account for development activities?
Capitalise as an intangible asset
Examples of research activities?
Activities aimed at obtaining new knowledge
The search for alternatives for materials, products, processes etc
The selection design or evaluation of possible alternatives
Examples of development activities?
The design, construction and testing of preproduction or peruse prototypes and models
The design is tools mould and jigs involving new technologies
Design, construction and operation of a pilot plant
What are the PIRATE criteria?
P probable future economic benefits
I intention to complete and sell/ use asset
R resources adequate to complete asset
A ability to use / sell asset
T technical feasibility of completing asset
E expenditure can be measured reliability
What is amortisation?
Equivalent of depreciation but for intangible assets
How to treat and intangible with a finite life?
Amortise the intangible on a systematic basis over its useful life.
How to treat an intangible with an indefinite life?
Not amortised
Useful life is reassessed each year.
Impairment review conducted annually
Do intangibles tend to have a residual value?
No!
When is an asset impaired?
If it’s carrying amount is greater than it’s recoverable amount
What is recoverable amount?
The HIGHER of:
Fair value less costs to sell
Value in use (present value of future cash flows derived from the asset by using it in the business).
What is the impairment loss?
Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount
What is an external source of impairment?
A significant call in the assets market value
Adverse effects on the company caused by technology, markets, the economy or laws
Increases in interest rates
Stock market value is less than the varying amount of net assets
What is an example on internal sources?
Obsolescence or physical damage to the asset
Adverse effects on the asset after a significant reorganisation within the company
Economic performance of the asset it worse than the company expected
A fall in the profit of operations
A fall in cash flows from operations or negative cash flow
A fall in budgeted cash flows or profits from operations
How to recognise an impairment if the asset is carried at historical cost?
DR impairment loss (SPL) CR Asset (SOFP)
How to recognise an impairment if the asset is carried at a revalued amount?
DR revaluation reserve (any previous revaluation reserve relating to that asset)
DR Impairment loss (SPL) (balancing figure)
CR Asset (SOFP)
How to review impairment?
Determine the recoverable amount (higher of fair value less costs of disposal and value in use)!
Compare the amounts. If carrying amount is greater than the recoverable amount - there is IMPAIRMENT
What is carrying amount is greater than recoverable amount?
The asset is impaired - by the difference between the two figures!
What are the methods for costing inventory?
FIFO
LIFO - NOT ACCEPTABLE FOR FS
AVCO
