D 104 Study Deck OA 1 Flashcards
The impairment of limited life intangibles two step process
1) recoverability test- estimates the future cash flow from the use of the asset and its eventual disposal, then makes the following comparison and conclusions
2) Fair Value Test
Recoverability Test
If the sum of expected future cash flow is greater than the carrying value of the intangible asset, there is no impairment.
If the sum of the expected future cash flow is less than the carrying value of the intangible asset, there is impairment.
If the conclusion is impaired the company continues to the fair value test.
Fair Value Test Formula
If the intangible asset is impaired the impairment amount is calculated as follows:
Carrying value of intangible asset - fair value of intangible asset = impairment loss.
Impairment test for indefinite life intangible asset is a fair value test
If the carrying value of intangible asset is less than the fair value of the intangible asset, there is no impairment.
If the carrying value of intangible asset is greater than the fair value of the intangible asset there is an impairment loss
Goodwill
Goodwill is the excess of the cost over the fair value of the identified net asset (less liabilities) purchased.
Internally created goodwill should not be capitalized.
Recoverability Test
If the sum of expected future cash flow is greater than the carrying value of the tangible asset, there is no impairment.
If the some of expected future cash flow is less than the car value of the intangible asset there is an impairment.
If the conclusion is impaired the company continues to the fair value test.
Intangible asset indefinite life testing
No foreseeable limit on time the asset is expected to provide cash flow.
Must test indefinite life intangibles for impairment at least annually.
No amortization.
Average Accumulated Expenditure (AAE)
Total expenditure during the construction period that could have been avoided if no construction took place.
Weighted Average interest rate formula
Weighted Average Interest Rate = total interest/total principal.
Impairment of Goodwill
If the fair value of the reporting unit is less then the carrying value of the reporting unit there is an impairment.
If the fair value of the reporting unit is greater than the fair value of the reporting unit there is no impairment.
Debit impairment loss (Income Statement)
Credit Goodwill or Contra account to Goodwill.
How to Amortize a Limited Life Intangible Asset
Amortize to expense over useful life
Credit asset account or accumulated amortization
Useful life should reflect the periods over which the asset will contribute cash flow
Amortization should cost less residual value
Companies should evaluate limited life intangible potential impairment (patents, copyright, trademark)
How to record a purchased intangible asset
Record at cost
Include all necessary costs to make the intangible asset ready for it’s intended use
Typical costs capitalized include: purchase price, Legal fees, other incidental expenses
How to record a internally created intangible asset
Recorded at cost
Only capitalize direct costs incurred in developing intangible such as legal costs
Generally expensed: research costs, development costs, training activities
What are characteristics of intangible assets
1) Lack Physical Existence
2) Not financial instruments
Normally classified as long term assets
Examples: patent, copyright, franchise, licenses, trademark, goodwill
In order to be able to capitalize one of there conditions must be met. What are the three conditions?
1) useful life must be increased
2) quantity of units produced must be increased
3) quality of units produced must be enhanced
Property Plant and Equipment (PP&E)
Also known as plant asset and fixed asset
Used in Operations not for resale
Passed Physical substances
Uses historical cost to measure the cost of these assets (historical cost is reliable)
What is included in the cost of land?
Cost of land includes all expenditures to acquire land and ready it for use. Costs typically include:
1) purchase price
2) closing cost, title to the land, attorney fees, recording fees
3) cost of grading, filling, draining and clearing
4) assumption of any liens, mortgage, or encumbrances on the property
5) additional land improvements that have an indefinite life.
What is included in cost of buildings?
Includes all expenditure related directly to acquisition on construction
Materials, labor, and overhead costs incurred during construction
Professional fees & building permits
What is included in the cost of land improvements?
Improvement with limited lives such as private driveways walks, fences, and parking lots.
Recorded as land improvements & depreciated over its useful life.
What is included in the cost of equipment?
Includes all expenditures incurred in acquiring the equipment and preparing for use:
1) Purchase price
2) freight and handling charges
3) insurance on equipment in transit
4) cost of special foundations
5) assembly and installation costs
6) costs of conducting trials runs
Involuntary Conversion
Assets service is terminated through some type of involuntary conversion such as fire, flood, theft, or condemnation
What is included in self constructed asset
Self constructed asset
1) Materials and directed labor
2) overhead can be handled two ways:
• Assign no fixed overhead
• Assign a portion of all overhead to the construction process
Note: Companies use the second method extensively increases net income as these costs are the. Depreciated over the useful life instead of being expensed immediately on the income
Weighted-Average Accumulated Expenditure (WAAE)
The average amount of money spent on a project over a period of time where each expenditure is weighted based on how long it was outstanding during that period.
Technology related Intangible Assets
Example: patent technology and trade secrets granted by US patent and trademark office
• Patent gives holder exclusive use for 20 years
• Capitalize cost of purchasing patent
• Expense any R&D cost in development a patent
• Amortize over legal life or useful life whichever is shorter
Contract Related Intangible Assets
Example: Franchise & licensing agreement, construction permits, broadcasting rights, and service or supply contracts.
Franchise with limited life should be amortized over the life of the franchise.
Franchise with an indefinite life should be carried at cost and not amortized
Artistic Related Intangible Asset
Examples: plays, literary work, music work, pictures photographs, video audiovisual material
Copyright- granted for life of the creator plus 70 years
Capital costs of acquiring and defending
Amortized to expense over useful life whichever
Customer Related Intangible Asset
Examples: customer lists, order or production logs and both contractual and non contractual customer relations
Capitalization acquisition costs
Amortized to expense over useful life
Marketing Related Intangible Asset
Examples: Trademarks, trade names, newspaper masterheads, internet domain names and non competition agreements
• US gives legal protection for indefinite number of 10 years renewal periods
• Capitalize acquisition costs
• no amortization
