F3-M6-Intangibles with Finite Lives

Question 1

How should the contractual amounts of future services to be performed under a franchise agreement be accounted for by the franchisee

Answer 1

They should be recorded at their present value as an intangible asset

Question 2

Define start-up costs. What is the accounting treatment of start-up costs?

Answer 2

1. Costs incurred for one-time activities to start a new operation. Start-up costs included costs incurred in the formation of a corporation
2. Start-up costs are expensed in the period incurred

Question 3

What is the maximum period over which an identifiable intangible asset (not goodwill) should be amortized?

Answer 3

The shorter of its estimated useful economic life and its remaining legal life (as in a copyright, franchise, or patent)

Question 4

For intangible assets, how is the impairment loss reported in the financial statements?

Answer 4

As a component of income from continuing operations before income taxes.

The carrying amount of the asset is reduced

Question 5

How are purchased intangible assets and internally developed intangible assets recorded under US GAAP?

Answer 5

Purchased intangible assets:
Recorded at cost, including legal and registration fees.

Internally developed intangible assets:
1. legal fees, costs of successful defense, registration fees, consulting fees, and design fees can be capitalized.
2. Most research and development costs must be expensed.

Question 6

How are intangible assets reported under US GAAP

Answer 6

Reported at cost less amortization (finite life intangibles only) and impairment.

Question 7

What is the two-step impairment test for the impairment of intangible assets with finite lives under US GAAP

Answer 7

Step 1: The carrying amount of the asset is compared with the sum of the undiscounted cash flows expected to result from the use of the asset and it eventual disposition.

Step 2: if the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and its fair value is recorded.

Question 8

What intangible assets with finite lives are subject to the impairment test?

Answer 8

1. Intangibles and fixed assets to be held and used
2. Intangibles and fixed assets slated for disposal

Note: intangible assets with finite useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.