FAR - Intangibles, Goodwill, and Impairment Flashcards
What is the definition of goodwill under the acquisition method?
Goodwill is a representation of an acquired company’s fair value over the fair value of the entity’s net assets. It is capitalized on the purchaser’s books and tested annually for impairment.
R&D costs are to be expensed when incurred but can be capitalized for the following:
- if materials, equipment, or facilities developed have alternative future uses.
- R&D costs are undertaken on behalf of others under a contractual arrangement
Can software costs be capitalized?
The costs AFTER reaching technological feasibility can be capitalized. The amortization starts after the product is released for sale. Note that this only is for software that is developed to be sold, leased, or licensed.
training and G&A cost related to the project cannot be capitalized
How to amortize an intangible that has an indefinite life?
the intangible asset does not get amortized. it gets tested annually for impairment.
How are legal fees and other costs associated with registering for a patent reflected in the financials?
They are capitalized then amortized over the useful life or legal life, whatever is less.
if a company incurs legal fees to defend the patent. it can capitalize those legal fees if the are successful. it simply gets added to the cost of the patent account. if not successful the legal fees get expensed in that year.
How to amortize computer software development costs?
The annual amortization is calculated based off the useful life or the percentage of revenue, whatever is greater. If a company forecasts $3M in sales and has $2M in sales in the first year then you take 2/3 (66.67% and multiply that by the capitalized cost
the method can switch each year depending on the method that produces the greater expense
Greg Inc paid $50K for an intangible asset (not goodwill) but it had a fair value of $55K, how is this recorded on Greg’s books?
$50K, intangible assets are recorded at cost
If an asset that was previously written down due to impairment, goes up in fair value, can the previously impaired amount be reversed?
It cannot be reversed (recovered) if it is an asset held for use. Reversal of previously impaired amount is only allowed for assets held for SALE.
What is the impairment test for intangible assets for:
- Intangibles with finite lives
- Intangibles with indefinite lives
-Intangibles with finite lives. There is a two step impairment test.
Step 1: the carrying amount of the asset is compared
to the sum of UNDISCOUNTED cash flows (this is
known as the recoverability test)
Step: if it fails step 1, then the asset is written down to
the Fair Value or DISCOUNTED cash flows
-Intangibles with indefinite lives. There is a one step impairment test. however, there is a step 0 test..
Step 0 - Qualitative factors are looked at. if there is no
possibility of impairment then you do not need to
proceed to Step 1.
Step 1 - Compare Carrying Value to Fair Value (of DCF)
What is the impairment test for P,P,&E?
Similar to the Intangibles with finite lives. It is a two step test.
Step 1: the carrying amount of the asset is compared
to the sum of UNDISCOUNTED cash flows (this is
known as the recoverability test)
Step: if it fails step 1, then the asset is written down to
the Fair Value or DISCOUNTED cash flows
Which intangible assets can reverse its previous impairment when the fair value goes back up? finite life or indefinite life?
neither can reverse the previously recorded impairment
How are legal fees to obtain a patent recorded in the financials?
they are capitalized. the amortization is not considered an R&D expense
How are software development cost accounted for?
- Computer software developed to be sold, leased, or licensed
- Computer software developed internally or obtained only for INTERNAL use
- For computer software to be sold, leased, and licensed..expense costs until technological feasibility is reached. At that point you can capitalized expenses until the product is released for sale. Annual amortization is the greater of percent of revenue or straight line
- For internally developed software..expense costs for preliminary project state and costs incurred for maintenance and training. Capitalize cost incurred after the preliminary project stage. These are direct cost of materials/services, costs of employees directly associated with project, interest incurred for project. Straight line basis
Hy Corp. bought Patent A for $40,000 and Patent B for $60,000. Hy also paid acquisition costs of $5,000 for Patent A and $7,000 for Patent B. Both patents were challenged in legal actions. Hy paid $20,000 in legal fees for a successful defense of Patent A and $30,000 in legal fees for an unsuccessful defense of Patent B. What amounts should Hy capitalize for patents?
$65K, you do not include patent B bc an unsuccessful outcome suggest that no asset exists
