Intangible Assets

Question 1

Describe Intangible Assets, what is associated with costs, and when expensed?

Answer 1

1. Associated with legal right (patent, copyright)
2. The cost includes the legal costs of obtaining it and, if
   necessary, defending it.
   * If successful in defense add the costs to the cost of the asset & amortize over life of asset.
   * If a legal defense of the asset is unsuccessful then expense the legal costs

Question 2

How to amortize intangibles

Answer 2

over the Shorter of:
* Legal Life
* Useful Life

Question 3

When to test intangible asset for impairment

Answer 3

1. when events suggest undiscounted future cash flows will be less than carrying value of intangible. In this cash, write down to FMV.
   *Undiscounted cash flows are the expected cash to be generated by an asset over its useful life.

Question 4

When to determine impairment for intangibles with no clear legal or useful life. i.e. trademarks

Answer 4

annually, must be conducted the same time each year

Question 5

What are the two steps of the impairment test

Answer 5

1. identify potential impairment–if carrying value of operating segment > FV, perform step 2. If FV> Carrying value, no impairment
2. if carrying value > FV, the difference is impairment of goodwill, if the impairment loss exceeds the amount of goodwill already shown on the balance sheet, don’t exceed amt already shown on the balance sheet.

Question 6

Describe un-identifiable intangible Goodwill

Answer 6

o Results from business acquisition or combination
o Excess of acquisition price over fair value of underlying net assets

Question 7

Journal entry for impairment of Goodwill

Answer 7

Impairment Loss (I/S) xxx
Goodwill xxx
(see notes for example)

Question 8

Purchased software

Answer 8

-finite life, identifiable, intangible asset
-recorded on BS at purchase price
-amortized over the shorter of the legal life (contract) or economic life (period in which software provides cash flows)

Question 9

Cloud computing

Answer 9

-finite life, identifiable, intangible asset
-pay vendor fee in exchange for right to use software
-vendor is responsible for hosting the software on its computing infrastructure

Question 10

3 phases of cloud computing arrangements

Answer 10

1. Preliminary project: determining the system requirements for software. Costs expenses as incurred
2. Application development: customize or change infrastructure. Capitalize: software, software licensing, 3rd party software development fees, external materials, coding fees, testing fees
   Expense: training, manual data conversion, maintenance costs, and support costs.
3. Post implementation: software placed in service. Costs expensed as incurred.

Question 11

How costs capitalized during application development phase

Answer 11

-Recorded as an intangible asset and expensed over the term of the hosting arrangement
-amortization begins when ready for intended use

Question 12

How purchase software and capitalized cloud computing arrangements are tested for impairment

Answer 12

Use two step impairment process

Question 13

Franchisee Accounting

Answer 13

-initial franchising costs are capitalized
-ongoing or continuing franchise costs are expensed as incurred
-both are considered finite life, intangible, and identifiable

Question 14

Initial Franchise Fees

Answer 14

-Cash paid + present value of any note issued + FV of any stock issued
-recorded as an intangible asset on the BS
-amortized over the expected period of benefit of the franchise

Question 15

Continuing Franchise Fees

Answer 15

-expense as incurred
-calculated based on a percentage of franchise revenues
-includes mgmt training, promotion, and legal assistance
-fees reported by the franchisee as an expense as and revenue by the franchisor, in the period incurred

Question 16

Start up costs

Answer 16

-expensed as incurred
-Include: costs associated with NEW entity, facility, product, customer
-not include: routine, ongoing efforts, mergers/acquisitions