Intangible Assets (18.5) Flashcards
Define intangible assets
Intangible assets are non-monetary assets that lack physical substance
Describe identifiable vs. non-identifiable intangible assets
Identifiable intangible assets can be acquired separately or are the result of rights or privileges conveyed to their owner. Examples of identifiable intangibles are patents, trademarks, and copyrights.
Unidentifiable intangible assets cannot be acquired separately and may have an unlimited life. The best example of an unidentifiable intangible asset is goodwill.
How are costs reported for intangible assets under IFRS and GAAP
Under IFRS, identifiable intangibles that are purchased can be reported on the balance sheet using the cost model or the revaluation model, although the revaluation model can only be used if an active market for the intangible asset exists. Under IFRS, a firm must identify the research stage (discovery of new scientific or technical knowledge) and the development stage (using research results to plan or design products). Under IFRS, the firm must expense costs incurred during the research stage but can capitalize costs incurred during the development stage.
Both models are basically the same as the measurement models used for PP&E.
Under U.S. GAAP, only the cost model is allowed. Except for certain legal costs, intangible assets that are created internally, such as research and development costs, are expensed as incurred under U.S. GAAP
Under IFRS and U.S. GAAP, all of the following should be expensed as incurred:
Start-up and training costs.
Administrative overhead.
Advertising and promotion costs.
Relocation and reorganization costs.
Termination costs.
Finite-life vs. infinite-life intagibles, are they amortized & tested for impairment?
Finite-lived intangible assets are amortized over their useful lives and tested for impairment in the same way as PP&E. The amortization method and useful life estimates are reviewed at least annually.
Intangible assets with indefinite lives are not amortized, but are tested for impairment at least annually.
Describe goodwill
Goodwill is the excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition Goodwill is only created in a purchase acquisition. Internally generated goodwill is expensed as incurred.
Acquirers are often willing to pay more than the fair value of the target’s identifiable net assets because the target may have assets that are not reported on its balance sheet.(examples: reputation, customer loyalty, research and development assets)
How does an acquirer report an acquisition at less than fair value?
Occasionally, the purchase price of an acquisition is less than fair value of the identifiable net assets. In this case, the difference is immediately recognized as a gain in the acquirer’s income statement.
Is goodwill tested for impairment?
Goodwill is not amortized but must be tested for impairment at least annually. If impaired, goodwill is reduced and a loss is recognized in the income statement. The impairment loss does not affect cash flow. As long as goodwill is not impaired, it can remain on the balance sheet indefinitely.
Since goodwill is not amortized, firms can manipulate net income _____ by allocating more of the acquisition price to goodwill and less to the identifiable assets. The result is _____ depreciation and amortization expense, resulting in _____ net income.
Since goodwill is not amortized, firms can manipulate net income upward by allocating more of the acquisition price to goodwill and less to the identifiable assets. The result is less depreciation and amortization expense, resulting in higher net income.
Accounting vs. economic goodwill
Accounting goodwill should not be confused with economic goodwill. Economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions.
When computing ratios, analysts should eliminate _____ from the balance sheet and _____ _____ _____ from the income statement for comparability
When computing ratios, analysts should eliminate goodwill from the balance sheet and goodwill impairment charges from the income statement for comparability
