Intangible Assets

Question 1

What is an intangible Asset?

Answer 1

Long-term operational assets that lack physical substance or presence, but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date.

Question 2

Where do intangible assets come from?

Answer 2

Intangibles are either acquired from other parties or internally developed.

Question 3

What is the accounting treatment for intangible assets that are acquired?

Answer 3

An acquired intangible is separately recognized in the accounts if either (1) the benefit of the asset is obtained through contractual or other legal rights (as in a patent), or (2) if the intangible is otherwise separable, i

Question 4

What is the accounting treatment for intangible assets that are developed internally?

Answer 4

Internally developed intangibles (such as organization costs) are expensed immediately if they are not specifically identifiable, have indeterminate values, or are inherent in a continuing business and related to the entity as a whole

The only costs related to internally developed intangibles that are capitalized are registration fees and legal costs paid to outsiders

Question 5

How are intangible assets classified?

Answer 5

Definite life intangibles (all of these are identifiable); or
Indefinite life intangibles (further subdivided into identifiable intangibles and goodwill).

Question 6

What does it mean for an intangible to have a definite life?

Answer 6

An intangible has a definite life either if the asset has a finite legal life or if the firm believes the useful life is finite

Only definite life intangibles are amortized.

Question 7

What does it mean for an intangible to have a indefinite life?

Answer 7

An intangible has an indefinite life if no legal, regulatory, contractual, competitive, or other factor limits the life

Question 8

Which intangibles are subjust to impairment?

Answer 8

all of them

Question 9

Do intangible assets have a residual value?

Answer 9

For amortized intangibles, residual value is assumed to be zero unless:

1. The entity has a commitment from a third party to purchase the intangible asset at the end of its useful life, or
2. The residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset’s useful life.

Question 10

What is the useful life for an intangible asset?

Answer 10

For amortized intangibles, if an asset is valuable only when it is used with other assets, the useful life of the other assets in the group can be a factor in setting useful life

then the shortest useful life of the assets in the group sets the useful life for them all.

Question 11

When are legal costs included in the book value of intangible assets?

Answer 11

Accounting for the legal costs of this action is dependent on the outcome of the legal action.

If the rights associated with the intangible asset are successfully defended, the economic benefits associated with the intangible asset have been enhanced. Therefore, the related legal costs are recorded as an increase in the capitalized value of the intangible asset.

If the rights associated with the intangible asset are unsuccessfully defended, the related legal costs are recorded as legal expenses of the period incurred

Question 12

What is the process for determining if an intangible is impaired?

Answer 12

The book value (BV) of the definite life intangible is compared to the recoverable cost (R) of the intangible asset. Recoverable cost is the sum of net cash inflows attributable to using the asset and from the ultimate disposal. If the BV is greater than the recoverable costs, then the asset is impaired.
The second step is to compare the BV to the fair value (FV). If the BV is greater than the FV, the asset is written down to FV. The impairment loss equals BV - FV. Subsequent amortization proceeds based on the new BV.

Question 13

how often must a test for impairment be completed for intangible assets?

Answer 13

If the intangible asset is an indefinite life and not subject to amortization, then it must be tested for impairment at least on an annual basis

Question 14

Can the impairment loss for an intangible be reversed?

Answer 14

no

Question 15

What are some exampled of deferred charges?

Answer 15

Long-Term Prepaid Insurance;
Long-Term Prepaid Rent;
Machinery Rearrangement Costs 
Deferred Income Taxes 
Deferred bond issue costs

Question 16

What is a cash surrender value for life insurance?

Answer 16

Firms that carry whole life insurance policies on key employees enjoy an annual increase in the investment portion of the policy. Cash surrender value is appropriately classified as an investment account but may be reported by some firms in Other Assets in the balance sheet.
In subsequent years, the cash surrender value portion of the premium increases.

Question 17

What accounting differences are there between a developing state enterprise and a normal business?

Answer 17

The most important aspect of development stage company reporting is that the same US GAAP is used for these firms as for any other type of firm, with a few additional disclosures required.

Question 18

What is goodwill?

Answer 18

The result of a business combination that is measured as the difference between the fair market value of the acquired company as a whole (the acquiree) and the fair market value of the identifiable net assets (assets - liabilities).

Goodwill is the only intangible asset that is not identifiable

Goodwill is recognized only when a buyer firm (the acquirer) obtains control of another enterprise

Question 19

Are goodwill costs expensed or capitalized?

Answer 19

costs to maintain, enhance, or repair purchased goodwill are expensed.

Question 20

How do you treat internally developed goodwill?

Answer 20

due to conservatism and objectivity/verifiability, internally developed goodwill is not recognized as an asset in the accounting records of a business entity.

Question 21

What is a bargain purchase?

Answer 21

Occasionally a firm acquires another enterprise for a price less than the fair value of the acquiree’s net assets. This situation is referred to as a bargain purchase. The amount by which the fair value of the acquiree’s net assets exceeds the price paid is recognized by the acquirer in the period of the acquisition as ordinary income

Question 22

How often must goodwill be tested for impairment?

Answer 22

must be tested for impairment at least annually or when certain circumstances indicate that its carrying value may be greater than its fair value

Question 23

What steps are taken to detemine if goodwill needs to be impaired?

Answer 23

Qualitative Assessment (Prestep) - The purpose of the qualitative assessment is to determine if it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of the reporting unit with which the goodwill is associated has declined below the carrying value of that reporting unit, including its goodwill.

After assessing the totality of the above kinds of events and circumstances, an entity determines that it IS NOT more likely than not that the fair value of the reporting unit is less than its carrying value, then the quantitative steps of the goodwill impairment test are unnecessary.
After assessing the totality of the above kinds of events and circumstances, an entity determines that it IS more likely than not that the fair value of the reporting unit is less than its carrying value, then the first step of the two-step quantitative assessment must be performed.

Quantitative Assessment - Step 1: Testing for Potential Impairment –
The first quantitative step used to identify potential goodwill impairment compares the fair value of a reporting unit with its carrying amount, including any deferred income taxes and previously recognized goodwill.
If the carrying amount of the reporting unit is greater than zero and its fair value exceeds that carrying amount, goodwill of the reporting unit is considered not impaired and the second quantitative step of the impairment test is not required.
If the carrying amount of the reporting units is greater than its fair value, the second quantitative step of the impairment test is required to measure the amount of the goodwill impairment loss.

Quantitative ASsessment - Step 2
Goodwill impairment is measured by comparing the (current) implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the amount of the excess.

Question 24

How does IFRS define an intangible asset?

Answer 24

“an identifiable nonmonetary asset without physical substance.”
The asset:
1. is controlled by the entity and the entity expects to derive future economic benefits;
2. lacks physical substance;
3. is identifiable to be distinguished from goodwill.

Question 25

Are intangible assets allowed to be revalued to Fair market under IFRS?

Answer 25

Yes, if there is an active market for the asset