Intangible Assets

Question 1

LHI (Leasehold) Amortization Calculation

Answer 1

When completed to end of lease and ignore any ending value that may belong to the Lessor.

Question 2

Internal vs External Costs

Answer 2

In the past, firms capitalized and amortized organization costs. However, now, organization costs are expensed immediately. Such costs are internally generated. Typically, only costs paid to outside entities are capitalized to intangible assets, and only those intangibles with definite lives are amortized.

Question 3

Insurance Cash Surrender Value

Answer 3

The revenue recognized in 2004 is $210,000, the difference between the proceeds of $300,000 and the surrender value. The build-up in surrender value has been recognized in previous years’ earnings as a reduction in insurance expense. The increase in surrender value in any year is treated as a deduction from the premium in computing insurance expense for the year. Thus, of the $300,000, $210,000 has not been recognized in earnings before 2004.

Question 4

Intangibles of Development Stage Companies

Answer 4

Development stage enterprises capitalize the same costs as established on-going enterprises. Thus, only the leasehold improvements, equipment, and furniture ($1,200,000) would have been capitalized.
Research and development is expensed as incurred, as are most general and administrative costs. There is no information in the question to justify capitalizing the laboratory operations cost.

Question 5

Lease Term vs. Useful Life Amortization Period

Answer 5

The shorter of the lease term and useful life of the leasehold improvements is used for amortization because leasehold improvements revert to the lessor at the end of the lease term. A 10-year lease term is used because renewal is uncertain.

Question 6

What makes an intangible indefinite life?

Answer 6

This intangible has an indefinite life because it can be renewed and because management believes its cash flow will be generated indefinitely. Under GAAP, indefinite life intangibles are not subject to amortization. All intangibles are subject to impairment, however.

Question 7

Costs are often deferred until when?

Answer 7

ABC is a development stage enterprise. Such enterprises are subject to the same accounting principles governing capitalization of costs as enterprises that have established themselves as on-going enterprises. Therefore, the amount of cost to be capitalized or deferred is the amount of cost that is recoverable in future periods.

Question 8

Patent Costs that can be capitalized?

Answer 8

The legal cost for applying for a patent can be capitalized. Alta can also capitalize the costs associated with the legal defense of the patent. Under U.S. GAAP, research and development costs must be expensed.

Question 9

Cash Surrender Amount is what type of Account?

Answer 9

Investment Account that goes against Insurance Premium expense for the year.

Any dividends paid by the policy would also reduce Insurance Expense, but must check to see or implied that included in Cash Surrender Balance Already (don’t double count)

Question 10

When can litigation costs be capitalized?

Answer 10

Only when successful (otherwise there is NO PATENT)!!

Question 11

Impairment Reversals on Intangibles vs Plant Assets

Answer 11

All intangibles are subject to impairment, but the resulting impairment losses cannot be reversed. Although impairment losses on plant assets held for disposal can be reversed to the extent of previous losses, this is not the case for intangibles.

Question 12

Start up costs of a Product vs. a Company

Answer 12

Start up costs of a Company are EXPENSED, but a Product…..

Question 13

KEYS to INTANGIBLES

Answer 13

Identifiable vs unidentifiable
Definite vs Indefinite
Lower of Useful life or lease term (Legal life)
Cash Surrender Value is Investment portion of Insurance and offsets Insurance Expense

Question 14

JET: Are all intangibles on B/S as Asset?

Answer 14

i.e. are some not on B/S (unidentifiable?)

Goodwill is the only unidentifiable asset that can be capitalized.

Question 15

IFRS Intangible Asset Capitalization

Answer 15

The capitalizable costs for an intangible asset under IFRS 38 are essentially the same as U.S. GAAP. The cost of the asset is the cash paid to acquire the asset, including the cost to obtain legal title and control of the asset. This cost will include the purchase price ($100,000), the taxes ($5,000), and the legal costs to register the asset ($10,500).

Question 16

KEYS to GOODWILL

Answer 16

Goodwill is the Value in Purchase Price NOT attributable to identifiable assets.

PV of Excess Earnings

Pre-Test (Qualitative) is OPTIONAL

Owners' Equity = Net Assets (What Purchased on books)
Market Value of Net Identifiable Assets (FV of what purchased ex. Goodwill)
Market Value (FV of the Company)

implied goodwill is determined by comparing the fair market value of the reporting unit to the fair market value of the identifiable assets - not by using a discount model.

Goodwill is recognized and measured at the date of a business acquisition. Goodwill is measured as the difference between the consideration transferred in a business acquisition and the fair market value of the identifiable net assets acquired.

Question 17

Implied Purchase Price and Future Earnings

Answer 17

With the information provided, goodwill can be computed directly as the present value of excess earnings. Goodwill is then added to the market value of net identifiable assets to yield the purchase price. Excess earnings is the difference between B’s earnings and the expected earnings in B’s industry for a firm the size of B, based on market value of net assets. Given B’s

Question 18

Firm A is negotiating with Firm B to purchase Firm B and bring it into the corporate organization headed by Firm A. The two firms agree to the following:
Firm B’s average annual income is $900, to continue for 10 years after purchase.
Firm B’s total owner’s equity is $2,000.
Firm B’s market value of net identifiable assets is $3,500.
The average rate of return in B’s industry is 10%.
The risk adjusted rate of return for the purchase is 8%.
Compute the purchase price for B implied by this information. The present value of an annuity of $1 for 10 years at 8% is 6.71008, and at 10% is 6.14457.

Answer 18

Excess earnings is the difference between B’s earnings and the expected earnings in B’s industry for a firm the size of B, based on market value of net assets. Given B’s size, B is expected to earn $350 per year (.10 x $3,500). Excess earnings = $900 - $350 = $550. Goodwill = present value of excess earnings = $550(6.71008) = $3,691. The implied purchase price = $3,500 + $3,691 = $7,191.

Question 19

IFRS and Intangibles

Answer 19

IAS 38 defines an intangible asset as a nonmonetary asset without physical substance that is identifiable. Identifiable means that the asset is 1) separable or capable of being separated or divided from the entity and can be sold or transferred and 2) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity. This definition is essentially the same as under U.S. GAAP.

Under IFRS impairment losses associated with identifiable intangibles are recoverable. Impairment losses associated with goodwill are NOT recoverable.

Question 20

IFRS Goodwill Impairment

Answer 20

Under IFRS goodwill impairment is measured in a one-step process. The carrying value of the CGU is compared to the recoverable amount. If the CV > recoverable amount the goodwill is impaired. The impairment loss is the recoverable amount - the CV. In this case $32,000 - $45,000 = ($13,000) loss.

Question 21

Under IFRS, the test for asset impairment is to compare the carrying value of the intangible asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?

Answer 21

The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.