Intangibles

Question 1

What is an impairment?

Answer 1

An impairment is simply an unanticipated decline in an asset’s value that occurs when the asset’s carrying amount is greater than its recoverable amount.

Question 2

What are the two alternative approaches to accounting for goodwill that are available to private companies and not-for-profit organizations.

Answer 2

Eligible entities may elect to amortize goodwill and/or test for impairment only once at the end of each reporting period

Question 3

How is software developed solely for internal use accounted for?

Answer 3

Costs for software developed for solely internal use are accounted for based on when the software is intended for use.

1. Costs incurred during the application development are capitalized.
2. Costs incurred before application development (ie research and development) and after the software is ready for its intended use are expensed.

Question 4

What is a Goodwill?

Answer 4

Goodwill is an intangible asset that represents the residual amount paid for a business over the FV of the acquired company’s net identifiable assets. This is only recorded from the purchase of another entity because it is impossible to objectively verify the entity’s value in the absence of an actual transaction and costs tp develop or maintain goodwill cannot be capitalized.

Question 5

How must an intangible assets that have an indefinite useful life be tested.

Answer 5

This must be tested annually, for impairment by using Qualitative Assessment and/or the Quantitative Impairment Test. These two can rule out an impairment loss; however, only Quantitative Impairment Test can confirm if an impairment loss exists and determine a loss amount, if necessary.

Question 6

When are R&D expense costs incurred?

Answer 6

Under Research costs are incurred under the following circumstances:

1. Discovering new knowledge
2. Developing new products
3. Improving existing products.

Under Development costs are incurred under the following circumstances:

1. Converting knowledge into plans
2. Designing new products
3. Testing new products.

Question 7

What is the accounting for R&D costs?

Answer 7

The following are expensed immediately:

1. Materials used
2. Labor for design & development

The following are capitalized over time:

1. Equipment and facilities (long-lived assets)
2. Purchased or developed intangibles

Question 8

Where is goodwill assigned to when filing a consolidated financial statement?

Answer 8

Goodwill is assigned to whichever reporting unit (i.e operating segment or one level below) that receives the benefit of the acquired business.

Question 9

How are Patent expensed under GAAP?

Answer 9

Under GAAP here are the following ways Patents are expensed:

1. Research and development (Internally developed patents)
2. Legal Fees (unsuccessful defense of patent)

Here is when patents are capitalized:

1. Purchase price(acquired patents)
2. Legal Fees(successful defense of patent)
3. Filing fees.

Question 10

How do you calculate the amortization expense of an intangible asset with finite useful life?

Answer 10

Amortization expense = Cost - Residual value / Useful life

Question 11

When are Intangible amortized?

Answer 11

Intangible assets with finite (ie. determinable) useful lives are amortized, while intangible assets with indefinite lives(eg. goodwill) are not amortize but instead are tested annually for impairment.

Question 12

What is a trademark?

Answer 12

This is an intangible asset that provides legal protection for the exclusive use to an identifying name or logo of a product or process. The protection typically lasts 10 years but can be renewed an unlimited number of times.

Question 13

What is a copyright?

Answer 13

This is an intangible asset that lacks physical substance which provides legal protection of artistic works. The copyright period is typically for the life of the creator plus 70 years

Question 14

When should Goodwill be tested for value impairment?

Answer 14

Goodwill is typically assigned to the reporting unit that receives the benefit (eg. name recognition, customer loyalty) of an acquired business. When goodwill no longer provides benefit to the reporting unit to which it was assigned, goodwill must be impaired and an impairment loss must be recognized.

Question 15

What are franchisee accounting?

Answer 15

This includes:

1. Capitalizing initial franchise fees - the initial fee and any costs associated with entering the contract(eg. legal fees) are capitalized as an intangible asset.
2. Paying ongoing franchise fees - this is typically, a percentage of the franchisee’s revenue(ie. royalties) are paid to the franchisor and expensed as incurred.
3. Amortizing the intangible asset. The asset is amortized over its useful life,, which is typically the franchise agreement’s initial term.

Question 16

What are research costs with no alternative use?

Answer 16

Research costs with no alternative use are expensed as incurred. However, if a long-term asset acquired for R&D activities has an alternative use, it is capitalized.