Intangibles Flashcards
Intangibles with indefinite life
DO NOT AMORTIZE
Problem should state that the company has the right to extend the rights INDEFINITELY
SHOULD BE TESTED FOR IMPAIRMENT every reporting period.
Carrying value – Future Undiscounted Cash flows
If impaired, write down the asset to FV.
Impairment loss
Asset
Journal entry
Amortization expense
Intangible Asset
Impairment test process
For intangibles other than goodwill
- Perform qualitative testDetermine if it is more likely than not that the events and circumstances would result in impairment, then perform step 2 (YES)If qualitative test shows otherwise (results wont lead to impairment, then no more further tests needed bec the asset is not impaired) NO
- Perform quantitative assessment if qualitative assessment is YES.
***********
Compare CV vs. FV - difference is the impairment loss amount.
************
When to test for impairment
Goodwill VS Other intangibles
GOODWILL-
- test annual basis and between annual tests
- anytime during the company’s fiscal year as long as done the same time every year ( it doesn’t have to be year end)
- different reporting units may be examined at different times during the year
OTHER INTANGIBLES:
- tested annually EVERY REPORTING PERIOD
or when circumstances changed
Qualitative performance - circumstances affecting impairment
- cost increases negatively affecting cash flows
- financial performance declines
- legal, regulatory or contractual changes
- entity specific events
- industry and market deterioration
- other macroeconomic conditions
Goodwill impairment test process
- Perform qualitative testIf CV > FV proceed to step 2
- Compute fair value of implied goodwill
Fair value of unit
Less: FV of net assets
= Implied goodwill
Carrying amount of goodwill (original at
acquisition date)
Less: implied (new) goodwill
= Impairment loss (new target)
GOODWILL
When to test for impairment?
do not amortize
tested annually for impairment at the same time
use two step process
impairment loss cannot be recovered
internally developed goodwill is not capitalized
- expenses right away
Other intangibles
Useful lives
Patent - maximum of 20 years / shorter of useful or legal life
Copyright - life of creator + 70 years
- 95 years for works for hire
Trademark - renewable every 10 years
Franchise - depending on contract
If useful life is longer than 10 years, amortize over useful life.
If ranges of lives are given, use the shortest.
Amortize SL unless given otherwise in the problem
Research definition
costs aimed at discovery of new knowledge that will result in a new product or process
OR
significant improvement to a new product or process
Development costs
conversion of new knowledge into a plan or design for a new product or process
Market research and R&D performed for others - how are these recognized?
NOT research and development costs
Considered like cost of sales
Market testing activities - research and development cost?
are not research and development costs
Fixed assets used in research and development which has future economic benefits
CAPITALIZED and amortized over useful life
Research and development expense
Accumulated amortization
Patents - what costs are capitalized?
cost of obtaining legal protection
successful defense in court
maximum life - 20 years
use shorter of useful or legal life
unsuccessful defense - expense
Copyright
Life?
protection for artistic works etc
life of creator plus 70 yrs
95 years for works made for hire
amortize over USEFUL LIFE
Trademark
Life?
use of identifying name or product
amortize over useful life
usually has indefinite number of renewals
franchise
Life?
operation of a business under contractual arrangements
Intangibles with indefinite lives
NOT AMORTIZED
tested for impairment annually - use undiscounted present value method to test
CV > FV = Impairment loss
Reasons for impairment
unanticipated competition
significant adverse change in business climate
loss of key personnel
expectation that a reporting unit will be sold or otherwise disposed
3 methods of amortization of intangibles
SL
Unit of sales
Net realizable value -
use the most conservative - lowest carrying value and highest amortization expense
Development stage enterprise
- devoted entirely to research and development
2. not yet generating significant revenue from any product or service
Development stage enterprise financial statements
Report both one year and cumulative results on
Income statement
Statement of cash flows
Balance sheet - report cumulative losses since
inception in Stockholder’s equity
Organization costs
Expensed immediately
Includes legal costs of incorporation
How are legal costs of incorporation related to organization costs/forming a new organization reported?
expensed immediately
IFRS - INTANGIBLE ASSETS
Cost Model
Intangible asset
Cash
Amortization expense
Accumulated amortization
Impairment loss - IS
Accumulated amortization of IA
#impairment loss
Accumulated amortization
Impairment recovery - IS
# up to amounts previously recognized
for impairment loss only
IFRS - INTANGIBLE ASSETS
Revaluation Model
Intangible asset
Cash
Option to Revaluation Model:
Intangible asset
Revaluation surplus - OCI
#adjustment to FV
Revaluation Surplus - to zero
Revaluation loss -IS
Intangible asset
#impairment loss
Intangible asset
Revaluation surplus-OCI
New carrying value should not exceed the carrying amount before impairment.
