Intangibles

Question 1

Intangibles Definition

Answer 1

-Intangible assets are assets that lack physical substance but provide economic benefits. Intangible assets include patents, copyrights, trademarks, goodwill software, brand recognition, customer lists, and other proprietary information.

Question 2

Types of intangible assets based on form

Answer 2

• Knowledge- based intangible assets
• Based on knowledge, expertise, and intellectual capital.
  Examples include research and development (R&D), software, and databases.
• Marketing base intangible assets
• based on a company’s brand and marketing efforts
• Examples include brand recognition and trade names.
• Customer based intangible assets
• Based on a company’s relationships with its customers.
  Examples= Customer lists. Customer contracts, and customer loyalty programs.

Contract based intangible assets
- Based on contractual Agreements
* Examples include franchise agreements, license agreements, and lease agreements.

Question 3

Types of intangible assets based on identifiability

Answer 3

• Identifiable intangible assets
• Identifiable intangible assets have a clear and distinguishable value and can be separately identified from other assets.
  Examples of identifiable intangible assets include patents, copyrights, trademarks, franchises, licenses and leasehold improvements.

Non-identifiable intangible assets
- non-identifiable intangible assets like goodwill do not have a specific value that can be separately identified from the value of other assets.
- Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination.

Question 4

Types of Intangible assets based on expected life

Answer 4

Definite life intangibles
- Specific period of time over which they are expected to provide economic benefits.
Examples of intangible assets with a definite life include patents, copyrights, franchises, licenses, and leasehold improvements.

Indefinite Life Intangibles
- Expected to provide economic benefits to the company over an extended period of time, with no specific end date.
-Examples of intangible assets with an indefinite life include trademarks and good will.

Question 5

Types of intangible assets based on manner of Acquistion

Answer 5

-Externally Acquired
- Internally Developed

Question 6

Accounting for intangibles: initial Measurement

Answer 6

Externally Acquired
Intangible asset Debit
Cash Credit

Internally Developed
- The costs of internally Developed intangible assets are generally expensed when incurred.
Expense Debit
Cash Credit

• However certain costs of internally developed assets can be capitalized if certain criteria are met. The cost of successful defense of an intangible asset can be capitalized.
  Intangible asset Debit
  Cash Credit

Question 7

Accounting for intangibles: Amoritzation

Answer 7

Intangible assets with definite life
- Amortized over useful lives
- amortization calculation

Amortization Expense= (Original cost- Salvage value)/ Lower of: Useful life or legal life.

Amortization Journal Entry
Amortization Expense Debit
Acc. Amortization Credit

Intangible assets with indefinite life
- not amortized

Question 8

Accounting for intangibles: Impairment: Definite Life Intangibles

Answer 8

• Impairment of definite life intangibles is calculated using the 2 step approach:
  step 1- Test for impairment

Carrying value> non-discounted future cash flows: Intangible asset is impaired; proceed to step 2.

Carrying value< non-discounted future cashflows: Intangible asset is not impaired; no further action required.

Step 2- Measure and record the impairment loss

Impairment loss= Carrying value- fair value

Impairment loss Debit
Intangible asset Credit

Question 9

Accounting for intangibles: Impairment: Indefinite Life Intangibles

Answer 9

Impairment of indefinite life intangibles is calculated using the 2 step approach:
Step 1- Test for impairment

Carrying value> fair value= intangible asset is impaired, proceed to step 2.

Carrying value< fair value= intangible asset is not impaired; no further action required.

Step 2- Measure and record the impairment loss

Impairment loss= Carrying value- fair value

Impairment loss Debit
Intangible asset Credit

Question 10

Accounting for intangibles: Disposal

Answer 10

Cash Debit
Acc Amortization Debit
Loss on disposal Debit
Intangible asset Credit
gain on disposal Credit

Question 11

Patents

Answer 11

• Patents are intangible assets that provide legal protection for a company’s product or process ideas resulting from research and development.

Capitalization
Cost of Patent application XXX
Costs of Purchase if the patent is XXX
purchased from another party
Costs incurred in successful defense XXX
of a patent if infringed during its
economic life

Expensed
R&D expenses incurred to develop XXX
the patent
Costs incurred on failure to defend XXX
a patent

Amortization
- Patents are intangible assets and should be amortized over their useful life or legal life, whichever is shorter.
- The maximum legal life of a patent is typically 20 years from the date of application.

Question 12

Copyrights

Answer 12

-Copyrights are a form of legal protection that gives creators of original exclusive rights to use, distribute, and profit from their creations.

Capitalization
- Cost of acquiring or creating the asset

Amortization
- Copyrights are intangible assets and should be amortized over their useful life or legal life, whichever is shorter. The maximum legal life of a copyright is the life of the author plus 70 years.

Question 13

Franchise agreements

Answer 13

-A franchise agreement is a legal contract that grants franchisee the right to use the franchisors business model, trademarks, and other intellectual property in exchange for payment of fees and adherence to certain standards and operating procedures.

Capitalization
- Initial franchise fees are capitalized as an intangible asset on the franchisors balance sheet.

Amortizaiton
- Initial franchise fees are amortized over the expected life of the franchise.

Question 14

Leasehold improvements

Answer 14

-Leasehold improvements are improvements made to leased property by the tenant/lessee

Capitalization
- Leasehold improvement should be capitalized and recorded as an asset on the balance sheet.

Amortization
- The cost of the leasehold improvement should be amortized over its useful life or the lease term, whichever is shorter.

Question 15

Trademarks

Answer 15

• A trademark is an exclusive symbol, word, phrase, or design used to identify and distinguish a company’s products or services from those of its competitors.

-Trademarks are indefinite life intangible asset

• Trademarks are generally not amortized but tested for impairment

Capitalization
- The cost of the trademark should be capitalized, meaning it is recorded as an intangible asset on the balance sheet.

Amortization
- Trademarks are never amortized, but it is tested for impairment annually.

Impairment
- The trademark should be tested for impairment regularly, typically at least annually, or whenever there are indications that the carrying value may be impaired.

Question 16

Goodwill

Answer 16

-Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable net assets of that business.

• It is created when a company acquires another company and pays more than the fair value of the net assets it receives in return.

Fair value of entity XXX
Less: Fair value of entity’s net asset XXX
=goodwill XXX

-Goodwill arises from intangible assets such as the acquired company’s brand, customer relationships, intellectual property, and other factors that are difficult to quantify or value.

Question 17

Accounting for goodwill

Answer 17

Capitalization
- Goodwill is capitalized only if it is externally acquired.

Assets FV
Goodwill Plug
Liabilities FV
Investment in subsidiary XXX
non-controlling interest XXX

Amoritzation
- Goodwill is never amortized, but it is tested for impairment annually.

Impairment
- Impairment testing involved comparing the FV of the reporting unit to its carrying value.
- The impairment test can be performed either on a qualitative basis or a quantitative basis.

Question 18

Cash Surrender Value

Answer 18

• The cash surrender value of a life insurance policy is the amount of money that the policy owner is entitled to receive from the insurance company if they cancel or surrender the policy before the insured person dies.
• It is considered a noncurrent asset because it represents a long-term investment that can provide future benefits.

Life insurance expense
- Life insurance expense= premium paid- increase in cash surrender value

Cash surrender value Debit
Life insurance expense Debit
Cash Credit

Question 19

Start-up costs and organizational costs

Answer 19

• Start-up costs and organizational costs are two types of expenses that a company may incur when starting and organizing its operations.

Start-up Costs
- Start-up costs refers to the expenses incurred before the business starts commercial operations.
- These costs can include market surveys, expenses to secure suppliers and distributors, advertising, employee training, and other costs incurred to set up the business.

Organizational Costs
- Organizational cost refer to the expenses incurred to organize and incorporate the business.
- These costs can include state fees for incorporation, accounting and legal costs incidental to incorporation, temporary directors’ fees, and expenses related to organizing meetings and drafting bylaws and minutes.

-From an accounting perspective, both start-up costs and organizational costs are expensed when incurred.

Question 20

Purchase software

Answer 20

-Purchased software refers to software that an organization acquires by buying rights to use it from a vendor or developer.

• Purchased software is recorded as an intangible asset on the balance sheet at the purchase price.
  Purchased software Debit
  Cash Credit

-The purchased software is amortized over the shorter of its legal life or its economic life
Amortization Expense Debit
Acc Amortization Credit

Question 21

Cloud computing arrangements

Answer 21

• Cloud computing arrangements refer to agreements where an organization pays a vendor for the right to use software over the internet, with the vendor responsible for hosting the software on their infrastructure.

-Cloud computing arrangements are account as follows:
- Preliminary project phase: Expensed
- application development phase: Capitalized as intangible asset or expensed.

Capitalized costs
- include implementation costs related to software development, licensing fees, third- party development fees, external materials, coding, and testing fees.

Expensed costs
- Are training, manual data conversion, maintenance, and support are expensed as incurred, meaning they are immediately recognized in the income statement.

Post implementation phase: Expensed

Amortization: Costs capitalized during the application development phase are recorded as an intangible asset and amortized over the term of the arrangement.
Amortization Expense debit
Acc Amortization Credit