Intangibles

Question 1

what is an intangible asset

Answer 1

assets of a company which lack physical substance and provide economic benefits through the rights and privileges associated with their possession & maybe identifiable or unidentifiable. they may also be extremely acquired (purchased at fair value) or internally developed.

Question 2

what 3 basic forms do intangibles come in?

Answer 2

• knowledge
• legal rights & identifiable intangibles
• goodwill (unidentifiable intangible)

Question 3

when should not be considered as R&D?

Answer 3

when they are directly related to revenue such as the following:

• research performed for others for a fee
• periodic design changes to existing products
• cost for settling up production of a commercially viable product

Note: these cost are considered cost of sales, and will be capitalized and recognized as appropriate

Question 4

what are the legal rights regarding identifiable intangibles?

Answer 4

• capitalize cost of obtaining legal protection
• include cost of successful defense in court
• unsuccessful defense-expense the legal costs and possibly the entire patent
• do not include R&D of product or process
• Maximum 20 year life, but use the shorter of useful or legal life.

Question 5

how do you account for a patent that is purchased from another party?

Answer 5

it is capitalized and amortized over the shorter of the useful life or legal life at the purchase price.

Question 6

how are “copyright” legal rights accounted for?

Answer 6

the copyright period is for the life of the creator plus 70 yrs (or 95 yrs total for works made for hire) but the costs should be amortized over its useful life.

Question 7

how are “trademarks” accounted for?

Answer 7

external acquisition costs are amortized over their useful life. indefinite number of renewals for periods of 10 years each

Question 8

how are franchise cost accounted for?

Answer 8

the purchase price to the extent benefits were obtained from other parties and legal expenditures associated with protecting them should be capitalized.

Question 9

how are leasehold improvements accounted for?

Answer 9

should be capitalized and amortized over the benefit period. which will be the shorter of

• *useful life of the improvements
• *legal life of the lease, including extensions that are reasonable assured of occurring.

Question 10

how are intangible assets with finite useful lives accounted for?

Answer 10

-amortized over their estimated useful lives in accordance w/the matching principle and if there are multiple useful lives the shortest alternative should be used because of the conservative principle.

These assets are tested annually for impairment using the un-discounted present value approach.

Question 11

how are the useful lives for intangible assets determined?

Answer 11

• the expected use of the asset by the entity
• legal, regulatory, or contractual provisions that may limit the useful life
• the effects of obsolescence, competition, and other economic factors
• the expected maintenance expenditures required.

Question 12

what is the criteria for an intangible to have an indefinite useful life?

Answer 12

• no legal’
• no regulatory
• no contractual
• no competitive
• no economic or other factors limit the useful life, it is considered to be indefinite.

Question 13

how are intangibles other than goodwill tested for impairment?

Answer 13

by comparing the carrying value of the asset to its fair value.

Question 14

how is the FV determined to check to see if an asset is impaired?

Answer 14

• market approach (uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or groups of assets and liabilities)
• income approach (converts expected future amounts, such as revenues or cash flows, to a single current amount applying present value concepts.)
• cost approach measures the amount that would be currently required to replace the service capacity of an asset

Question 15

what are the 3 methods of amortization?

Answer 15

• straight line ( costs are recognized equally over the useful life
• units of sales (costs are allocated based on the sales to date as a % of estimated total sales)
• net realizable value (sufficient amortization is recorded to reduce the carrying value of the intangible to the estimated remaining future benefits.)

Question 16

what is goodwill?

Answer 16

unidentifiable intangible since its value cannot be directly determined. It is instead represented by the excess of what a buyer is willing to pay for a business over the value of the net identifiable assets, including other intangible assets, but not goodwill on the books of the acquired company. It has an indefinite useful life and is tested annually for impairment.

Question 17

how do you calculate the value of goodwill when checking for impairment?

Answer 17

the FV of all of the reporting units identifiable assets and liabilities will be measured by the following:

• cash and cash equivalents is valued @ face value
• short-term receivables are valued @ net realizable value
• inventories are valued at replacement cost subject to floor and ceiling limitations.
• all other items will be measured at the generic procedures to determine FV. for example the following:
• *the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction btwn market participants @ measurement date.
• *for financial assets & liabilities FV is generally the PV of expected cash flows
• *for nonfinancial assets, the entity considers the assets highest & best use, which might be in use such as the case of a productive asset or might be in exchange such as in the case of an asset held for investment purposes

Question 18

what is the journal entry to record an impairment loss on goodwill?

Answer 18

debit-impairment loss (this loss is going to the income statement in the non operating section for continuing operations)
credit - goodwill

Question 19

what accounts are involved in tallying up the value of “underlying net assets”

Answer 19

\+cash
\+accounts receivable (NRV)
\+inventories
\+other current assets
\+PPE
\+intangibles (if any)
-current liabilities
-long-term debt
=underlying net assets

compare to the FV of the reporting unit If underlying net assets is more than FV then goodwill is possibly impaired if the amount recorded as goodwill is more than the difference.

Question 20

who established the alternative accounting approach for nonpublic entities (goodwill)

Answer 20

The private company council of the FASB.

Question 21

how is goodwill accounted for under the alternative accounting approach for nonpublic entities?

Answer 21

it will begin amortizing its goodwill on a straight-line basis over its useful life not to exceed 10 yrs. however it is tested for impairment when a triggering event occurs that would more likely than not reduce the FV below its carrying amount.

Question 22

what events are considered triggering events?

Answer 22

• economic conditions
• competition
• changes in costs
• changes to the regulatory environment to determine if there is a reason to believe that it is more likely than not. meaning it is a greater than 50% probability that goodwill has been impaired.
• if the FV is lower than the CV the entire difference is attributed to goodwill & recognized as an impairment loss.

Question 23

in regards to computer software; how are cost to sell, lease or market as a product with converting a technologically feasible program into final commercial form accounted for?

Answer 23

they are capitalized & amortized based on the most conservative method (the one that will result in the lowest CV) by choosing one of the following:
**straight-line
**units of sale
** or NRV
At year end they should be reported @ the lower of unamortized cost or NRV

• *coding & testing after tech feasibility
• *product masters after tech feas.

Question 24

cost of computer software development prior to “technological feasibility” is accounted for how?

Answer 24

the are expensed as incurred to R&D.

• *program
• *design
• *coding & testing

Question 25

how are cost for computer software development incurred the production phase accounted for?

Answer 25

as a part of "inventory cost" * *duplication * *training materials * *packaging

Question 26

how is internal use computer software preliminary cost accounted for?

Answer 26

preliminary stage cost of the following should be expensed: - training - data conversion & maintenance

Question 27

how are cost after the preliminary stage and for upgrades/enhancements accounted for?

Answer 27

capitalized and amortized on a straight-line basis & these should cease when the software project is substantially complete & ready for its intended use.

Question 28

what is the journal entry for life insurance?

Answer 28

debit-cash surrender value debit-life insurance expense (plug figure) credit-cash (for the amount of the premium payment)

Question 29

how do you account for franchise agreements?

Answer 29

revenue on franchise agreement should be recognized when the franchisor has substantially performed all material services and conditions, and collect-ability is reasonably assured. Direct franchise costs are deferred until the related revenue is recognized.

Question 30

what is a sinking fund?

Answer 30

the cash & earning will be accumulated in a sinking fund account and classified as a long-term asset on the B/S (as long as the bonds repayment long-term liabilities) earnings will be recognized as ordinary income.

Question 31

Does GAAP apply to development state enterprises?

Answer 31

Yes because they are currently devoted to R&D and are likely to be recognizing substantial research & development costs w/virtually no revenue generating a substantial loss each period. **development stage enterprises should report both one year and cumulative results on the I/S

Question 32

how are organization cost accounted for?

Answer 32

forming an organization, including the legal costs of incorporation, should all be expensed immediately for financial accounting purposes.

Question 33

when does IFRS require an intangible asset to be recognized?

Answer 33

- whether acquired from others or internally generated, if certain conditions are met: * *the entity is able to reliably measure the cost of the asset * *the assets expected future economic benefits are likely to flow to the entity.

Question 34

under IFRS what is considered an identifiable intangible?

Answer 34

- it is separable which means it can be sold transferred licensed exchanged or otherwise disposed of - it arises from contractual or legal rights

Question 35

under IFRS how are acquired intangibles recognized?

Answer 35

-at cost including direct costs of preparing the asset for its intended use.

Question 36

Under IFRS how are internally generated goodwill and assets resulting from RESEARCH accounted for?

Answer 36

- they are expensed b/c they are not allowed to be capitalized. * *also, internally generated brands, masterheads, publishing titles, customer lists & similar items cannot be capitalized.

Question 37

Under IFRS how are internally generated identifiable intangibles that result from DEVELOPMENT accounted for?

Answer 37

they are capitalized if they can demonstrate that certain conditions are all met: - it is technically feasible to complete the asset for use or sale - the entity has the intent to complete the asset and the availability of resources to do so - the ability to use or sell the asset - the asset will generate probable future economic benefits - resources are available to complete the development - cost incurred during the development of the intangible can be reliably measured.

Question 38

Under IFRS what are the two methods that intangibles can be accounted for?

Answer 38

- cost model | - revaluation model

Question 39

what is the criteria under IFRS to use the revaluation model?

Answer 39

- the revaluation model may only be used when there is an active market for the asset such that the FV can be readily determined - when the revaluation model is used all assets in its class are also required to be valued using the revaluation model unless there is no active market for them.

Question 40

under IFRS how is the "cost model" used for intangible assets?

Answer 40

- depreciated to the residual value - each significant part is amortized separately - the method should reflect the pattern based on the economic benefits the entity obtains from the use of the asset - amortization is recognized in income unless it is included in the cost of another asset such as manufactured inventory.

Question 41

under IFRS how is the "revaluation model" used?

Answer 41

- asset is periodically adjusted to its estimated FV - revaluations to FV must be made regularly to assure that the carrying amount is not significantly different from FV. - the asset is reported at its revalued amount less amortization and any impairments from the date of revaluation to the balance sheet date - changes are generally recognized in income * **increases in value prior to any decreases are recognized in other comprehensive income * **decrease in value first offset cumulative amounts of increases in other comprehensive income with the excess reported in income * **increases in value occurring subsequent to decreases are first recognized in income w/the excess reported in other comprehensive income.

Question 42

when is an impairment loss recognized under IFRS?

Answer 42

- when the carrying value exceeds its recoverable amount - if impaired; the loss will be the difference btwn the carrying amount and the greater amount. - loss recorded in the period incurred and is done immediately in profit and loss under the cost model - if the asset is accounted for under the RM the impairment loss is a revaluation decrease

Question 43

under IFRS how are reversals of impairments accounted for?

Answer 43

- Under the CM impairment reversals are recognized up to the amount of previously recognized impairment losses - under the RM impairment reversals are treated as revaluation adjustments * **increases in the value of an impaired asset are recognized in income to the extent that they offset previously recognized losses. * **any remainder is recognized in other comprehensive income (OCI)