Intangibles

Question 1

How are Research and Development costs recorded?

Answer 1

They are expensed in the period incurred and are not capitalized.

Question 2

The legal protection of product and process ideas resulting from research and development is known as what?

Answer 2

Patent

Question 3

How are legal fees to defend a patent amortized?

Answer 3

If the patent is SUCCESSFULLY defended, the legal fees are amortized over the patent’s economic life.

If unsuccessful, they are expensed immediately.

Question 4

How long does a patent last?

Answer 4

Maximum 20 year life, but use shorter of useful or legal life.

Question 5

The legal protection of artistic works is known as what?

Answer 5

Copyright

Question 6

How long does a copyright last?

Answer 6

The life of the creator plus 70 years (or 95 years total for works made for hire), but the costs should be amortized over their useful life.

Question 7

The exclusive use of an identifying name for a product or process is known as what?

Answer 7

Trademark

Question 8

How long does a trademark last?

Answer 8

Indefinite renewals of 10 year periods

Question 9

The operation of a business unit under contractual arrangements with another party is known as what?

Answer 9

Franchise

Question 10

Which intangible assets are subject to amortization?

Answer 10

Those with finite useful lives (such as patents, copyrights, and franchises).

Question 11

Are intangible assets with infinite useful lives subject to amortization?

Answer 11

No, as their infinite useful life makes amortization any calculation impossible.

Question 12

What methods of amortization are used for intangible assets?

Answer 12

Straight-line, units of sales (sales to date over estimated sales), and net realizable value (carrying value relative to remaining future benefits)

Question 13

Intangible assets are tested for impairment at what frequency?

Answer 13

Those with infinite useful lives are tested at least annually. Those with finite useful lives are tested less frequently.

Question 14

How are most intangible assets tested for impairment?

Answer 14

Two steps:

1) Compare the carrying value to the undiscounted present value of cash flows of the asset.
2) If greater, then compare the carrying value to the fair value. Any excess of carrying value over fair value is the impairment loss amount.

Question 15

What factors might cause intangible assets to become impaired?

Answer 15

Poor firm financial performance, adverse changes in the associated legal and regulatory environment, changes in management and/or personnel, potential litigation, industry and market changes (new subsitute products), and macroeconomic factors (access to capital, interest rates, FX rates, etc.)

Question 16

What are the two steps for testing goodwill impairment?

Answer 16

1) Compare the carrying value of goodwill to its fair value. If CV is greater than FV, impairment exists.
2) The net assets (assets - liabilities) should then be compared to the fair value of the reporting unit. The difference is Goodwill and it should be compared to the CV of Goodwill and written down accordingly.

Question 17

Are previously recognized impairment losses subject to reversals or recovery?

Answer 17

No

Question 18

How are costs for restoring or maintaining goodwill treated?

Answer 18

Expensed as incurred.

Question 19

At what organizational level should goodwill be tested periodically for impairment?

Answer 19

At the operating segment level or one level below

Question 20

How are costs for developing software recorded?

Answer 20

Expenses prior to technological feasibility are expensed as R&D.

After technological feasibility, but prior to production costs are capitalized.

Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.

Question 21

For nonpublic entities electing the alternative accounting approach, is goodwill amortizable?

Answer 21

Yes

Question 22

For nonpublic entities electing the alternative accounting approach, what amortization method is used for goodwill? For how long?

Answer 22

Straight-line over useful life (not to exceed 10 years)

Question 23

For nonpublic entities electing the alternative accounting approach, what is the process for recording goodwill impairment?

Answer 23

Compare fair value of the entity to its carrying value, if carrying value is greater the difference is attributed to goodwill and impairment loss.

Question 24

At what point do costs stop being R&D expenses?

Answer 24

Once technological feasibility is reached

Question 25

What happens to costs upon reaching technological feasibility?

Answer 25

Costs can now be capitalized as a part of the software costs (amortizable) or part of production costs.

Question 26

How is software amortized?

Answer 26

Larger of straight-line (usually 5 years) or ratio of annual revenues to total expected revenues

Question 27

What is an accrued revenue?

Answer 27

A revenue that has been earned, but payment has yet to be received.

Question 28

What is an accrued expense?

Answer 28

An expense that has been incurred, but hasn’t been paid.

Question 29

What is a deferred revenue?

Answer 29

Cash funds paid/received in advance of providing a good/service (money hasn’t been earned yet).

Question 30

What is a deferred expense?

Answer 30

Cash funds paid in advance of receiving a good/service (it’s a prepaid asset until fulfilled)

Question 31

What is a Patent?

Answer 31

The legal protection of product and process ideas resulting from research and development

Question 32

What is a Copyright?

Answer 32

The legal protection of artistic works

Question 33

What is a Trademark?

Answer 33

The exclusive use of an identifying name for a product or process

Question 34

What is a Franchise?

Answer 34

The operation of a business unit under contractual arrangements with another party