Intangibles

Question 1

What does research consist of?

Answer 1

Discovering new knowledge
Developing a new product or process
Improving an existing process

Question 2

What does development consist of?

Answer 2

Converting new knowledge into a plan or design for a new product or process

Question 3

What costs should not be included in R and D?

Answer 3

Research performed for others for a fee
Periodic design changes to existing products
Costs for setting up production of a commercially viable product

Question 4

How are patents treated?

Answer 4

Capitalize cost of obtaining legal protection
Include cost of successful defense
Expense if unsuccessful defense
Amortize over shorter of useful or legal life, max 20 years

Question 5

How are copyrights, trademarks, and franchises treated?

Answer 5

Finite life - amortize costs over useful life
Cost - Residual Value

Infinite Life - test at least annually for impairment
If impairment factors are more likely than not, then compare CV-FV

Question 6

What are indicators of impairment?

Answer 6

Increase in costs 
Decrease in cash flows or revenues
A change in the business environment
Changes in management
Change in market conditions
Change in general economic conditions

Question 7

What is the 2-step approach for evaluating goodwill impairment?

Answer 7

1. Compare FV of operating unit to BV including GW
   If FV of operating unit < BV = Impairment
   If FV of operating unit > BV = OK
2. FV of operating unit > FV of NA excluding GW =
   FV GW
   If FV GW < BV GW = loss

Question 8

How are computer software costs treated?

Answer 8

1. Before technological feasibility - expense costs as R and D
2. During technological feasibility - capitalize costs as SOFTWARE
3. During production, expense costs as INVENTORY

Question 9

What are the types of costs incurred before technological feasibility?

Answer 9

Program
Design
Coding and Testing
= R and D Expense

Question 10

What are the types of costs incurred during technological feasibility?

Answer 10

Coding and Testing after feasibility
Product Masters
= Software Costs

Question 11

What are the types of costs incurred during production?

Answer 11

Duplication
Training Materials
Packaging
= Inventory Costs

Question 12

How are leasehold improvements treated?

Answer 12

Capitalized and amortized over the shorter of the useful life or legal life of lease, including extensions that are reasonably assured of occurring

Question 13

When is revenue recognized for franchise agreements?

Answer 13

When the franchisor has substantially performed all material services and collectibility is reasonably assured

Question 14

How are intangibles amortized?

Answer 14

1. Straight Line
2. Compare sales to date as a percent of total expected sales
3. Record sufficient amortization to reduce CV to estimated remaining future benefits