Intangibles Flashcards
Intangible Assets
Intangible assets refer to assets of a company which lack physcial substance and privide economic benefits through the rights and privileges associated with their possession. They may be identifiable or unidentifiable. They may also be externally acquired (purchases at fair value) or internally developed. Three basic forms:
- Knowledge
- Legal rights and Identifiable intangible
- Goodwill (unidentifiable intangible)
Intangible Asset Type: Knowledge
Knowledge is developed by a process of R&D. Research is aimed at the discover of new knowledge that will result in a new product or process or a signifcant improvement to an existing product or process.
Developement is the conversion of that new knowledge into a plan or design for a new product or process.
Matching the costs of R&D to benefits is virtually impossible, since much of the work will result in failure, or benefits of indefinte value and duration. As a result of the tremendous uncertantity, R&D costs are expenses as incurred.
Fixed assets purchased for use in research should be capiltalized unless the equipment is purchased for current R&D projects only, they should be immediately expenses as R&D.
Costs should NOT be treated as R&D whey they are directly related to current revenue such as:
- research performed for others for a fee.
- periodic design changes to existing products
- costs for setting up production of a commercially viable product
These costs are considered part of cost of sales and will be captialized and recognized as appropriate.
Intangible Asset Type:
Legal Rights and Identifiable Intangibles
These types of intangible assets include patents, copyrights, trademarks, franchises, leasehold improvements and licenses.
The costs incurred to legally protect product and process ideas resulting from R&D are not part of it, but are instead a form of legal right known as a patent.
- 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/process
- maximum 20 year life, but use shorter of useful/legal life.
The cost of the patent includes the legal costs of obtaining it and, if necessary, defendint it in court against infringement by other companies. If a legal defense of the patent is unsuccessful, all costs should be expensed, since no legal benefit exists in that case. A patent that has been purchased from another party is capitalized at the purchase price.
Copyright: protection of artistic works, copyright period is for the life of the creator plus 70 years (or 95 years total for works made for hire), but the costs should be amoritzed over its useful life.
Trademark: exclusive use of an identifying name for a product/process. External acquisition costs are amoritized over their useful life. Indefinite number of renewals for periods of 10 years each.
Franchise: operation of a business unit under contractual arrangments with another party.
Leasehold Improvements
When a tenant has a long-term lease on real estate, and has incurred costs to improve the properly the leasehold improvements should be capitalized and amortized over the benefit period. Thiw will be the shorter of:
- Useful Life of the improvments
- Legal life of the lease, including extensions that are reasonably assured of occuring.
Intangible Asset Type : Goodwill
Goodwill is known as the unidentifialbe 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 businessover the value of the net identifiable assets, includingother intangible assets but not goodwill on the books of the acquired company.
Goodwill has an indefinite useful life and is tested for impairment at least annually. Goodwill is considered impaired when the carrying value of the reporting unit with which it is associated exceeds that reproting unit’s fair value.
2 Step Approach for Goodwill Impairment Testing
Step 1: compare the CV of the reporting unit to its FV.
- If the FVof the reporting unit is > its CV than its generally assumed that goodwill is not impaired and no further testing is required.
- If the FV is < CV, it is assumed that goodwill is impaired and needs to be measured in Step 2.
Step 2: determine the FV of goodwill
- FV of all of the reporting units identifiable assets & liabilities will be measured
- Some items will be measured according to existing authoritative literature.
- Remaining items will be measured applying the generic definition of FV
- The fair value of the underlying net assets will be compared to the FV of the reporting unit, as measured in Step 1.
- The difference represents the FV of goodwill
- Goodwill will be written down to that amount and an impairment loss will be recognized for the difference.
Alternative Accounting approach for Nonpublic Entities (Goodwill)
When the alternative accounting approach is elected, the entity will begin amortizing its goodwill. It will be amortized on a straightline basis over its useful life not to exceed 10 years.
Goodwill will also be tested for impairment at the company-wide level, only when a triggering event occurs that would more likely than not, reduce the FV below its carrying amount. THe entitiy will combine allc omponents of goodwill and peform a single one-step impairment test for the entity as a whole.
- the FV of the entity is compared to its CV
- If the FV is lower than the CV, the entire difference is attributed to goodwill and recongnized as an impairment loss.
Computer Software
Compter software developed to sell, lease or market as a prouct, these costs associated with converting a technologically feasible program into final commercial form are capitalized. Costs prior to technologically feasiblity are expensed as R&D anc costs incurred after software sales begin are inventoried and included in cost of sales.
Amoritzation of capitalized software costs is calculated using a two-step process:
- Amorization is calculated using the more conservative of straight-line and relative sales value approach. The larger of these two calculations will be recognize as amortization expense
- straight line amount is calculated by dividing the remaining CV @ begining of the period by the useful life, also @ beginning of the period.
- the amount under the relative sales value approach is calcuated by establising a ratio with the current period’s sales in the numerator and the total estimated sales for the remaining life of the software including the current period’s sales in the denominator.
- The new carrying value of the software, after the amortization from the 1st step is compared to the NRV of the software. If the CV is >, the excess is also written off as amortization expense. For purposes of this calculation, the NRV of the software is the amt expected to be generated from future sales less the costs associated with completeion, disposal, maintenance, and customer support.
Computer Software for Internal Use
If the computer software was developed for internal use ONLY, costs incurred in the preliminary project state and costs inurred in training, data conversion and maintenacne should be expensed as R&D.
Costs incurred after the preliminary project stage and for upgrades and enhancements should be capitalized and amoritized on a straight-line basis. Capitalization of costs should cease when the software project is substantially complete and ready for its intended use.
If the entity later decides to market the software to outsiders, net proceeds received should be applied first to the carrying amount of the software until the CV has reached zero, then recognized as revenue.
Other Assets
In order to account for differences between the time of payment and the time of recognition for revenue and expenses, it is often necessary to accrue or defer items.
Accrued Revenue - an amount that is being recognized on the I/S prior to collection. Accrued revenue is a receivable.
Deferred (Prepaid) Expense - an amount that is being paid prior to recognition on the I/S. A deferred expense is generally referred to as a prepaid expense, reported as a current asset.
Royalties
Royalties often include both accrued and deferred amounts. A publishing company may pay some royalties to authors based on book sales that have occured (accrued expenses) and pay other authors advances on expected future book sales (deferred expenses).
Life Insurance
When a corporation takes out a life insurance on the life of an officer, it will sometimes select a policy that builds a cash value over time (cash surrender value). Since this value doesn’t require the death of the officer, it is considered an asset.
Cash Surrender Value 6,000
Life Insurance Expense 44,000
Cash 50,000
Franchise Agreements
Revenue on a franchise agreement should be recognized when the franchisor has substantially performed all material services and conditions, and collectability is reasonably assured. Direct franchsie costs are deferred until the related revenue is recognized.
Sinking Fund
A company will sometimes be required to set aside amount for the future repayment of bonds. The cash and earning will be accumulated in a sinking fund account, and classified as a long-term asset (as long as the bonds repyament is related to bonds that are long-term liabilities). The earnings will be recognized as ordinary income.
Organization Costs
The expenses associated with forming an organization, include the legal costs of incorporation, should all be expensed immediately for financial accounting purposes.
Intangible Assets under IFRS
