Intangibles with Finite Lives Flashcards
What are intangible assets?
they are long-lived legal rights and competitive advantages developed or acquired by a business enterprise; they are typically acquired to be used in operations of a business and provide benefits over several accounting periods (patents, copyrights, franchises, trademarks, and goodwill are the most commonly tested items)
intangible assets acquired from other enterprises or individuals should be recorded as an asset at cost; legal and registration fees incurred to obtain n intangible asset should also be capitalized
under U.S. GAAP, the cost of intangible assets not acquired from others (i.e. developed internally) should be expensed when incurred because U.S. GAAP prohibits the capitalization of research and development costs
How are intangible assets amortized?
the value of intangible assets eventually disappears; therefore, the cost of each type of intangible asset (except for goodwill and assets with indefinite lives) should be amortized by systematic charges to income over the period estimated to be benefited (useful economic life)
the straight-line method of amortization should be applied, unless a company demonstrates that another systematic method is more appropriate; the method and estimated useful lives of intangible assets should be adequately disclosed in the notes to the financial statements; expenses that increase the useful life of the intangible asset require an adjustment to the calculation of the annual amortization
if the life of an existing intangible asset is reduced or extended, the remaining net book value is amortized over the new remaining life…remember that intangible assets are amortized over the shorter of its estimated life or remaining legal life
if an intangible asset is sold, compare its carrying value at the date of sale with the selling price to determine the gain/loss
under U.S. GAAP, finite life intangible assets are reported at cost less amortization and impairment; indefinite life intangible assets are reported at cost less impairment
Impairment test for finite-lived intangible assets
intangible assets with finite useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable
an intangible asset with a finite life is tested for impairment using a two-step impairment test:
step 1 - the carrying amount of the asset is compared with the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition
step 2 - if the carrying amount exceeds the total undiscounted future cash flows, then the asset is impaired and an impairment loss equal to the difference between the carrying amount of the asset and its fair value is recorded
an impairment loss is reported as a component of income from continuing operations before income taxes, unless the impairment loss is related to discontinued operations; the carrying amount of the asset is reduced by the amount of the impairment loss; restoration of previously recognized impairment losses is prohibited, unless the asset is held for disposal
the impairment loss is calculated as the amount by which the carrying amount exceeds the fair value of the asset; however, when testing indefinite-life intangible assets for impairment, fair value must be used instead of undiscounted future net cash flows –> fair value - net carrying value = positive (no impairment) or negative (impairment)
Purchased software and cloud computing arrangements
software purchased for use by an organization is recorded on the balance sheet as an intangible asset at the purchase price; the asset is amortized over the shorter of the legal life (the contractual term of the asset) or the economic life (the period over which the software provides cash flows to the organization)
cloud computing arrangements (CCA) involve paying a vendor a fee in exchange for the right to use software over the internet; the vendor is responsible for hosting the software on its computing infrastructure; costs capitalized during the CCA application development phase are recorded as an intangible asset and are expensed over the term of the arrangement; amortization begins when any module or component of the CCA is ready for intended use
How to account for franchise fees
initial franchise fees are the present value of the amount paid (or to be paid) by a franchisee is recorded as an intangible asset on the balance sheet and amortized over the expected period of benefit of the franchise (i.e. the expected life of the franchise)
continuing franchise fees are received for ongoing services provided by the franchisor to the franchisee; these fees should be reported by the franchisee as an expense and as revenue by the franchisor in the period incurred
How to account for start-up costs
expenses incurred in the formation of a corporation (ex. legal fees) are considered organizational costs and are an example of start-up costs; start-up costs, including organizational costs, should be expensed when incurred
