Intangibles with Indefinite Lives Flashcards
What are intangible assets?
they are long-lived legal rights and competitive advantages developed or acquired by a business enterprise; intangible assets may be either specifically identifiable (patents, copyrights, etc.) or not specifically identifiable (goodwill) and may have a finite life or an indefinite life
if there are no contractual, legal, economic, or other factors which limit the useful life of an intangible asset, it is deemed to have an indefinite life; the most common indefinite life intangible asset is goodwill
the carrying amount of an indefinite life intangible asset is equal to the cost incurred to acquire the asset, less impairment; amortization expense is not relevant, as indefinite-lived intangible assets do not have a useful life over which to amortize
costs associated with maintaining, developing, or restoring goodwill are not capitalized as goodwill (they are expensed)
Impairment of indefinite-lived intangible assets other than goodwill
intangible assets with indefinite useful lives must be tested for impairment at least annually; an entity assessing an indefinite-lived intangible asset for impairment can choose to first perform a qualitative assessment of impairment to determine whether it is more likely tan not (more than 50%) that the indefinite-life intangible asset is impaired
the quantitative impairment test is not necessary if, after assessing relevant qualitative factors, it is determined that it is not likely (less than 50%) that the asset is impaired; an entity has an unconditional option to bypass the qualitative assessment and move directly to the quantitative impairment test
an intangible asset with an indefinite life is tested for impairment at least annually by comparing the fair value of the intangible asset to its carrying amount; if the asset’s fair value is less than its carrying amount, an impairment loss is recognized in an amount equal to the difference
an impairment loss is reported as a component of income from continuing operations before income taxes; 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
goodwill impairment is very similar to everything listed above except it is calculated at the reporting unit level; a reporting unit is an operating segment, or one level below an operating segment; the goodwill of one reporting unit may be impaired while the goodwill for other reporting units may or may not be impaired
it is important to remember that the impairment charge cannot exceed the value of the goodwill that is allocated to the reporting unit
Research and development (R&D) costs
the only acceptable method of accounting for R&D costs is a direct charge to expense with 3 exceptions:
materials, equipment, or facilities (tangible assets) that have alternative future uses; capitalize and depreciate the assets over their useful lives (not the life of the R&D project)
R&D costs of any nature undertaken on behalf of others under a contractual arrangement (treated as cost of sales by the provider)
“in process” R&D associated with the purchase of one company by another company; these costs are capitalized
the following items may be capitalized as part of product costs or may be expensed in an area such as SG&A expenses, but they will not be classified as R&D expenses:
routine periodic design changes to old products or troubleshooting in the production stage (these are manufacturing costs), marketing research, quality control testing, and reformulation of a chemical compound
Computer software development costs: to be sold, leased, or licensed
expense costs (planning, design, coding, and testing) incurred until technological feasibility has been established for the product
capitalize costs (coding, testing, and producing product masters) incurred after technological feasibility has been established up to the point that the product is released for sale (technological feasibility is established upon completion of a detailed program design or working model)
annual amortization (on a product by product basis) is the greater of:
percentage of revenue = total capitalized amount * (current gross revenue for period / total projected gross revenue for product)
straight line = total capitalized amount * (1 / estimate of economic life)
costs incurred to actually product the product are product costs charged to inventory; capitalized software costs are reported at the lower of cost or market, where market is equal to net realizable value
Computer software development costs: developed internally or obtained only for internal use
expense costs incurred for the preliminary project state and costs incurred for training and maintenance
capitalize costs incurred after the preliminary project state and for upgrades and enhancements, including: direct costs of materials and services, costs of employees directly associated with project, and interest costs incurred for the project
capitalized costs should be amortized on a straight-line basis
if software previously developed for internal use is subsequently sold to outsiders, proceeds received (from the license of computer software net of incremental costs) should be applied first to the carrying amount of the software, then recognized as revenue (after the carrying amount of the software has reached zero)
