Unit 9 - Intangible Assets & Other Capitalization Issues Flashcards
Intangible Assets Distinct from Goodwill - Accounting Subsequent to Acquisition
The reversal of a previously recognized impairment loss is
When an impairment of an intangible asset is recognized, the previous carrying amount of the asset is reduced by the impairment loss. The adjusted carrying amount is the new accounting basis. Thus, it cannot be increased subsequently for a change in fair value. This rule applies whether the intangible asset has a finite or an indefinite useful life.
An intangible asset with an indefinite useful life
is not amortized.
eg. The carrying amount at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark.
Patents
R&D costs are
expensed as incurred
Patents
What items should be capitalized?
Amortization - what should be used - patent’s legal life OR estimated economic life?
legal work in connection with patent applications
or litigation and the sale or licensing of patents
The patent should be amortized over its estimated economic life
When is goodwill recorded?
Goodwill is not recorded except in a business combination. Thus, only the $ amount recognized at the acquisition date should be recorded as goodwill. It should not be amortized but should be tested for impairment at the reporting-unit level.
Which of the following costs (maintaining goodwill & developing goodwill) should be capitalized and amortized?
None
Goodwill arising from a business combination must be capitalized. However, amortization of goodwill IS PROHIBITED.
Moreover, the cost of developing, maintaining, or restoring intangible assets (including goodwill) that are:
(1) are not specifically identifiable,
(2) have indeterminate useful lives, or
(3) are inherent in a continuing business and related to an entity as a whole are EXPENSED AS INCURRED.
How often should goodwill be tested for impairment? how reported?
Goodwill must be tested for impairment at least annually. The impairment test compares the carrying amount of the reporting unit, including goodwill, with its fair value.
A goodwill impairment loss is recognized for the amount by which the carrying amount of the reporting unit, including goodwill, exceeds its fair value.
The loss is limited to the total amount of goodwill allocated to that reporting unit.
Franchise Accounting
How do you account for it?
A franchise is an intangible asset. The initial measurement of an intangible asset acquired other than in a business combination is at fair value. Thus, the “cost” to be amortized should be based on the more reliably measurable of the fair value of the consideration given or the fair value of the assets acquired. If the useful life is finite, the intangible asset is amortized over that period. Moreover, if the consumption pattern of benefits of the intangible asset is not reliably determinable, the straight-line method of amortization is used.
Eg. given no residual value, the amortization expense is $4,080 ($204,000 consideration given ÷ 50-year finite useful life).
What should be expensed as incurred by the franchisee for a franchise with an estimated useful life?
Payments under a franchise agreement made to a franchisor based on the franchisee’s revenues do not create benefits in future periods and should not be treated as an asset.
These payments should be treated as operating expenses in the period in which they are incurred.
Research & Development costs - how are they treated?
R&D costs are expensed as incurred. However, legal work in connection with patent applications or litigation and the sale or licensing of patents are specifically excluded from the definition of R&D. The legal costs of filing a patent should be capitalized.
Costs include those incurred for the design, construction, and testing of preproduction prototypes. Moreover, the cost of equipment used solely for a specific project is also expensed immediately.
Materials used in R&D, compensation costs of personnel, and indirect costs appropriately allocated are R&D costs that should be expensed immediately.
The costs of equipment and facilities that are used for R&D activities and have alternative future uses, whether for other R&D projects or otherwise, are to be capitalized as tangible assets when acquired or constructed.
Guidance does not apply to R&D activities conducted for others.
Computer Software (Created internally)
What is the guidance for accounting for the costs of computer software to be sold, leased or otherwise marketed?
Costs incurred internally in creating a computer software product are expensed when incurred as research and development UNTIL TECHNOLOGICAL FEASIBILITY has been established for the product.
Afterward, all software production costs incurred until the product is available for general release to customers are capitalized and amortized separately for each product. Subsequently, the lower of unamortized cost OR net realizable value at the end of the period is reported in the balance sheet.
Hence,
(1) the costs of completing the detail program design and establishing technological feasibility are expensed;
(2) the costs of duplicating software, documentation, and training materials and packaging the product are INVENTORIED; and
(3) the costs of coding and other testing after establishing technological feasibility and the costs of producing product masters are capitalized and amortized.
