ACCT 3021 Chapter 12

Goodwill

generated internally should not be capitalized in the accounts.

Fair Value

or indefinite-life intangibles other than goodwill, only the _____________ test is employed. For goodwill, a more complex fair value test is used.

Fair Value

When determining the impairment, if any, of goodwill, the _____________ of the reporting unit should be compared to its carrying amount including goodwill.

Master Valuation Approach

When this approach is used to measure goodwill, it is considered to be the excess of the cost over the fair value of the identifiable net assets acquired.

Limited-Life Intangibles

•Amortize to expense over useful life •Credit asset account or accumulated amortization •Useful life should reflect the periods over which the asset will contribute to cash flows •Amortization should be cost less residual value •Companies should evaluate the limited-life intangibles for impairment

common types of intangibles

•Patents •Copyrights •Franchises or licenses •Trademarks or trade names •Goodwill

Purchased (Buy) Intangibles

-Acquisition Cost typically recorded as LT asset -Include all costs incurred to make the intangible asset ready for its intended use. -Example: Franchisee for Panera Bread

Assets with Limited-Life

Amortize (expense) over useful life. (dr amortization expense) - Matching credit is either the asset or accumulated amortization. -- Useful life should reflect the period over which the asset will contribute to cash flows. -- Amortization is limited to cost less residual value. -- Must evaluate for impairment

Assets with INDEFinite Life

Do not amortize (expense). •Must be evaluate for impairment

Fair Value Test

This test measures the impairment loss by comparing the asset's fair value with its carrying amount. The impairment loss is the carrying amount of the asset less the fair value of the impaired asset.

Marketing-Related Intangible Assets

- Examples: Trademarks or trade names, newspaper mastheads, Internet domain names, and non-competition agreements. - In the United States, trademarks or trade names have legal protection for indefinite number of 10-year renewal periods. Accounting: If purchased with definite life, •At inception: Capitalize cost •In future: Amortize to expense over useful life. •If developed internally, •Deduct cost as expenses when incurred

Purchased Intangibles

- Recorded at cost - Includes all costs necessary to make the intangible asset ready for its intended use - Typical costs include: -- Purchase price -- Legal fees -- Other incidental expenses

Internally Created (Make) Intangibles

- Cost typically recorded as expense as incurred. - Exception: Capitalize direct costs incurred in developing the intangible, such as legal costs. - Example: Microsoft Office

Customer-Related Intangible Assets

- Customer lists, order or production backlogs, and both contractual and non-contractual customer relationships. Accounting: If purchased with definite life, •At inception: Capitalize cost •In future: Amortize to expense over useful life. • If asset developed internally, •At inception: Deduct cost as expenses when incurred •In future: no future

Indefinite-Life Intangibles

•No foreseeable limit on time the asset is expected to provide cash flows •Must test indefinite-life intangibles for impairment at least annually •No amortization

Internally Created (Make) Intangibles

•Recorded at cost •Generally expensed •Only capitalize direct costs incurred in developing intangible, such as legal costs

Goodwill

is considered to have an indefinite life and therefore should not be amortized.

Copyright

is granted for the life of the creator PLUS 70 years.

Goodwill

is often identified on the balance sheet as the excess of COST over the FAIR VALUE of the net assets acquired.

Cost

is the appropriate basis for recording purchased intangible assets

Cost

is the basis for recording intangible assets, including acquisition price and all expenditures incurred to prepare the asset for its intended use.

Amortization

is the systematic charge to income of the cost of an intangible asset.

Trademark

may properly be considered to have an indefinite life.

Impairment Loss

reported as a part of income from continuing operations, generally in the "Other expenses and losses" section.

Recoverability test

the fair value of an asset is measured by its market value if an active market for it exists. If no active market exists, the present value of expected future net cash flows should be used.

Marketing-Related Intangible Assets

•Examples: •Trademarks or trade names, newspaper mastheads, Internet domain names, and non-competition agreements •In the United States trademarks or trade names have legal protection for indefinite number of 10-year renewal periods •Capitalize acquisition costs •No amortization

long-term assets

Intangible Assets are ormally classified as

Characteristics of Intangible Assets

Intangible assets have two main characteristics: (1) they lack physical existence, and (2) they are not financial instruments. In most cases, they provide services over a period of years and normally classified as long-term assets.

In a non-cash acquisition of an intangible asset, the initial cost of the intangible is either the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.

Intangible assets may be internally generated or purchased from another party. In either case, what costs should be included in the initial valuation of the asset is an issue. Discuss how to determine the cost of an intangible asset acquired in a non-cash transaction.

The typical costs included in the purchase of an intangible asset are: purchase price, legal fees, and other incidental expenses.

Intangible assets may be internally generated or purchased from another party. In either case, what costs should be included in the initial valuation of the asset is an issue. Identify the typical costs included in the cash purchase of an intangible asset.

Identify the costs to include in the initial valuation of intangible assets.

Intangibles are recorded at cost. Cost include all acquisition costs and expenditures needed to make the asset ready for its intended use. If intangibles are acquired in exchange for stock or other assets, the cost is fair market value of the consideration given or the fair market value of the intangible received, which ever is more clearly evident. A "basket purchase" should allocate the cost on the basis of fair values.

Amortization of Intangibles

Intangibles have either a limited (finite) useful life or an indefinite useful life. An intangible asset with a limited life is amortized; an intangible asset with an indefinite life is not amortized.

Explain the procedure for amortizing intangible assets.

Intangibles have either a limited useful liife or an indefinite useful life. Companies amortize limited-life intangibles. They do not amortize indefinite-life intangibles. Limited-life intangibles should be amortized by systematic charges to expense over their useful life. The useful life should reflect the period over which these assts will contribute cash flows. The amount to report for amortization expense should reflect the pattern in which a company consumes or uses up the asset, if it can reliably determine that pattern. Otherwise, use a straight-line approach.

ok

Legal fees and other costs incurred in successfully defending a patent suit are debited to Patents, an asset account, because such a suit establishes the legal rights of the holder of the patent. (Answer = ok)

How are limited-life intangibles accounted for subsequent to acquisition?

Limited-life intangibles are amortized by systematic charges to expense over their useful life. In addition, they are reviewed for impairment each year. Impairment occurs when the future net cash flows are less than the carrying amount of the intangible asset. The intangible asset is reduced for the amount by which its carrying value exceeds its fair value at year end.

Identify the conceptual issues related to research and development costs.

R&D costs are not in themselves intangible assets, but R&D activities frequently result in the development of something a company patents or copyrights. The difficulties in accounting for R&D expenditures are: (1) identifying the costs associated with particular activities, projects, or achievements, and (2) determining the magnitude of the future benefits and length of time over which a company may realize such benefits. Because of these latter uncertainties, companies are required to expense all research and development costs when incurred.

Amortization

The allocation of the cost of intangible assets

Limited-Life Intangibles

The amount of amortization expense for a limited-life intangible asset should reflect the pattern in which the asset is consumed or used up, if that pattern can be readily determined. If not, the straight-line method of amortization should be used. When intangible assets are amortized the charges should be shown as expenses, and the credits should be made either to the appropriate asset accounts or to separate accumulated amortization accounts. The amount of an intangible asset to be amortized should be its cost less residual value.

Recoverability Test

The company estimates the future cash flows expected from use of the assets and its eventual disposal. If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset, the company would measure and recognize an impairment loss.

Incurred

The costs of services performed by others in connection with the reporting company's R&D should be expensed as

Intangibles

The general rules that apply to impairments of long-lived assets also apply to

Intangible Assets

are amortized over their useful lives unless they can remain in existence indefinitely.

Intangible Assets

are assets that derive their value from the rights and privileges granted to the company using them. They provide services over a period of years and are normally classified as long-term assets. Examples are patents, copyrights, franchises, goodwill, trademarks, and trade names.

Bargain Purchase

arises when the fair value of the asset acquired is higher than the purchase price of the asset.

Incurred

All research and development costs should normally be charged to expense when

Intangible Assets Characteristics

1.Lack physical existence (not tangible). 2.Not financial instruments.

ok

Acceptable accounting practice requires that disclosure be made in the financial statements (generally in the notes) of the total R&D costs charged to expense each period for which an income statement is presented. (Answer = ok)

Incurred

Costs incurred internally to create intangible assets are generally expensed as

Amortized

Because a copyright has a limited life and the useful life is usually less than the legal life, a copyright is generally

Balance Sheet

If goodwill is present, it should be reported as a separate item on the

Indefinite-Life Intangibles

If no legal, regulatory, contractual, competitive, or other factors limit the useful life of an intangible asset, the useful life is considered indefinite. An intangible with an indefinite life is not amortized, instead it is tested for impairment at least annually.

Explain the accounting issues related to intangible-asset impairments.

Impairment occurs when the carrying amount of the intangible asset is not recoverable. Companies use a recoverability test and a fair value test to determine impairments for limited-life intangibles. They use only a fair value test for indefinite-life intangibles. Goodwill impairments require a two step process: First, test the fair value of reporting unit, then do the fair value test o implied goodwill (Updated Topic 350 2011-08) Simplified.

Types of Intangible Assets

Major types are: (1) marketing-related intangibles, used in the marketing or promotion of products and serices; (2) customer-related, resulting from interactions with outside parties; (3) artistic-related, giving ownership rights to such items as plays and literary works; (4) contract-related, representing the value that arise from contractual arrangements, (5) technology-related, relating to innovations or technological advances; and (6) goodwill, arising from business combinations.

Describe the accounting for research and development and similar costs.

Many costs have characteristics similar to R&D costs. Examples are start-up costs, initial operating losses, and advertising costs. For the most part, these costs are expensed as incurred, similar to the accounting for R&D costs.

Indicate the presentation of intangible assets and related items.

On the balance sheet, companies should report all intangible assets other than goodwill as a separate item. Contra accounts are not normally shown. If goodwill is present, it too should be reported as a separate item. On the income statement, companies should report amortization expense and impairment losses in Continuing operations. The notes to the financial statements have additional detailed information. Financial statements must disclose the total R&D costs charged to expense each period for which an income statement is presented.

Incurred

Start-Up Costs are to be expensed as

Describe the accounting procedures for recording goodwill.

To record goodwill, a company compares the fair value of the net tangible and identifiable intangible assets with the purchase price of the acquired business. The difference is considered goodwill. Goodwill is residual. Goodwill is often identified on the balance sheet as the excess of cost over the fair value of the net assets acquired.

Explain the conceptual issues related to goodwill.

Unlike receivable, inventory, and patents that a company can sell or exchange individually in the marketplace, goodwill can be identified only with the company as a whole. Goodwill is a "going concern" valuation and is recorded only when an entire business is purchased. A company should not capitalize goodwill generated internally. The future benefits of goodwill may have no relationship to the costs incurred in the development of that goodwill. Goodwill may exist even in the absence of specific costs to develop.