Chapter 11: Intangible Assets
for which of the following are differences between current fair value and book value more common? long-term assets or current assets
long term assets
What are intangible assets normally classified as?
long-term assets
what are examples of artistic-related intangible asseets?
ownership rights to plays, literary works, musical works, pictures, photographs, and video and audiovisual material
(T/F) trademarks with an indefinite number of renewals for periods of 10 years each are not ammortized
true
what is a bargain purchase? what does it result from, and what is the implication?
when the purchaaser in a businesses combination pays less than the fair value for an asset results from a market imperfection; the buyer would have been better off selling the assets individually than in total
What are some indicators that an indefinite-life intangible asset might be impaired?
1) Deterioration of general economic conditions. 2) Increased competitive environment. 3) Change in the market for a company's products or services. 4) Regulatory or political developments. 5) Overall financial performance such as negative or declining cash flows.
what is the accounting treatment for each cost associated with R&D: 1) materials, equiipment, and facilities 2) personnel 3) purchased intangibles 4) contract services 5) indirect costs
1) Materials, equipment, and facilities. Expense the entire costs, unless the items have alternative future uses (in other R&D projects or otherwise). If there are alternative future uses, carry the items as inventory and allocate as consumed, or capitalize and depreciate as used. 2) Personnel. Expense as incurred salaries, wages, and other related costs of personnel engaged in R&D. 3) Purchased intangibles. Recognize and measure at fair value. After initial recognition, account for in accordance with their nature as either limited-life or indefinite-life intangibles.11 4) Contract services. Expense the costs of services performed by others in connection with the R&D as incurred. 5) Indirect costs. Include a reasonable allocation of indirect costs in R&D costs, except for general and administrative cost, which must be clearly related to be included in R&D.
what are the 2 main characteristics of intangible assets?
1) they lack physical existence 2) they are not financial instruments
How long are patents good for?
20 years
how should franchises with a limited life, indefinite life, and perpetial life be ammortized?
A company should amortize the cost of a franchise (or license) with a limited life as an operating expense over the life of the franchise. It should not amortize a franchise with an indefinite life nor a perpetual franchise; the company should instead carry such franchises at cost and test for impairment using the fair value test.
how are R&D costs reported on financial statements?
Companies should disclose in the financial statements (generally in the notes) the total R&D costs charged to expense each period for which they present an income statement.
What is goodwill and how is it calculated?
Goodwill is an intangible asset and reflects the value of a company that is not attributed to its other assets and liabilities. Goodwill =Equity purchase price paid for company - Target's book value (i.e. excess purchase price). This can remain on a company's balance sheet indefinitely barring impairment.
Start-Up Costs FACTS U.S.-based Hilo Beverage Company decides to construct a new plant in Brazil. This represents Hilo's first entry into the Brazilian market. Hilo plans to introduce the company's major U.S. brands into Brazil on a locally produced basis. The following costs might be involved. Travel-related costs; costs related to employee salaries; and costs related to feasibility studies, accounting, tax, and government affairs. Training of local employees related to product, maintenance, computer systems, finance, and operations. Recruiting, organizing, and training related to establishing a distribution network. QUESTION How would you account for these costs?
Hilo Beverage should expense all these start-up costs as incurred. Start-up activities commonly occur at the same time as activities involving the acquisition of assets. For example, as it is incurring start-up costs for the new plant, Hilo probably is also buying or building property, plant, equipment, and inventory. Hilo should not immediately expense the costs of these tangible assets. Instead, it should report them on the balance sheet, using appropriate GAAP reporting guidelines.
what is the impairment rule for goodwill?
If the fair value of the reporting unit (including goodwill) is less than the carrying value of the reporting unit (including goodwill), there is an impairment loss. If the fair value of the reporting unit (including goodwill) is greater than the carrying value of the reporting unit (including goodwill), there is no impairment.
Accounting for a Trademark (Indefinite-Life) FACTS Double Clik Inc. acquired a trademark that it uses to distinguish a leading consumer product. It renews the trademark every 10 years. All evidence indicates that this trademarked product will generate cash flows for an indefinite period of time. QUESTION How should Double Clik account for the trademark?
In this case, the trademark has an indefinite life. Double Clik does not record any amortization.
what is the master valuation approach?
It assumes goodwill covers all the values that cannot be specifically identified with any identifiable tangible or intangible asset
what is the journal entry to record the loss on impairment of an asset? how is the loss on impairment calculated?
JE: dr. loss on impairment cr. (impaired) asset Calculation: carrying value - fair value *Fair value = PV of expected future cash flows
Goodwill is the residual—the excess of cost over __________ of the identifiable net assets acquired.
fair value
Initial Operating Losses FACTS Continuing with Hilo Beverage from Example 11.14, now assume that Hilo lost money in its first year of operations and wishes to capitalize this loss. Hilo's CEO argues that as the company becomes profitable, it will offset these losses in future periods. QUESTION How would you respond to Hilo's CEO?
This approach is unsound since losses have no future service potential and therefore cannot be considered an asset. GAAP requires that operating losses during the early years should not be capitalized.
how is goodwill calculated and recorded?
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.
What is impairment?
a permanent decline in the fair value of an asset
what is the accounting treatment for: Acquisition of machinery for use on current and future R&D projects.
accounting treatment: Capitalize and depreciate as R&D expense. rationale: Has alternative future use.
what is the accounting treatment for: Construction of long-range research facility for use in current and future projects (three-story, 400,000-square-foot building).
accounting treatment: Capitalize and depreciate as R&D expense. rationale: Has alternative future use.
what is the accounting treatment for: . Costs of successfully defending patent on laser scanner.
accounting treatment: Capitalize as patent and amortize to overhead as part of cost of goods manufactured. rationale: Direct cost of patent.
what is the accounting treatment for: Legal fees to obtain patent on new laser scanner.
accounting treatment: Capitalize as patent and amortize to overhead as part of cost of goods manufactured. rationale: Direct cost of patent.
what is the accounting treatment for: Executive salaries.
accounting treatment: Expense as operating expense. rationale: Not R&D cost (general and administrative expense).
what is the accounting treatment for: Commissions to sales staff marketing new laser scanner.
accounting treatment: Expense as operating expense. rationale: Not R&D cost (selling expense)
what is the accounting treatment for: Cost of marketing research to promote new laser scanner.
accounting treatment: Expense as operating expense. rationale: Not R&D cost (selling expense)
what is the accounting treatment for: Costs of testing prototype and design modifications.
accounting treatment: Expense immediately as R&D. rationale: Development cost.
what is the accounting treatment for: Engineering costs incurred to advance the laser scanner to full production stage.
accounting treatment: Expense immediately as R&D. rationale: Development cost.
what is the accounting treatment for: Material, labor, and overhead costs of prototype laser scanner.
accounting treatment: Expense immediately as R&D. rationale: Development cost.
what is the accounting treatment for: Salaries of research staff designing new laser bone scanner.
accounting treatment: Expense immediately as R&D. rationale: Research cost.
what is the accounting treatment for: Acquisition of R&D equipment for use on current project only.
accounting treatment: Expense immediately as R&D. rationale: Research cost.
what is the accounting treatment for: Purchase of materials for use on current and future R&D projects.
accounting treatment: Inventory and allocate to R&D projects; expense as consumed. rationale:
what is the accounting treatment for: Research costs incurred under contract with New Horizon, Inc., and billable monthly.
accounting treatment: Record as a receivable. rationale: Not R&D cost (reimbursable expense).
(T/F) goodwill should be tested for impairment at least annually
true
what are examples of customer-related intangible assets
customer lists, order or production backlogs, and both contractual and noncontractual customer relationships
(T/F) R&D are intangible assets
false
(T/F) routine ongoing efforts to refine, enrich, or improve the qualities of an existing product are considered R&D
false
(T/F) the amount capitalized for costs incurred in developing patents, copyrights, and trademarks is usually significant
false
(T/F) goodwill has a limited life and should therefore be amortized
false; goodwill has an indefinite life and should therefore not be amortized
(T/F) intangible assets with an indefinite life do not need to be tested for impairment because they cannot be impaired
false; intangible assets with an indefinite life should be tested for impairment at least annually
(T/F) the following are R&D costs: 1) the costs of software incurred by an airline in improving its computerized reservation system 2) the costs incurred in developing a company's management information system
false; these are selling and administrative expenses
what is the difference between the impairment test for intangible assets with a definite life and intangible assets with an indefinite life?
for intangible assets with a definite life, the two-step approach is used (recoverability test and fair value test) for intangible assets with an indefinite life, only the fair value test is used because these assets have infinite cash flows and will generally never fail the recoverability test
what are examples of contract-related intangible assets?
franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts
In a bargain purchase situation, the excess amount is recorded as a _____ by the purchaser.
gain
_________ represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized
goodwill
goodwill generated internally (should/should not) be capitalized in the accounts
goodwill generated internally should NOT be capitalized in the accounts because it is too complex
when is the only instance in which goodwill is recorded?
goodwill is recorded only when an entire business is purchased.
what are examples of technology-related intangible assets?
innovations or technological advances such as patented technology and trade secrets granted by the U.S. Patent and Trademark Office
(T/F) the reporting of goodwill is similar to reporting of intangible assets
true
in cases where intangibles are exchanged for a stock or other assets, what is the cost of the intangible asset?
the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident
How are R&D costs accounted for?
they are expensed as the occur
how are start up costs treated?
they are expensed as they occur
what are examples of marketing-related intangible assets?
trademarks or trade names, Internet domain names, and noncompetition agreements.
(T/F) companies exclude from the definition of R&D activities the acquisition, development, or improvement of a product or process for use in their selling or administrative activities
true
(T/F) companies record at cost intangibles purchased from another party
true
(T/F) gains are inherent in a bargain purchase
true