Intermediate Accounting I Ch.13: Intangible Assets and Goodwill
Which kinds of intangible assets are assessed for impairment?
Both those with definite lives and those with indefinite lives.
Indefinite life:
Capitalize in BA, no amortization, and test for impairment annually.
Finite life:
Capitalize on balance sheet, amortization expense w/useful life, & test for impairment annually.
Impairment loss in one-step test:
Carrying value minus face value
Noncash consideration of intangible assets:
Cash paid + fair value of noncash consideration or fair values of assets.
How indefinite life intangible assets undergo quantitative assessment?
Compares fair value to carrying value; if fair value is bigger, impairment.
What is the exception for research and development costs?
Computer software.
After technological feasibility, research and development activity is allocated to
an intangible asset.
Computer software technological feasibility allows costs to be capitalized as
an intangible asset.
Impairment is recorded
annually
Organizational cost is expensed
as incurred.
Net identifiable assets =
assets minus liabilities.
Materials, equipment, and facilities acquired for particular research and development projects, with alternative future uses are recognized as
assets; expenses go to them and R&D expense.
Goodwill is recognized only when a
company is purchased.
Goodwill is the difference of
consideration minus face value of net identifiable assets.
Customer lists have the useful life depending on
customer relations.
Legal costs can be either
external lawyer or capitalize direct legal cost internal.
Useful life can be determined by
factors other than use or legal.
Goodwill is classified as
intangible asset, yet recorded separately.
Amortization expense, if not placed in accumulated amortization, is counted for in
operating cash flows in statement of cash flows, or operating expenses on income statement.
Gains on bargain purchase includes
other gains on income statement.
Copyright includes the right to
print, reprint, sell, or distribute copies & perform and sell work.
Research and development expensed during
product development.
Identifiable =
recordable.
Useful life may be gathered from
research and development.
Business combination:
Acquiring licenses, franchises, and other intangible assets through acquiring business.
Research and development:
Activities to create new products and processes, or improve existing ones, and to discover new knowledge that may be of value in future.
Goodwill (formal definition):
Asset representing future economic benefits arising from other assets acquired in a business combination not individually identified and separately recognized.
Identifiable assets:
Assets from contractual or legal rights, or are separable for other operations.
Copyright:
Legal protection to literary, musical, artistic, and other similar authors.
Goodwill useful life:
Continues as long as operations of business unit continues.
Licenses:
Contractual operating rights often granted by a governmental body.
Organizational cost:
Cost to get organization going.
How are amortization of intangible assets usually recorded?
Credit on intangible asset, debit to amortization expense or accumulated amortization.
Customer list:
Customer info including names and contact info.
Licenses' useful life:
Depends on agreed period, yet can be renewed endlessly.
2 ways to establish technological feasibility:
Detailed program design and working model.
Recoverability test of finite life intangible asset:
Discounted future net cash inflows compared to carrying value; if carrying value is bigger, impairment suggested.
Bargain purchase:
Face value of net identifiable assets greater than consideration
Capital intangibles have 2 types:
Finite life and indefinite life.
Working model:
How a company finds consistency in product design confirmed by testing.
Qualitative factors affecting impairment of goodwill:
Macroeconomic conditions, industry & market considerations, cost factors, overall financial performance, relevant entity-specific events, reporting unit specific events, and a sustained decrease in share price.
Impairment testing for goodwill:
Minimum of annual qualitative assessment, then quantitative goodwill impairment test if needed.
Impairment testing for indefinite life tangible asset:
Minimum of annual qualitative assessment, then quantitative test for impairment if needed.
Qualitative assessment of goodwill:
More likely than not impairment
Trademark:
Name, symbol, or other distinctive identity given to a company, product, or service.
Is useful life the same as asset life?
No.
Can the goodwill account be reduced below zero?
No; write adjusted journal entry where amount equals zero.
Indefinite-life intangibles and goodwills tests:
One-step test.
Impairment loss goes on where on income statement?
Other losses; decreases income from operations, thus net income and comprehensive income.
7 types of intangible assets:
Patents, copyrights, trademarks, customers' list, licenses, franchise, & goodwill.
Useful life:
Period asset is expected to contribute directly or indirectly to future cash flows.
Detailed program design:
Product design by company with skills, hardware, and software tech, confirmation of completeness of design by documentation and tracing of design to product specifications, and resolution of any identified high-risk development issues by coding and testing.
Typical costs for intangibles:
Purchase price, legal fees, and other incidents.
When R&D equipment is used, debit
R&D expense and credit accumulated depreciation of equipment R&D.
Cost of research and development services performed by another company is recognized as
R&D expense as incurred.
Intangible asset acquired for a specific research project with no alternative future use is recognized as
R&D expense as incurred.
Materials, equipment, and facilities acquired for particular research and development projects, with no alternative future uses are recognized as
R&D expense as incurred.
Salaries and wages of those engaged in research and development activities are recognized as
R&D expense as incurred.
Depreciation expense for assets in R&D is recorded as a
R&D expense.
Until technological feasibility, research and development activity is allocated to
R&D expense.
2 exceptions allowing R&D to be capitalized:
Raw materials used for more than one project & equipment used for more than one project.
2 Impairment testing steps:
Recoverability test and impairment loss.
Impairment testing for finite life tangible asset:
Recoverability test, then maybe an impairment test.
Impairment training step 1:
Recoverability test.
How often is goodwill impairment checked?
Same time annually.
Bargain purchase steps:
Subtract liabilities from assets to find face value of net identifiable assets, subtract that amount from cash outflow to get goodwill.
Which kinds of intangible assets are amortized?
Those with definite lives.
Carrying value:
What's left over after considering all debits and credits.
Intangible assets are always
acquired.
Intangible assets are recorded at
acquiring current cash-equivalent cost.
In the product release and sale of product, cost is allocated to both
amortization of intangible asset & non-R&D expense.
Straight-line amortization is used whenever
benefits from asset are unpredictable.
Carrying value =
book value.
Goodwill impairment happens when
carrying value plus goodwill is greater than fair value or purchase alone.
All intangibles are impaired
differently.
Computer software is allocated costs based on
establishing technological feasibility.
Reasonable allocation of indirect costs of a facility dedicated to R&D activities (rent, utilities, etc.) is recognized as
expense as incurred.
R&D costs are recorded as
expenses is incurred.
Intangible assets acquired for a number of research projects is recognized by`
finite or indefinite life intangible asset and amortization is a R&D expense.
Calculating for recoverability test:
future cash flows (FCF) < carrying value (CV) means impairment.
Indefinite-life tangibles and goodwills technically have no
future cash flows following effective measures.
All assets, including R&D, need
impairment.
Amortization is recorded either
in amortization expenses on income statement or accumulated amortization on balance sheet.
When preparing to submit patent, you need to pay
legal costs.
If useful life is not listed, assume
legal life is useful life.
Intangible assets have indefinite life when there are no
legal, regulatory, contractual, competitive, economic or other limitations.
Consideration for goodwill can include:
location, employees, development, and customer base; non-identifiable assets inseparable.
When goodwill should be reduced more than allowed,
make a note.
Gain or loss on sale of intangible assets is from
net proceeds of disposal minus adjusted book value.
When change in estimated life of intangible assets occurs, prior results are
not changed.
Intangible asset's life must evaluated by the
shortest amount, be it legal or useful life.
R&D costs are intended to bring about
significant improvements.
Organizational cost =
start-up cost.
If fair value is larger than carrying value
there's no impairment.
Trademarks can be renewed
every decade consistently; useful life may not be legal life.
3 classifications of intangible assets:
Finite life intangible assets, indefinite life intangible asset, and goodwill.
Franchise:
Franchisor gives right for franchisee to use name and specialized services or products.
Impairment:
Future cash flows are less than carrying value.
Finite life intangible asset is evaluated for impairment if
carrying value is not recoverable.
Goodwill arises when
company acquires another company and purchase price exceeds fair value of net identifiable assets acquired from purchase.
Impairment loss impacts the balance sheet by
decreasing net income, which decreases retained earnings, thus stockholders' equity, and, thus, stockholders' equity.
Goodwill:
Excess consideration given above fair value of net identifiable assets when acquiring control of something from another company.
Patent:
Exclusive right recognized by law and registered with the U.S. Patent Office; enables holder to use, manufacture, sell, & control item, process, or activity covered by patent without interference by others.
Calculating impairment loss:
Fair value < carrying value means loss. Carrying value minus face value sums to loss.
One-step test
If there's impairment; face value lesser than carrying value
Goodwill is amortized or impaired?
Impaired; tested at least annually.
Adjusted journal entry for goodwill's impairment:
Impairment loss debited, goodwill credited.
Impairment training step 2:
Impairment loss.
What assets have no recoverability tests?
Indefinite life intangibles and goodwills.
Intangible assets:
Insubstantial assets.
Acquired in-process research and development:
Intellectual property purchased as incomplete research and development projects, initially recorded as indefinite life intangible asset until project is done.
Raw materials used for more than 1 project goes into
Inventory - R&D
Franchise useful life:
Legal life set by contract, able to renewed endlessly.
Advertising costs are expensed either
as incurred or first advertising happens. Might incur after recognizing revenues.
Costs to developing intangible assets are generally expensed
as incurred.
Copyright exists as long as the
author lives plus 70 years; unrenewable.
Goodwill is seen from a
market perspective.
Difference in bargain purchase is called
negative consideration
Impairment training is for
tangible assets and intangible finite life.
Patents have shorter useful life because of
tech improvements eliminating competitive edge.
Patent enables holder to
use, manufacture, sell, & control item, process, or activity covered by patent without interference by others.
Projects are expensed as
used, no definite life.
R&D Inventory is expensed as
used.
R&D equipment is expensed as
used.
Franchise can be granted by government entities for
using public properties or making public services.