Unit 9

In the calculation of the gain or loss on disposal of a reporting unit, goodwill is included as part of its ___.

carrying amount

An intangible asset with an indefinite useful life other than goodwill must be reviewed for impairment at least annually. A qualitative assessment may be performed prior to determining whether it is necessary to perform the quantitative impairment test. If the entity cannot determine based on quantitative factors that it is more likely than not that an indefinite-lived intangible asset is not impaired, a quantitative impairment test must be performed. In a quantitative test, the ___ of an asset is compared with its ___. If the ___, the asset is impaired and the excess is the recognized loss.

carrying amount fair value carrying amount exceeds the fair value

R&D costs are all costs to establish technological feasibility of computer software. They are ___ when incurred.

expensed

Internally developed patents are less likely to be capitalized because related R&D costs must be ___ when incurred. The amortization period for a patent is the shorter of

expensed (1) its useful life or (2) the legal life remaining after acquisition or the moment the application was filed.

Costs of software to be marketed are subject to three treatments:

expensed as incurred, capitalized as computer software costs, or included in inventory.

The carrying amount of an intangible asset with a finite useful life equals its ___. The carrying amount of an intangible asset with an indefinite useful life equals its ___.

historical cost minus accumulated amortization and impairment losses historical cost minus impairment losses

Internally developed intangibles other than goodwill are most often initially recorded at the amount of the ___ costs (e.g., legal fees) only.

incidental NOTE: Most of the costs of an internally generated intangible asset consist of research and development (R&D), which must be expensed as incurred.

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

The goodwill impairment test includes an ___.

optional qualitative test and a two-step quantitative test

[IFRS Difference] A ___ assessment is not an option. The following one-step quantitative impairment test must be performed. For the purpose of impairment testing, goodwill is allocated to the entity's ___ that will benefit from the business combination. A ___ is the lowest level at which goodwill is monitored and must not be larger than an operating segment.

qualitative cash-generating units (CGUs) CGU

Occasionally, software developed for internal use will be sold to outside parties. The net proceeds from these sales ___ software costs. Once software costs reach $0, any further net proceeds are recognized as revenue.

reduce the carrying amount of capitalized

The amortizable amount equals the amount initially assigned minus the ___ value.

residual NOTE: The residual value is the estimated fair value to the entity at the end of the asset's useful life minus disposal costs.

[IFRS Difference] Intangible assets may be accounted for under either the cost model (as under U.S. GAAP) or the ___ model (described in the IFRS Difference box under item 11. in Study Unit 8, Subunit 1). The ___ model can be applied only if the intangible asset is traded in an active market.

revaluation revaluation

[IFRS Difference] An impairment loss for an asset (except goodwill) may be ___ if a change has occurred in the estimates used to measure the ___ amount.

reversed recoverable NOTE: The test for impairment of assets other than goodwill has one step: determine whether an asset's carrying amount is greater than its recoverable amount (greater of fair value minus costs to sell or value in use).

The entity must capitalize production costs of product masters, including coding and testing costs, if they are incurred after ___ is determined. Once the product is available for general release, software costs can no longer be capitalized.

technological feasibility

Research and development (R&D) costs must be expensed as incurred. Activities typically characterized as R&D include the design, construction, and ___ of preproduction prototypes and models.

testing

Potential impairment of goodwill is deemed to exist only if ___. The accounting for goodwill is based on the units of the combined entity into which the acquiree was absorbed. The goodwill impairment test includes an optional qualitative test and a two-step quantitative test.

the carrying amount of a reporting unit is greater than its fair value

Revenue from initial fixed fees received for a franchise right generally is recognized over ___

the franchise license period

Capitalized software costs are reported at ___.

the lower of unamortized cost or net realizable value (NRV)

The costs of materials, equipment, or facilities that are acquired or constructed for a particular R&D project and that have no alternative future uses and therefore no separate economic values are R&D costs ___. R&D costs are expensed in full when incurred.

when incurred

Annual Amortization of Capitalized Software Costs

1. Annual amortization is the greater of -Total capitalized cost times the revenue ratio (Annual gross software revenue ÷ Total projected gross revenue) or -Straight-line amortization (Total capitalized cost ÷ Estimated economic life of the software).

Determination of an Impairment Loss

1. Carrying amount of reporting unit > Its fair value 2. Estimate implied fair value of reporting-unit goodwill 3. Carrying amount of reporting-unit goodwill > Its implied fair value 4. Loss = Excess in 3.

[Private Companies Accounting] In accounting for subsequent measurement of goodwill, a private company may

1.Use the FASB codification guidance that applies to all entities (the accounting treatment described previously) or 2.Elect to apply the goodwill accounting alternative.

[Private Companies Accounting] Under the accounting alternative, goodwill recognized must be amortized on a straight-line basis over ___ years. The amortization expense is recognized in the income statement. Determination of an Impairment Loss

10 1. Triggering event indicating potential impairment 2. Impairment loss = Entity's carrying amount - Entity's fair value 3. Impairment loss recognized must not exceed the carrying amount of goodwill

Determination of an Impairment Loss

Events or changes in circumstances indicate a possible loss. Carrying amount > Sum of undiscounted cash flows Loss = Carrying amount - Fair value

[Goodwill] Implied FV of reporting-unit goodwill =

FV of reporting unit - FV of reporting unit net assets

___ is recognized only in a business combination. It is "an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized" (ASC 350-20-20). It is ___. Instead, it is tested for impairment each year at the same time.

Goodwill not amortized

In accordance with generally accepted accounting principles, which of the following methods of amortization is required for amortizable intangible assets if the pattern of consumption of economic benefits is not reliably determinable?

Straight Line NOTE:The default method of amortization of intangible assets is the straight-line method.

An intangible asset with an indefinite useful life is not ___.

amortized

An intangible asset with a finite useful life is ___ over that useful life. Goodwill, recognized only in a business combination, is ___.

amortized never amortized but is tested for impairment

Goodwill is not assignable to a reporting unit unless ___.

assets acquired or liabilities assumed in a business combination also are assigned to the reporting unit

If goodwill and another asset group of a reporting unit are tested for impairment simultaneously, the other asset group must be tested for impairment ___. If the asset group was impaired, the impairment loss would be recognized ___ goodwill being tested for impairment.

before goodwill prior to

[IFRS -Which cost is most likely to be expensed as incurred under IFRS?] Research is original, planned investigation to obtain new scientific or technical knowledge. Expenditures for research ___ in recognition of an intangible asset.

do not result

Costs of software for internal use in the preliminary project stage are ___ as incurred.

expensed

For financial accounting purposes, organization costs must be ___ as incurred.

expensed

An intangible asset with an indefinite useful life (a nonamortized intangible asset) must be reviewed for impairment at least annually. It is tested more often if events or changes in circumstances suggest that the asset may be impaired. An entity may perform a ___ assessment prior to determining whether it is necessary to perform the ___ impairment test. Determination of an Impairment Loss ___ [IFRS Difference] A one-step quantitative impairment test is performed. No ___ assessment exists.

qualitative quantitative 1. Review for impairment 2. Loss = Carrying amount - Fair value a. This loss is nonreversible, so the adjusted carrying amount is the new accounting basis. qualitative

An impairment test for a nonamortized intangible asset does not consider ___.

recoverability

The test for impairment under IFRS is whether the carrying amount of the CGU (including goodwill allocated solely for the purpose of impairment testing) exceeds its ___. Any excess is an ___. Thus, the test has one step.

recoverable amount impairment loss

Annual amortization of capitalized costs of software to be marketed is the greater of

(1) total capitalized cost times the revenue ratio (annual gross software revenue divided by total projected gross revenue) or (2) total capitalized cost divided by the estimated economic life of the software (i.e., straight-line).