EXAM 2

Types of intangibles GAAP and IFRS

Market-related intangible assets. Customer-related intangible assets. Artistic-related intangible assets — these ownership rights are protected by copyrights. Contract-related intangible assets — a common form is a franchise. Technology-related intangible assets. Business combination intangible assets

Impairment reversal GAAP:

NOT PERMITTED

Purchase intangibles IFRS

These costs would be expensed, except in the rare circumstance that they improve future economic benefit.

GAAP and IFRS lessor's apply same criteria for capitalization of lessee expect

MLP is viewed from lessors perspective

GAAP classifies a capital lease further to:

either a sales type or direct financing lease - includes accounting for leveraged leases

Development costs GAAP

expensed as incurred unless addressed by separate standard

disclosures for intangibles GAAP and IFRS

gaap doesn't have a comprehensive single standard for disclosures IFRS IAS 38 includes a list of general disclosures

Tests used for leases GAAP

gap uses a bright line test to determine capitalization

GAAP annual amortization amount

greater of the amount computed using A: the ratio that current gross revenues bear to the total of current anticipated future gross revenues of a product B: straight line method over the remaining estimated economic life of the product

IFRS calculating NPV of MLP:

implicit rate is used if practicable to determine (not that common) otherwise, the incremental borrowing rate should be used. (no evaluation made regarding which rate is lower)

sales type lease

includes profit

research and development GAAP and IFRS

internal costs to R&D are expensed - considered an indefinite lived asset separate from goodwill at its acquisition fate fair value

Carrying Value of intangibles GAAP

Revaluation is not permitted

GAAP disclosures

required to disclose identifiable intangibles separately from unidentifiable intangibles and goodwill along with the method of determining amounts - usually has less disclosure rules than IFRS

lease classification GAAP and IFRS

requires a lease to be classified either capital/financing or operating lease at the inception date of the lease by lessor and lessee - classification of a lease is based on whether it transfers substantially all the risks and rewards incidental to ownership to the lessee - such classification is evaluated through the use of capitalization indicators. if a lease meets on indicator, it is recored as capital/finance lease, otherwise it is recored as operating lease

direct financing

the FV equals the carrying value of the leased asset

GAAP and IFRS beginning of the term, leased assets and related liabilities are recognized at:

the lower of the FV of the leased assets or the NPV of the MLP

lease capitalization is required if for GAAP and IFRS:

the ownership of the asset is transferred to the lease at the end of the lease term - the lease contains a bargain purchase option

lease capitalization criteria GAAP:

1. lease term is at least 75% of the property's remaining economic life 2. NPV of minimum lease payments is 90% or more of the FV of the leased property a the inception date. 3. if the beginning of lease term falls within the last 25% of the leased assets remaining life, then the two criteria may not be used to determine capitalization

impairment quantitative testing for goodwill IFRS

A one-step approach: - The impairment is the amount by which the carrying amount exceeds its recoverable amount as previously described and is measured at the cash generating unit (CGU) level. A CGU is defined in IAS 36.6 as "... the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets." 1. CV of each CGU vs Recovery Amount of Each CGU - total = impairment loss if total loss is more than GW total, GW total goes to 0 and reduce all other assets by loss amount - RU go (ASK ABOUT)

Indefinite life intangibles assets IFRS

A one-step approach: - The impairment is the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of: - The fair value less costs to sell. - The value in use (the present value of future cash flows in use, including disposal value).

indefinite life intangible assets GAAP

A one-step approach: ► The impairment is the amount by which the carrying value exceeds its fair value. Just FV test

finite life intangible assets IFRS test:

A one-step approach: The impairment is the amount by which the carrying amount exceeds its recoverable amount.

impairment quantitative testing for goodwill GAAP

A two-step approach: - A recoverability test is performed 1. CV of RU vs FV of RU 2. RU FV - FV of net assets excluding GW

finite life intangible assets GAAP test:

A two-step approach: 1. 2. A recoverability test is performed by comparing the carrying amount of the asset to the sum of the future undiscounted cash flows generated through use and eventual disposition. If it is determined that the asset is not recoverable, the impairment is measured as the amount by which the carrying value exceeds its fair value.

finite intangible assets GAAP and IFRS amortization

Amortization assets over their estimated useful lives is generally required

If IFRS asset is revalued, and entity can account for the accumulative depreciation at the date by revaluation by:

Amortization elimination method: the accumulative amortization can be eliminated against intangible itself or Proportionate restatement method: accumulated amortization can be restated proportionately with the change in gross carrying amount of the asset so that the carrying amount of the asset after revolution equals its revalued amount. (rarely used)

Intangible Asset impairment recognition GAAP and IFRS

An impaired asset must be written down and the write- down should be recorded in net income.

Cost of intangibles GAAP and IFRS

Assuming no impairment, intangible assets are valued at cost less any accumulated amortization.

Impairment reversal IFRS:

Both finite and indefinite lived intangibles besides GW can be reviewed annually to be reversed. - a loss may be reversed up to newly estimated Recovery amount but > initial CV adjusted for Amortization - recorded in income

GOODWILL GAAP vs IFRS

GAAP allows to elect the option of performing Qualitative assessments for impairment rather than Quantitive. if Qualitative indicates that it is more likely than not (more than 50%) that the CV is more than FV then must perform Quantitive test - IFRS DOES NOT ALLOW THIS OPTION

impairment qualitative

GAAP only - macro conditions - industry and market - cost factors having a negative impact on earnings or cash flows - overall fin performance - relevant company specific events - prolonged decrease in share price (for gw only) - events impacting the ru (for GW only)

GAAP vs IFRS criteria chart

GAAP: 1. ownership is transferred to the lease by end of the term? 2. the lease contains BPO? 3. lease term is equal to 75% or more of the estimated economic life of the leased property? 4. PV of MLP equals or exceeds 90% if the FV of the lease property IFRS: 1. similar 2. similar 3. is it a major part of economic life? 4. is PV of MLP a substantial part of FV of leased property? additional: 1. leased are of specialized nature such as that only the lessee can use them without major medication being made 2. lessee bears the lessors losses if the lease cancels the lease 3. lessee absorbs the gains and losses from fluctuations int eh FV of the RV of an asset 4. the lease may extend the lease for a secondary period at a rent substantially below the rent

GOODWIll of intangibles GAAP and IFRS

Goodwill is recognized only as a result of a business combination. For a 100% acquisition, the acquirer recognizes the acquiree's net identifiable assets (including any intangible assets) at fair value at the acquisition date and recognizes goodwill, which represents the excess of the purchase price over the acquirer's interest in the fair value of the identifiable net assets of the acquiree. - Negative goodwill is recognized immediately as income (after reassessing the purchase price allocation).

Intangible Asset impairment definition and indicator IFRS and GAAP

Impairment indicators for an asset include such items as: -significant change in its use, -projected losses related to its use, - a significant decline in its market value.

Acquisition of intangibles GAAP and IFRs

In general, intangible assets that are acquired outside of a business combination are recognized at fair value at the time of acquisition. - Direct costs of securing a patent, including an acquisition from others, are included in the cost.

Acquisition of internally created Intangibles GAAP and IFRS

Internally generated assets other than goodwill, brands, mastheads, publishing titles, newspapers and customer lists may be recognized as assets if certain additional criteria are met. These additional criteria will be discussed in research and development. - recognized as asset

GAAP and IFRS current and incurrent portion of capital lease liabilities are calculated as:

PV of MLP due in one year subsequent to the b/s date. non current portion is the difference between the current portion and the total lease obligation

Residual value GAAP and IFRS

RV is the fair value of the leased asset at the end of the lease term and can be guaranteed or un guaranteed by the lessee or a party related to lease.

Carrying Value of intangibles IFRS

Revaluation to the fair value of intangible assets other than goodwill is an allowable alternative treatment: - - • Because this requires reference to an active market for the specific type of intangible, it is relatively uncommon in practice. Increases in value should be credited to the account "revaluation surplus." Revaluation surplus is an account that is included in accumulated OCI. Increases in value are not recorded in the revaluation surplus account if the increase reverses a loss that was previously expensed; that portion may be credited to an unrealized gain account which will flow through net income. Any decrease in value should be included as an unrealized loss in income unless it reverses the revaluation surplus relating to the same asset; that portion can be debited to revaluation surplus (OCI).

other costs advertising IFRS

ad and promotional costs are expensed as incurred. A prepayment may be recognized as an asset only when payment for goods or services is made in advance of the entity having access to the goods or refining the service

Other costs Adverting GAAP:

advertising and promotional costs are either expenses as incurred or expenses when advertising takes place for the first time. direct response adverting can be capitalized depending on criteria

Purchased intangibles GAAP

allows certain costs incurred subsequent to its initial recognition (legal costs to defend patent) to be capitalized

depreciating capital and financing leases GAAP and IFRS

amounts capitalized for a leased asset are depreciated according to the method of underlying asset - if the lease agreement transfers ownership of the asset or contains a BPO, deprecated the asset based on its economic useful life, otherwise deprecated over the term of lease (IFRS if there is reasonably certainty that the lease will obtain ownership but the end of the lease term, leased asset is deprecated based on economic life, **(otherwise asset is depreciated over the shorter of lease term and its useful life)

Leases definition GAAP and IFRS

an agreement whereby the lessor conveys a right to use an asset to a lessee for a certain period of time in return for payment - BPO= an option that allows the lessee to buy the leased asset at a price much lower than the assets fair value at the end of the lease term so that exercise of the option is reasonably assured.

GAAP and IFRS lease payments are recorded as

an expense when due if the lease is classified as an operating lease put on balance sheet when finance or capital lease

MLP GAAP and IFRS

are defined as payments over the leased term that lease is or can be required to make plus any amounts guaranteed by the lease or by a party related to the lessee as well as BPO

GAAP and IFRS BPO is ...

capitalized by lessee

Development Costs IFRS

capitalized when technical and economic feasibility of a project can be demonstrated with specific criteria some include: demonstrating technical feasibility, intent to complete the asset and liability to sell the asset in future, etc

MLP excludes GAAP and IFRS:

contigent rent executory costs, costs for service and taxes to be reimbursed to the lessor

lessor accounts receivable GAAP and IFRS:

current portion of the capital lease receivable is receivable in one year subsequent to the balance sheet date. non current portion is the difference between current portion and the total lease receivable - selling profit is recognized immediately in income - interest income is recognized over the ease term using a constant rate of return.

characteristics of intangibles GAAP and IFRS

definition is non monetary asserts without physical substance - recognition criteria require there be probable future economic benefit and cots that can be reliably measured

lessor can classify capital or financing lease as: under gaap

direct financing or sales type - difference is the presence or absence of a manufactures or dealers profit

IFRS future rent

disclosed for first year and year 2-5 inclusive and aggregate amounts thereafter

GAAP future rent

disclosure are by individual year for the first five years and the aggregate amount after

lessor perspective capitalization IFRS:

doesn't have additional two criteria, but requires qualitative assessment regarding the transfer of risks and rewards that address similar issues. this may or may not result in similar accounting treatment

IFRS disclosure

internally generated but be distinguished from other intangibles - separate disclosure for intangibles being amortized over more than 20years - intangibles being carried under allowed alternative treatments at revalued amounts - and for research and development - IAS38 encourages disclosure discretion of any fully amortized intangibles that are still in intangible assets that did not meet the recognition criteria

Lease terms GAAP and IFRS:

lease term is the non cancelable term of a lease. including any additional period when the lease can be continued that seem reasonably certain to occur at the inception of the lease - initial direct costs are incremental costs incurred by the lessor in acquiring a lease

lessor accounting GAAP and IFRS

lessors net investment in a lease is sum of MLP and any residual value accruing to the lessor - RV is capitalized by the lessor whether or not the value is guaranteed or not

MLP includes GAAP and IFRS:

min rental payments guaranteed RV penalty for failure to renew or extend the lease BPO

disclosure for impairment of intangibles GAAP

need disclosure of impairment loses and reasons for why they had loss - individual details about CGU not required

disclosure for impairment of intangibles IFRS

need disclosure of impairment losses in aggregate and by class of asset and reportable segment and if material by individual or CGUS - IAS36 specifies additional reporting requirements for impairment loss and reversal of those impairment losses for revalued assets

IFRS lease capitalization criteria

no bright line tests - the lease term is a major part of the property remains economic life - NPV of MLP is substantially all of the FV of the leased property at the inception date additional: leased assets are of such a specialized nature that only the lessee can use them without major modification being made - lease bears the lessors losses if the lessee cancels the lease - the lessee absorbs the gains and losses from fluctuations in the fv of the residual value of assets - the lease may extend the ease for a secondary period at a rent substantially below the market rent

IFRS annual amortization amount

not yet official but proposal would prohibit the use of deprecation or amortization method that is based on revenue generated

IFRS classifies a financing lease as:

nothing doesn't have this classification - does not include accounting for leveraged leases

Lessor perspetive capitalization GAAP:

two additional requirements: 1. collectibility of lease payments must be reasonably assured 2. there must be no important uncertainties surrounding the amount of non reimbursable costs to be incurred by the lessor

GAAP calculating NPV of MLP

use incremental borrowing rate, unless the implicit rate in the lease can be determined and is less - implicit rate= the discount rate when applied to the min lease payments and any ungarunteed RV accruing to the lessor, caused the aggregate pV to equal the FV of the leased property to the lessor

Terminology IFRS:

used the term financing lease - has a less expanded definition of a lease term - does not provide guidance on this issue

Indefinite intangible assets GAAP and IFRS amortization

useful life is not amortized

Tests used for leases IFRS

uses a more general criteria based on the substance of the lease to determine capitalization

terminology GAAP:

uses term capital lease - provides more expanded definition of a lease term - provides detailed guidance on which activities and costs qualify as initial direct costs

GAAP and IFRS RV is capitalized by the lease when ..

value is guaranteed. an un guaranteed rv is not capitalized

disclosures of Lease GAAP and IFRS

very based on type of lease and whether disclosure is for a lessee or lessor