Chapter 13 -- Intangible Assets and Goodwill
What is the equation for amortization expense
(Capitalized cost-residual value) / (shorter of useful or legal life)
What are the two parts of the intangible definition
1) Lack physical substance, long-lived, and used in operations 2) Not financial instruments (bank deposits, A/R, LT bond investments)
How are patented products classified?
20 yrs = definite life
How do you account for R & D costs? Exception?
Companies must expense all R & D costs when incurred Exception if the asset has an alternative future use, then you can capitalize it
Equation for impairment loss under IFRS
impairment loss = carrying amount - recoverable amount
What does writing down the assets essentially do?
makes the carrying value equal the fair value
What is undiscounted net cash flows equivalent to?
net cash flows
How do we account for indefinite life intangibles?
no amortization, written down for impairment
How do you impair indefinite life intangibles? (other than goodwill)
no recoverability test, just record impairment
Where are internally created intangibles put?
not on the balance sheet as an asset
How do you record internally generated goodwill
not recorded as an asset
What is an example of an artistic-related intangible?
ownership rights to plays, literary works, musical works, pictures, photographs, video material (i.e. copyrights) Ex: Disney's Mickey Mouse
What is an example of a technology-related intangible?
patented products or processes (i.e. technology products & pharmaceuticals)
How does one acquire goodwill?
purchase a business; cannot otherwise purchase GW or record internally generated GW
What is the equation for goodwill?
purchase price - FV of identifiable net assets
How do you value goodwill?
purchase price of acquired business - FMV of identifiable net assets
What are the two types of intangibles considered for valuation?
purchased and internally produced
How do you record purchased goodwill
recorded as an asset
When does an impairment exist under IFRS?
recoverable amount < Carrying amount
How does one get rid of goodwill?
sell the business
What is an example of a marketing related intangible asset?
trademarks, trade names, internet domain names
How long do copyrights last?
Author's life + 70 years
What is the recoverable amount under IFRS?
The higher of the fair value less the cost to sell or the assets value in use (PV of future net cash flows)
How do you account for purchased intangibles?
capitalize the cost of the asset (i.e. purchase price, legal fees, and incidentals)
What is an example of goodwill?
company purchases another and records excess cost of purchase over the fair value of the identifiable net assets purchased
What are the two models for IFRS intangibles?
cost model and revaluation model
What is an example of a customer-related intangible
customer lists, order or production backlogs
What is the JE for limited life intangibles?
debit amortization expense; credit accumulated amortization (or direct to asset)
JE for recording an impairment for intangible asset
debit impairment loss; credit accumulated depreciation
What is the JE for recording the impairment?
debit impairment loss; credit intangible asset (or accumulated amortization)
How do you amortize limited life intangibles? (3 steps)
1) amortization length shorter of useful life or legal life 2) amortization amount (cost-residual value) 3) amortization method (typically straight-line)
How do you impair limited life intangibles?
1) determine if circumstances changed 2) recoverability test (Undiscounted cash flows < CV?) 3) if yes for recoverability test, impairment is made for the value of CV-FV
What are the 3 steps for accounting for intangible assets?
1) how much should we capitalize? (valuation) 2) How do we allocate cost over time? (amortization) 3) How do we adjust carrying value if circumstances change? (impairment)
What are the two classifications for intangible assets?
1) limited life intangibles: finite useful life 2) indefinite life intangibles: indefinite useful life
How do you impair goodwill?
1) more than 50% that FV of reporting unit is less than carrying amt? 2) CV > FV = impairment
What are the three steps in accounting for goodwill?
1) valuation 2) amortization 3) impairment
How do you calculate the impairment amount for goodwill?
CV - FV
What set of rules allows you to undo an impairment?
IFRS
What is special about impairment and IFRS
Impairments can be reversed for assets other than goodwill and are credited to income
What are the 6 types of intangible assets?
Marketing-related Customer-related Artistic-related Contract-related Technology-related Goodwill
How do you amortize goodwill?
NOOOOO
How do you amortize indefinite intangibles?
NOOOOOO
How do you undo an impairment?
NOT POSSIBLE UNDER US GAAP
What are the two ways R & D is capitalized?
R & D asset has alternative future use OR Development costs that meed specified criteria are capitalized as an intangible asset under IFRS
What about amortization and impairment for goodwill?
US GAAP does not allow amortization of goodwill; impairment tested annually
Why is goodwill a thing?
a successful, going business is usually worth more than the sum of its parts competitive advantage = internally created goodwill not found on companies balance sheet
what is amortizing intangibles?
allocating historical cost of intangible asset to expense of periods benefitted
What is the overview for intangibles and goodwill?
amortization
How often do you evaluate intangibles for impairment?
annually
Why is there no recoverability test for indefinite life intangibles
because you can't discount the cash flows
JE for impairment loss under IFRS
debit to loss, or in certain cases to revaluation equity
How is customer list classified?
definite life
How are franchise and licensing agreements classified?
definite or indefinite life
What is Fair Value equivalent to?
discounted net cash flows
How are internally created intangibles accounted for?
expensed as incurred: costs related to R&D, contributions to charity, initial start-up costs, initial operating losses, ad costs capitalize: only direct costs incurred in developing the intangible (i.e. legal fees for securing the patent, registration fees)
How much of a purchased intangible is capitalized if acquired in exchange for stock or other asset?
fair value of consideration given OR fairy value of the intangible asset received, whichever is more evident (value given = value received)
What is an example of a contract-related intangible asset?
franchise and licensing agreements, construction permits
What is goodwill?
future economic benefit arising from other assets acquired in a business merger that are not individually identified and separately recognized
What is used to determine whether you should record an impairment for indefinite life intangibles?
if >50% chance of impairment, use the Fair Value Test
What is the classification for a trademark?
indefinite life
