Combo with "Introduction to Intangible Assets" and 2 others
Goodwill
A. Goodwill is the only intangible asset that is not identifiable. Goodwill is attributable to many different factors such as reputation, management skills, location, customer loyalty, etc. Goodwill is the value of the acquiree that cannot be attributable to specific identifiable tangible or intangible assets, or liabilities. Goodwill has an indefinite life because the going concern concept assumes that, in the absence of evidence to the contrary, the combined entity (acquirer and acquiree) will continue indefinitely.
Goodwill Example (100% acquisition)
1. 100% ownership of Acquiree Assume ABC Company acquired 100% of XYZ Company for $200,000, which is the FMV of XYZ as a whole. At the time of the acquisition, XYZ's net assets had a book value of $100,000. The fair market value of the net identifiable assets of XYZ is $160,000, which means that XYZ has net assets with a fair market value greater than their book value. In the acquisition of the XYZ Company, the ABC Company paid $40,000 for goodwill ($200,000 - $160,000), as illustrated in the model below.
Amortization
1. Amortization of definite life intangibles is recorded just like depreciation expense. The debit is to an expense account such as amortization expense or selling, general and administrative expense (SG&A) for intangibles devoted to nonmanufacturing activities, and the debit is to work in process (and ultimately cost of goods sold) for manufacturing intangibles. The credit is usually made directly to the intangible rather than to a contra account. Example: DR: Amortization of copyright (SG&A) xx CR: Copyright xx 2. The straight-line method is typically used to compute amortization.
Qualitative Assessment (Prestep)
1. An entity is permitted, and may elect, to begin its determination of whether goodwill is impaired by performing a qualitative assessment. 2. The purpose of the qualitative assessment is to determine if it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of the reporting unit with which the goodwill is associated has declined below the carrying value of that reporting unit, including its goodwill.
Quantitative Assessment - Step 1: Testing for Potential Impairment
1. If the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a quantitative assessment must be performed. 2. The first quantitative step used to identify potential goodwill impairment compares the fair value of a reporting unit with its carrying amount, including any deferred income taxes and previously recognized goodwill.
1. Intangibles are classified as:
1. Intangibles are classified as: a. Definite life intangibles (all of these are identifiable); or b. Indefinite life intangibles (further subdivided into identifiable intangibles and goodwill).
Marketing-related
1. Marketing-related -- Trademarks, Internet domain names, non-competition agreements. a. Some of these items are indefinite life intangibles. Indefinite life intangibles include trademarks because they are renewable every 10 years indefinitely.
Goodwill Impairment
A. Goodwill, like all indefinite life intangibles, must be tested for impairment at least annually or when certain circumstances indicate that its carrying value may be greater than its fair value (called an impairment). 1. When goodwill is recognized, it must be allocated to a reporting unit. A reporting unit is a component of an operating segment for which discrete financial information is available and regularly used by management for decision-making purposes. 2. Goodwill impairment testing must be done at the reporting unit level or one level below the reporting unit. Note: The CPA Exam typically does not ask the candidate to identify reporting units, but to know that goodwill is tested at the reporting unit level.
Quantitative Assessment - Step 2: Measuring Impairment
1. When the first step of the quantitative assessment indicates the potential that goodwill is impaired, then this second quantitative step is required to measure the goodwill impairment. 2. Goodwill impairment is measured by comparing the (current) implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. a. The implied fair value of the goodwill is determined by assigning fair value to all of the assets and liabilities of a reporting unit, including any intangible assets, and comparing that net fair value with the fair value of the reporting unit as a whole. b. The excess of the fair value of a reporting unit over the fair value amounts assigned to its net assets is the implied goodwill of the reporting unit. c. The assignment of fair values to assets and liabilities, including any previously unrecognized intangible assets, is used only for the purpose of measuring goodwill impairment; those assigned values are not used to change the recorded values of recognized assets or liabilities, or to recognize any previously unrecognized assets or liabilities, including intangible assets.
Definite life intangibles
2. An intangible has a definite life either if the asset has a finite legal life or if the firm believes the useful life is finite. The useful life for amortization is set by economic factors (market and obsolescence) as well as by its legal life.
Customer-related
2. Customer-related -- Customer lists, contractual relationships with customers. a. These are definite life intangibles because they could not have benefit periods of indefinite or unlimited life.
Goodwill (75% acquisition)
2. Now assume that ABC Company acquired 75% of XYZ Company for $150,000 and that the total value of the remaining 25% is $50,000. The diagram below depicts that the total goodwill is still $40,000, but goodwill is allocated between the controlling interest (acquirer ABC) and the noncontrolling interest (NCI). ABC Company, the controlling interest, is allocated $30,000 and the NCI is allocated the remaining 25%, or $10,000.
Indefinite life intangibles
3. An intangible has an indefinite life if no legal, regulatory, contractual, competitive, or other factor limits the life. Indefinite means there is no foreseeable limit on the period of time over which the intangible is expected to provide cash flows. A renewable and very recognizable trademark is an example.
Artistic-related
3. Artistic-related -- Copyrights (these are not renewable). a. Definite life.
Quantitative Assessment - Step 2: Measuring Impairment (continued)
3. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the amount of the excess. a. The amount of loss recognized cannot exceed the carrying amount of the goodwill. b. After the impairment loss is recognized, the adjusted carrying amount is the new accounting basis for goodwill. c. Subsequent reversal of a goodwill impairment loss is not permitted.
Quantitative Assessment - Step 1: Testing for Potential Impairment
3. If the carrying amount of the reporting unit is greater than zero and its fair value exceeds that carrying amount, goodwill of the reporting unit is considered not impaired and the second quantitative step of the impairment test is not required. 4. If the carrying amount of the reporting units is greater than its fair value, the second quantitative step of the impairment test is required to measure the amount of the goodwill impairment loss.
Qualitative Assessment (Prestep)
3. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, an entity should consider all relevant events and circumstances, including: a. microeconomic conditions such as deterioration in general economic conditions, limited access to capital, fluctuation in exchange rates, or other adverse events in equity and credit markets; b. industry and market conditions such as deterioration in the industry environment, increased competition, decline in market-dependent multiples, change in the market for the entity's products or services, or a regulatory or political development; c. cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows; d. overall financial performance such as negative cash flows or actual or projected declines in revenues, earnings, or cash flows; e. entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation; f. factors affecting a reporting unit such as changes in composition or carrying amount of its net assets, anticipation of selling or disposing all, or a portion, of a reporting unit, or recognition of goodwill impairment loss by a subsidiary that is a component of a reporting unit and g. if the reporting unit is publicly traded, a sustained decrease in share price (considered both in absolute terms and relative to the peer group).
Contract-related
4. Contract-related -- Franchises, licensing agreements, broadcast rights, service/supply contracts a. Some of these are definite life intangibles, and some are indefinite life intangibles (as in the case of a perpetual franchise or one that is renewable indefinitely).
Goodwill Impairment
4. Effective for fiscal years beginning after December 15, 2011, an entity may elect to use a qualitative assessment of whether impairment is likely to have occurred as a basis for determining if the quantitative two-step assessment is required. This qualitative assessment is often referred to as a "prestep." a. The ability to use a qualitative assessment about the likelihood of goodwill impairment is intended to reduce the complexity and costs associated with assessing goodwill for impairment. b. Only if the qualitative assessment determines that is it more likely than not that an impairment has occurred, is the subsequent complex and costly two-step assessment required. c. The qualitative assessment (before the quantitative assessment) is optional; however, if the qualitative assessment indicates that the fair value of the reporting unit is more likely than not below the carrying value of the reporting unit, then the quantitative assessment is required. If the qualitative "pre-step" is not completed, the entity must complete the quantitative two-step assessment.
Only definite life intangibles are amortized
4. Only definite life intangibles are amortized. For example, some licenses and franchises that are renewable or even perpetual are not amortized because their benefits are indefinite in duration and no means exists to determine the useful life. Example: A city providing a perpetual license to run a ferry across a body of water. The same logic holds for land - this asset also has an indefinite life and is not depreciated, so this is not a new concept. Only now that concept is being applied to intangibles. 5. However, if an intangible has an indefinite legal life (e.g. trademark) but management believes that the asset has a finite life, then the asset is treated as a definite life intangible. 6. All intangibles are subject to impairment.
Technology-related
5. Technology-related -- Patents (both product and process type) that have a 20-year life and give the holder the exclusive right to use, manufacture, or sell a product or process. Capitalize successful legal defense costs. a. These are definite life intangibles and although small modifications can lead to a new patent that effectively extends the life of the old (the BV of the old is added to the new), the new patent is still considered to have a definite life.
Goodwill
6. Goodwill -- Arises only from a business combination in which the fair market value of the entity purchased exceeds the fair market value of the entiy's identifiable net assets (assets - liabilities). (More on goodwill in the next lesson!) a. Indefinite life and tested for impairment annually.
Development Stage Enterprises (Start Up Firms)
A. Additional disclosures required for development stage enterprises. 1. The accumulated operating deficit from operating losses during the development stage, in the balance sheet; 2. Cumulative amounts from previous periods until the firm is no longer in the development stage; 3. A disclosure that the firm is a development stage enterprise while in that stage of its growth; 4. A disclosure that the firm was previously a development stage enterprise in the first year after the development stage is completed.
Deferred Charges
A. Deferred charges are accounts that are difficult to classify. A variety of practice exists for these accounts. They should not be included in intangibles but are often listed close to intangibles in the balance sheet and are sometimes confused with intangibles.
Goodwill and IFRS
A. IFRS IAS 36 requires goodwill impairment testing to use a single step quantitative test that is performed at the cash-generating unit (or group of cash-generating units). A company is likely to have more cash-generating units than reporting units. Therefore, more "buckets" of goodwill will be tested under IFRS than under U.S. GAAP within a given entity.
Intangibles and IFRS
A. IFRS defines intangible asset as "an identifiable nonmonetary asset without physical substance." This definition has three key characteristic (The definition and characteristics are very similar to U.S. GAAP.) The asset: 1. is controlled by the entity and the entity expects to derive future economic benefits; 2. lacks physical substance; 3. is identifiable to be distinguished from goodwill.
Introduction to Intangible Assets
A. Intangibles are similar to plant assets except that they lack physical substance. Many intangibles are legal rights. ASC 350 governs the accounting for intangibles by (1) dividing intangibles into definite or indefinite life intangibles, and (2) requiring that all intangibles be evaluated for impairment.
Under IFRS, at what value can you report intangible assets?
Amortized cost or fair market value.
Quantitative Assessment - Step 2: Measuring Impairment Example
Assume the facts in Example 2 above, specifically: Firm A acquires firm B for $400 million when B's net identifiable assets have a fair value of $300 million. Subsequent to the acquisition, Firm B is considered a reporting unit. As a consequence of the acquisition, Firm A will recognize $100 million in goodwill, determined as cost of investment (fair value of B) $400 million - fair value of identifiable assets $300 million = $100 million goodwill. One year later, as a result of its qualitative assessment, Firm A cannot rule out the possibility that the goodwill recognized when it acquired Firm B is impaired. Therefore, it carries out a quantitative assessment. In carrying out step 1 of its quantitative assessment, Firm A determines that the fair value of Firm B as a unit is $340 million and that the carrying value of its investment in Firm B is $380 million. Since the fair value ($340 million) is less than the carrying value ($380), goodwill is potentially impaired and step 2 of the quantitative assessment is required to measure the impairment loss, if any. Step 2: The fair value of Firm B's identifiable net assets is determined to be $280 million. Implied goodwill = Fair value of Firm B as a unit, $340,000 million - Fair value of Firm B's identifiable net assets, $280,000 million = $60 million implied goodwill. Impairment loss = Carrying amount of goodwill $100 million - Implied value of current goodwill $60 million = $40 million impairment loss Impairment Entry: DR: Impairment Loss - Goodwill $40 million CR: Goodwill $40 million
Examples of Deferred Charges
B. Examples of Deferred Charges are listed below. 1. Long-Term Prepaid Insurance; 2. Long-Term Prepaid Rent; 3. Machinery Rearrangement Costs - Related to an assembly line for a manufacturing concern, the costs of an efficiency study. These costs are typically amortized over five to ten years; 4. Deferred Income Taxes - When transactions in the current or past periods give rise to future deductible temporary differences (which reduce future taxable income relative to future pretax accounting income), a deferred tax asset is created. Coverage of this topic is significantly expanded in a subsequent lesson; 5. Deferred bond issue costs - the costs of issuing bonds is recorded in a deferred charge and amortized over the term of the bonds.
Goodwill
B. Goodwill is recognized only when a buyer firm (the acquirer) obtains control of another enterprise. If a firm has never acquired another enterprise, then that firm would not have goodwill listed in its balance sheet. C. In recording the acquisition of another business enterprise, the fair market value of the acquiree is compared to the fair market value of net identifiable asset of the acquiree. Any excess of entity fair value over fair value of identifiable assets is goodwill.
Intangible Assets Revaluations
B. IFRS allows the intangible assets to be revalued to fair market value if there is an active market for the intangible asset. If the intangible is valued at fair value, the entire class of of intangible assets must be valued this way, not just select individual intangible assets. U.S. GAAP does not allow this.
Sources of Intangibles
B. Sources of Intangibles -- Intangibles are either acquired from other parties or internally developed. 1. An acquired intangible is separately recognized in the accounts if either (1) the benefit of the asset is obtained through contractual or other legal rights (as in a patent), or (2) if the intangible is otherwise separable, i.e. can be sold, transferred, licensed, rented, or exchanged regardless of the acquirer's intent to do so. 2. Internally developed intangibles (such as organization costs) are expensed immediately if they are not specifically identifiable, have indeterminate values, or are inherent in a continuing business and related to the entity as a whole. Firms routinely expense the amount of internal expenditures devoted to the development of intangibles, most notably for patents, Research and Development (R & D), and goodwill. The only costs related to internally developed intangibles that are capitalized are registration fees and legal costs paid to outsiders.
Goodwill and IFRS
B. The test must be performed at least annually or whenever there is evidence that an impairment may have occurred. IFRS requires a one step impairment test. The carrying value of the cash-generating unit is compared to its recoverable amount. The impairment loss is the excess of the carrying amount of the cash-generating unit over the recoverable amount. The calculated value of the impairment loss reduces goodwill to zero. If there is additional value associated with the impairment loss, it is allocated to the other assets of the unit pro rata based on the carrying amount of each asset in the group. The unit is not reduced below the highest amount of its fair value less cost to sell, its value in use, or zero.
Bargain Purchases
Bargain Purchases Occasionally a firm acquires another enterprise for a price less than the fair value of the acquiree's net assets. This situation is referred to as a bargain purchase. The amount by which the fair value of the acquiree's net assets exceeds the price paid is recognized by the acquirer in the period of the acquisition as ordinary income. Note: A full description of the determination of goodwill and a bargain purchase amount resulting from a business combination is covered in the later lesson "Recognizing/Measuring Goodwill or Bargain Purchase Amount" as part of the Business Combination topic.
IFRS Intangible Reversals
C. IFRS allows reversal of impairment losses on intangible assets to the carrying value that would have been recognized had the impairment not occurred.
Goodwill and IFRS
C. IFRS for small and medium-sized companies require goodwill to be amortized over the estimated useful life. If an estimate useful life is not reliably determinable, the goodwill should be assigned a life of 10 years.
Cash Surrender Value of Life Insurance
Cash Surrender Value of Life Insurance A. Firms that carry whole life insurance policies on key employees enjoy an annual increase in the investment portion of the policy. Cash surrender value is appropriately classified as an investment account but may be reported by some firms in Other Assets in the balance sheet.
Accounting for intangible assets - Copyright
Copyright: Classification - Definite life intangible Capitalization - Only expenditures made to external parties Amortization - Amortize Impairment - Recoverable cost test
Accounting for intangible assets - Customer list
Customer list: Classification - Definite life intangible Capitalization - Only expenditures made to external parties Amortization - Amortize Impairment - Depends on whether definite or indefinite life
Goodwill and IFRS
D. Although other types of impairment loss are reversible under IFRS, goodwill impairment loss cannot be reversed. The IFRS believes that any subsequent increase in goodwill is more likely to be internally generated goodwill rather than a reversal of the impairment of the purchased goodwill. The IFRS (and U.S. GAAP) prohibit recording internally generated goodwill - therefore, goodwill impairment cannot be reversed.
Intangible Amortization
D. The method and amortization method of the intangible asset should be reviewed each annual reporting period. There is no requirement in U.S. GAAP that requires a review of the amortization method or life.
Fair market value of net identifiable assets
D. With reference to determining the fair market value of net identifiable assets, there are two notable points: 1. The use of the term "net" implies that all liabilities assumed in the acquisition have been subtracted from all assets acquired in the acquisition. 2. The use of the term "identifiable assets" implies that all identifiable assets are included, both tangible (such as property, plant, and equipment) and intangible (such as patents), including those that have a definite life and those that have an indefinite life. E. Recoded goodwill remains on the books of the acquirer unless the acquiree is sold or the goodwill becomes impaired (as described in IV. below).
How is amortization of definite life intangibles recorded?
Debit amortization expense and credit the intangible asset (there is no accumulated amortization contra account as with tangible assets).
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Definite Life Intangibles (summary) Capitalize - External costs* Amortization - Over useful life - Usually no residual value - Usually SL method Impairment - Same as assets in use - Impairment if BV > R - Impairment Loss = BV - FV * External costs in the summary table above include amounts paid for registration, legal and accounting fees, outside design costs, consulting fees, successful legal defense costs, and also the cost of direct purchases of intangibles from others. Costs of internally developed intangibles including salaries of employees working on patents, materials used, and overhead are expensed as incurred.
List the classifications of intangible assets.
Definite life intangibles, indefinite life intangibles.
Goodwill (also has indefinite life) Summary
Goodwill (also has indefinite life) Capitalize - Price of firm acquired - less fair value of net assets of firm acquired Amortization - Do not amortize Impairment - 2 steps - see text
Successful Legal Defense Example
Example: A firm owns a patent with a total capitalized cost of $45,000. At the beginning of the current year, the patent has been amortized four years of a total estimated nine year useful life. During the current year, the firm won a patent infringement suit concerning its patent. Legal costs amounted to $15,000. The legal costs are added to the book value of the patent. The book value at the beginning of the current year plus the $15,000 legal costs are amortized over the remaining five years of the patent's life. Book value of patent at beginning of current year = $45,000 - $45,000(4/9) = $25,000
Goodwill represents
F. Goodwill represents an expectation on the part of the acquiring business enterprise that, because of synergies, there will be above normal earnings in the years immediately following the acquisition. If the acquiring company had created a new business, it would have had to develop a client base, reputation, and other favorable intangible characteristics. In acquiring an existing business enterprise, the acquiring company pays for the established client or customer base, the established business reputation, and other intangible characteristics.
Quantitative Assessment - Step 1: Testing for Potential Impairment Example
Facts: Assume Firm A acquires firm B for $400 million when B's net identifiable assets have a fair value of $300 million. Subsequent to the acquisition, Firm B is considered a reporting unit. As a consequence of the acquisition, Firm A will recognize $100 million in goodwill, determined as cost of investment (fair value of B) $400 million - fair value of identifiable assets $300 million = $100 million goodwill. One year later, as a result of its qualitative assessment, Firm A cannot rule out the possibility that the goodwill recognized when it acquired Firm B is impaired. Example #1: No Potential Impairment In carrying out step 1 of its quantitative assessment, Firm A determines that the fair value of Firm B, as a unit, is $420 million and that the carrying value of its investment in Firm B is $410 million. Since the fair value ($420 million) is greater than the carrying value ($410), there is no potential impairment and step 2 of the quantitative assessment is not required.
Quantitative Assessment - Step 1: Testing for Potential Impairment Example 2
Facts: Assume Firm A acquires firm B for $400 million when B's net identifiable assets have a fair value of $300 million. Subsequent to the acquisition, Firm B is considered a reporting unit. As a consequence of the acquisition, Firm A will recognize $100 million in goodwill, determined as cost of investment (fair value of B) $400 million - fair value of identifiable assets $300 million = $100 million goodwill. One year later, as a result of its qualitative assessment, Firm A cannot rule out the possibility that the goodwill recognized when it acquired Firm B is impaired. Example #2: Potential Impairment Assume in carrying out step 1 of its quantitative assessment, Firm A determines that the fair value of Firm B, as a unit, is $340 million and that the carrying value of its investment in Firm B is $380 million. Since the fair value ($340 million) is less than the carrying value ($380), goodwill is potentially impaired and step 2 of the quantitative assessment is required to measure the impairment loss, if any.
Useful Life
For amortized intangibles, if an asset is valuable only when it is used with other assets, the useful life of the other assets in the group can be a factor in setting useful life. For example, if a number of patents are used for one combined purpose, and the patents do not have any usefulness apart from the group, then the shortest useful life of the assets in the group sets the useful life for them all.
Accounting for intangible assets - Franchise (initial fee)
Franchise (initial fee): Classification - Definite or indefinite life intangible Capitalization - Only expenditures made to external parties Amortization - Depends on whether definite or indefinite life Impairment - Depends on whether definite or indefinite life
Goodwill Costs
G. Goodwill Costs -- Subsequent to acquisition, the costs to maintain, enhance, or repair purchased goodwill are expensed. The acquirer understandably wishes to maximize the return on its investment and often spends considerable sums to integrate the acquiree operations into its (acquirer's) operations. All such expenditures are expensed. They are not added to the recorded purchased goodwill.
A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year?
Goodwill impairment testing permits a qualitative "pre-step" test to determine if it is more likely than not that the goodwill is impaired. This pre-step can result in considerable savings to companies who do not have to complete the quantitative tests associated with testing and measuring goodwill impairment.
Goodwill should be tested for value impairment at which of the following levels?
Goodwill is included in an asset group when the group is a reporting unit. A reporting unit is an operating segment or one level below.
Accounting for intangible assets - Goodwill
Goodwill: Classification - Indefinite life intangible Capitalization - Only expenditures made to external parties Amortization - Do not amortize Impairment - Fair value test
Changes in Classification
If an amortized (definite life) intangible is later deemed to have an indefinite life, then amortization ceases. An impairment might result because fair value would now be used to test for impairment rather than recoverable cost.
Impairment Test of Definite Life Intangibles
Impairment Test of Definite Life Intangibles -- The test for impairment is a two step process and it is the same as for plant assets in use. 1. The book value (BV) of the definite life intangible is compared to the recoverable cost (R) of the intangible asset. Recoverable cost is the sum of net cash inflows attributable to using the asset and from the ultimate disposal. If the BV is greater than the recoverable costs, then the asset is impaired. 2. The second step is to compare the BV to the fair value (FV). If the BV is greater than the FV, the asset is written down to FV. The impairment loss equals BV - FV. Subsequent amortization proceeds based on the new BV.
Accounting for intangible assets - Research and development
Research and development: Classification - Not an intangible Capitalization - No expenditures Amortization - Do not amortize Impairment - Not subject to impairment
Impairment Test of Indefinite Life Intangibles Other than Goodwill
Impairment Test of Indefinite Life Intangibles Other than Goodwill -- 1. If the intangible asset is an indefinite life and not subject to amortization, then it must be tested for impairment at least on an annual basis, or when circumstances indicate there may be impairment. The procedure to test for impairment is the same as for plant assets held for sale. The FV is used to test for impairment AND measure the loss. An asset is impaired if BV exceeds FV. Note: Recoverable cost is not used to test for impairment for indefinite life intangibles because it could be argued that an indefinite life intangible could have unlimited recoverable costs given the potential for indefinite life. That is, how do you determine the future cash flow streams for a life that is indefinite? You can't! 2. Impairment losses cannot be reversed for either definite life or indefinite life intangibles. This is the same as for impairment of assets in use - impairment losses are not recoverable. Note: Recall that for plant assets held for sale previous impairment losses can be recovered.
When can impairment of an intangible be recovered?
Impairment of an indefinite or definite life intangible CANNOT be recovered.
Firm A purchased Firm B for $4,000 when B's total owners' equity was $2,000. Firm A completed the qualitative test for goodwill impairment and determined that it is more likely than not that goodwill may be impaired. B had one asset worth $500 more than the book value. One year after the purchase, Firm B's total market value had dropped to $3,200 and the market value of its net identifiable assets was $2,000. What amount of goodwill impairment loss is recorded?
In general, goodwill is impaired when factors and circumstances indicate that the fair value is less than the current recorded value. This generally occurs when the market value of the unit previously purchased has declined because of economic factors and events. In this question, the market value of B has declined significantly in one year. Goodwill is re-estimated the same way that it was when B was purchased, as the difference between unit market value and the market value of net identifiable assets. The new value for estimated goodwill is $1,200 (= $3,200 - $2,000). The goodwill originally recorded is $1,500 (= $4,000 - $2,000 - $500). The impairment loss is the decline in goodwill, or $300 (= $1,500 - $1,200).
Indefinite Life Intangibles Other than Goodwill (summary)
Indefinite Life Intangibles Other than Goodwill Capitalize - External costs* Amortization - Do not amortize Impairment - Same as assets held for sale - Impairment if BV > FV - Impairment loss = BV - FV
Internally Developed Goodwill
Internally Developed Goodwill Internally developed goodwill exists for most business entities. However, due to conservatism and objectivity/verifiability, internally developed goodwill is not recognized as an asset in the accounting records of a business entity. Internally developed goodwill cannot easily be measured or verified. This is a major reason that only purchased goodwill, resulting from an arm's length transaction, is recognized for accounting purposes.
What are intangible assets?
Long-term operational assets that lack physical substance or presence but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date.
Intangible Assets
Long-term operational assets that lack physical substance or presence, but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date.
Separate Recognition
Many intangibles must be separately identified: trademarks and trade names, non-competition agreements, customer lists, order or production backlogs, copyrights and patents, secret formulas and processes, licensing agreements, and supply contracts. A major reason for identifying these is that intangibles with definite life are amortized. To include them in goodwill in an acquisition would mean they would not be amortized.
List the types of intangibles
Marketing Related, Customer Related, Artistic Related, Contract Related, Technology Related, Goodwill.
Development Stage Enterprises (Start Up Firms)
Note: The most important aspect of development stage company reporting is that the same US GAAP is used for these firms as for any other type of firm, with a few additional disclosures required.
What is the impairment test for indefinite life intangibles?
One step: BV compared to FV. If BV > FV then impairment loss = BV - FV.
Accounting for intangible assets - Patent
Patent: Classification - Definite life intangible Capitalization - Only expenditures made to external parties Amortization - Amortize Impairment - Recoverable cost test
What costs can be capitalized to an intangible asset?
Price paid to other parties.
Provide examples of the class of assets can you carry at fair market value under IFRS?
Property, plant, and equipment; identifiable intangible assets; financial assets including investments and financial instruments.
Qualitative Assessment Outcomes
Qualitative Assessment Outcomes -- a. After assessing the totality of the above kinds of events and circumstances, an entity determines that it IS NOT more likely than not that the fair value of the reporting unit is less than its carrying value, then the quantitative steps of the goodwill impairment test are unnecessary. b. After assessing the totality of the above kinds of events and circumstances, an entity determines that it IS more likely than not that the fair value of the reporting unit is less than its carrying value, then the first step of the two-step quantitative assessment must be performed.
Reporting Unit Book Value = Zero or Negative
Reporting Unit Book Value = Zero or Negative 1. If the carrying amount of a reporting unit is zero or negative, the second quantitative step must be performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. 2. In evaluating whether it is more likely than not that the goodwill of a reporting unit with zero or negative book value is impaired, an entity should take into account: a. the events and circumstances described previously (IV. B.), b. whether there are significant differences between the carrying amount and the estimated fair values of its assets and liabilities, and c. the possible existence of significant unrecognized intangible assets.
Residual Value
Residual Value -- For amortized intangibles, residual value is assumed to be zero unless: 1. The entity has a commitment from a third party to purchase the intangible asset at the end of its useful life, or 2. The residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset's useful life.
Revaluation of Book Value
Revaluation of Book Value -- From time to time, the rights associated with an intangible asset must be legally defended. For example, a company might have a patent on a unique product. If a competitor infringes on the rights represented by the patent and manufactures a similar product, the company holding the patent might elect to defend those rights through legal action. Accounting for the legal costs of this action is dependent on the outcome of the legal action.
Accounting for intangible assets - Software development
Software development: Classification - Part definite life intangible, part not intangible - Capitalization Only expenditures beyond technological feasibility - Amortization Amortize expenditures beyond technological feasibility - Impairment Net realizable value test for capitalized amount
What method is used to amortize intangible assets?
Straight line, unless another systematic method can be shown as more appropriate.
Successful Legal Defense
Successful Legal Defense -- If the rights associated with the intangible asset are successfully defended, the economic benefits associated with the intangible asset have been enhanced. Therefore, the related legal costs are recorded as an increase in the capitalized value of the intangible asset.
Cash Surrender Value of Life Insurance Example
The annual premium on a life insurance policy for a corporate executive is $800. In the third year, cash surrender value begins accumulation, at $200. Entry for third year premium: Dr:Insurance Expense 600 Cr:Cash Surrender Value of Life Insurance 200 Cr:Cash 800 In subsequent years, the cash surrender value portion of the premium increases. The fourth year might be $300, for example. At the end of the fourth year, the balance in cash surrender value then would be $500.
Large purchased all of Small's voting stock for $11 million when Small's total owners' equity was $4 million. The book value and market value of Small's liabilities equal $3 million. However, the market value of Small's total assets equals $9 million. What amount of goodwill is recorded by Large (in millions)?
The market value of Small's net assets is $6 ($9 - $3). Goodwill ($5) is the difference between the purchase price of $11 and the market value of Small's net assets of $6. Goodwill is the portion of the purchase price not attributable to identifiable assets.
How much of the impairment loss can be recovered under IFRS?
The recovery of an impairment loss is limited to the carrying value had the impairment not occurred.
Goodwill
The result of a business combination that is measured as the difference between the fair market value of the acquired company as a whole (the acquiree) and the fair market value of the identifiable net assets (assets - liabilities). The fair market value of the acquiree as a whole is often greater than the fair market value of the identifiable net assets. Goodwill is the excess of the fair market value of the entity as a whole over the fair market value of its identifiable assets.
Which of the following is not one of the qualitative factors considered to determine if it is more likely than not that the reporting unit is less than its carrying value?
This is a quantitative measure of the implied goodwill. The question asked which of the responses is not a qualitative factors used in the pre-step for goodwill impairment. This response is incorrect also because implied goodwill is determined by comparing the fair market value of the reporting unit to the fair market value of the identifiable assets - not by using a discount model.
Accounting for intangible assets - TradeMark
Trademark: Classification - Definite or indefinite life intangible Capitalization - Only expenditures made to external parties Amortization - Depends on whether definite or indefinite life Impairment - Depends on whether definite or indefinite life
What is the impairment test for definite life intangibles?
Two steps: 1. The book value (BV) of the definite life intangible is compared to the recoverable cost (RC) of the intangible asset. If the BV > than the RC then 2. BV compared to fair value (FV). If BV > FV then impairment loss = BV - FV.
Types of Intangibles
Types of Intangibles: 1. Marketing-related 2. Customer-related 3. Artistic-related 4. Contract-related 5. Technology-related 6. Goodwill
At what level is goodwill impairment testing performed under U.S. GAAP and IFRS?
Under U.S. GAAP, goodwill impairment is tested at the reporting unit level. Under IFRS, goodwill impairment is tested at the cash generating unit.
Unsuccessful Legal Defense
Unsuccessful Legal Defense -- If the rights associated with the intangible asset are unsuccessfully defended, the economic benefits associated with the intangible asset have likely been decreased to zero. Therefore, the related legal costs are recorded as legal expenses of the period incurred. In addition, the intangible is written off as a loss.
Under what conditions is the residual value of a definite life intangible not assumed to be zero?
When 1) the entity has a commitment from a third party to purchase the intangible asset at the end of its useful life; or 2) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset's useful life.
