FAR Unit 10 - Intangible Assets and Other Capitalization Issues
Software to be used internally - Annual amortization (10.7.3)
Annual amortization of the capitalized costs of software to be used internally is done on a straight line basis over the estimated economic useful life of the software.
R&D Activities
** Need to know R&D activities included and not included ** page 357
Determination of an Impairment loss
1. Events or changes in circumstances indicate a possible loss 2. Carrying amount > sum of undiscounted cash flows 3. Loss = carrying amount - fair value
Franchises (10.3.1)
A franchise is a contractual agreement by a franchisor (grantor of the franchise) to permit a franchisee (purchaser) to operate a certain business.
Nonamortized assets - testing for impairment loss (10.2.5)
A nonamortized intangible asset must be reviewed for impairment at least annually. An entity may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. The qualitative tests looks at various factors to determine if it is more likely than not than an indefinite-lived intangible asset is not impaired. If it is more likely than not that the asset is NOT impaired, the quantitative test is not required. However, if potential impairment is found, the quantitative impairment test needs to be performed. If the carrying amount exceeds the fair value, the asset is impaired and the excess is the recognized loss. The asset is then amortized prospectively and otherwise accounted for as an amortized asset. * NOTE: The undiscounted future cash flows are not considered when testing an intangible asset with an indefinite life.
Computer Software (10.7.1)
Accounting for the costs of developing or obtaining computer software depends on whether the software will be sold to external customers or used strictly internally. Costs of software may be expensed as incurred, capitalized as computer software costs, or included in inventory.
IFRS Difference - Advertising Costs
Advertising costs are generally expensed as incurred.
Trademarks (10.2.4)
Trademarks and related property are not as readily transferable as patents and copyrights. Trademarks may only be sold in connection with the goodwill of the entity it represents. Capitalizable costs includes fees and other costs except advertising and R&D.
Software to be sold (10.7.2)
Costs expensed - Costs incurred before technological feasibility is established are expensed (testing and coding treated as R&D). Costs capitalized - Costs incurred after technological feasibility is established (costs include testing, coding, producing product masters) are capitalized as computer software costs. Amortization begins and capitalization ends when the product is available for general release. Costs capitalized as inventory - Costs incurred to prepare the product for sale (duplication of software, training materials, packaging) are capitalized as inventory.
Software to be used internally (10.7.3)
Costs expensed - Costs incurred during the preliminary project stage (planning and evaluation) and training and maintenance are expensed as incurred. Costs capitalized - Costs incurred during the application development stage (coding, testing) are capitalized. They include (1) external direct costs of materials and services, (2) payroll costs directly associated with the project, and (3) interest costs associated with the project. When the software is replaced, unamortized costs of the old software are expensed.
Prepayments (10.6.1)
Deferred costs are recorded as assets and expensed when used.
Special Issues - DSEs (10.8.2)
Development Stage Entities (DSEs) are devoting substantially all of their efforts to establishing the business and have not begun principal operations or have not earned significant revenues from those operations. Financial statements of DSEs must be presented in accordance with the same GAAP applicable to established operating entities. Additionally, entities must show the deficit accumulated during the development stage (presented in the equity section of the balance sheet). Show per period and cumulative amounts since the entity's inception. During the development stage, the financial statements are shown as those of a DSE. When the development stage is complete, the statements disclose that in prior years the entity was in the development stage. This stage is complete when significant revenue is generated from the planned principal operations.
Disclosure of R&D Costs (10.5.4)
Disclosure is made in the financial statements of the total R&D costs charged to expense in each period for which an income statement is presented.
Advertising Costs (10.8.3)
Advertising costs should be expensed either as incurred or when advertising first occurs. The primary costs are production and communication. However, certain direct response advertising costs should be capitalized (deferred). Capitalization is appropriate if the primary purpose is to generate sales from customers who respond specifically to the advertising and probable future economic benefits result. The deferral of advertising costs is appropriate for both interim and year-end financial reporting if benefits clearly apply to more than one period.
Assignment of goodwill to reporting units (10.4.3)
All goodwill is assigned to the reporting units that will benefit from the business combination. The method used should be reasonable, supportable, consistently applied, and consistent with the objectives of the assignment. Goodwill assigned to a reporting unit = FV of reporting unit - FV of net assets assigned
Amortization (10.2.1)
Amortization is based on the pattern of consumption of economic benefits, if reliably determinable. Otherwise, the straight-line method must be used. The amortizable amount equals the amount initially assigned less residual value. Residual value is always zero, unless (1) a third party has committed to purchase the asset or (2) it can be determined from an exchange transaction in an existing market for the asset that is expected to exist at the end of the useful life.
Copyrights (Copyright Act) (10.2.3)
An author's copyright is for life plus 70 years. A publisher's copyright is for the earlier to expire of 95 years from publication or 120 years from creation. The copyright holder has exclusive rights to reproduce, distribute, perform, display, and prepare derivative works from copyrighted material. A copyright provides automatic protection once it is in tangible form. The Copyright Act does NOT protect ideas, processes, discoveries, principles, etc. Usually the estimated useful life of a copyright is substantially less than its legal life.Copyrights are similar to patents in that they can be sold and licensed. Fees/costs can also be capitalized, except R&D.
IFRS Difference - Impairment losses
An impairment loss for an asset (except goodwill) may be reversed if a change in the estimates used to measure the recoverable amount has occurred. 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 (the greater of fair value minus costs to sell or value in use).
IFRS Difference - recording intangible assets
An intangible asset must be recognized only if (1) it is probably that the entity will receive the asset's economic benefits and (2) the cost is reliably measurable.
Software to be sold - Annual amortization (10.7.2)
Annual amortization is the greater of (1) total capitalized cost times the revenue ratio (annual gross software revenue / total projected gross revenue) or (2) total capitalized cost / the economic lift of the software (straight line) Capitalized software costs are reported at the lower of unamortized cost or NRV.
Presentation in the Financial Statements (10.4.8)
Bal sheet - Intangible assets are required to be presented at a minimum as a single aggregated line item. Goodwill is presented in the aggregate as a separate line item. Income statement - Amortization expense and impairment losses related to intangible assets are presented as line items under continuing operations.
Quantitative Test (10.4.5)
Doesn't need to be performed if the qualitative assessment does not indicate impairment. If potential impairment is found, however, determination of impairment loss: 1. Carrying amount of reporting unit > reporting unit FV 2. Estimate implied FV of reporting unit goodwill. 3. Carrying amount of reporting unit goodwill > reporting unit goodwill implied FV 4. Impairment loss = excess of carrying amount of reporting unit goodwill over reporting unit goodwill implied FV
Equity Method Goodwill (10.4.7)
Equity method investments are reviewed for impairment. However, equity method goodwill itself is not reviewed for impairment because it is not separable from the investment. Furthermore, it is not amortized.
Initial Recognition - Externally acquired (10.1.2)
Externally acquired intangibles are initially recorded at acquisition cost plus any incidentals such as legal fees. If cash paid, the asset is recorded at the cash price. If the asset was acquired in an exchange involving noncash assets, initial recognition is at the fair value of the more clearly evident of (1) the consideration given or (2) the asset received.
IFRS Difference - Goodwill impairment testing
For the purpose of impairment testing, goodwill is allocated to the entity's cash-generating units (CGUs)??
Franchisor Accounting (10.3.3)
Franchise fee revenue should be recognized with a provision for uncollectible amounts. Recognition is at the earliest time when the franchisor has substantially performed (usually the beginning of operations by the franchisee). The installment and cost recovery methods are appropriate only when the franchise fees are to be collected over an extended period and collectibility cannot be reasonably estimated. Initial fees (franchisor revenue) are deferred if they are large in relation to subsequent continuing fees or if future related services are promised. Repossession of the franchise or refund of the franchise fee is a reduction of revenue in the current period.
Goodwill (10.4.1)
Goodwill is only recognized in a business combination. Goodwill is not amortized. Instead, goodwill of each reporting unit is tested for impairment each year at the same time.A reporting unit is an operating segment or one of its components. A component is a reporting unit if (1) it is a business for which discrete financial information is available and (2) segment management regularly reviews its operating results.
Testing for Impairment (10.2.5)
If an amortized intangible asset is later determined to have an indefinite useful life, it (1) must no longer be amortized and (2) must be tested for impairment. An amortized asset is also reviewed for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount is not recoverable and is greater than the asset's fair value. Reversal of a recognized impairment loss is prohibited. The impairment test (not recoverable test) is met if the sum of the undiscounted expected future cash flows from the asset is less than the carrying amount. The loss recognized is the excess of the carrying amount over the fair value. (Loss = FV - Carrying amount)
IFRS Difference - Development (10.5.1)
In some cases, development results in recognition of an intangible asset.
Disposal of a Reporting Unit (10.4.6)
In the calculation of the gain or loss on disposal of a reporting unit, goodwill is included as part of its carrying amount.Goodwill is based on relative value if only part of the reporting unit is to be disposed of.
Useful life (10.2.1)
Intangible assets with finite useful lives are amortized over the useful life. The useful life should be reevaluated each reporting period. A change in the estimate results in a prospective change in amortization. Intangible assets with an indefinite useful life are not amortized.
Initial Recognition - Internally developed (10.1.2)
Internally developed intangibles are most often recorded at the amount of the incidental costs (legal fees) only. R&D costs are expensed as incurred.
Organization and Start up Costs (10.1.3)
Organization costs are those incurred in the formation of a business entity. They include payments to promoters, legal and accounting fees, and costs of registering with the state. Under the federal tax code, organization and start-up costs must be capitalized and amortized over a period of not less than 15 years. Nongovernmental entities must expense all start-up and organization costs as incurred.
Patents (10.2.2)
Patents grant an exclusive right given to the holder to use, product, and sell a product or process for a period specified by law without interference or infringement by others. Patents may be purchased or developed internally (R&D costs expensed, not capitalized). The amortization period for a patent is the shorter of its useful life or the legal life remaining after acquisition. Patents may be sold outright or temporarily licensed. Patent fee and royalty revenue must be recognized when earned. The accounting treatment of the costs of the legal defense of a patent depends on the outcome of the litigation. Costs of successful litigation are capitalized because they will benefit future periods. Costs of unsuccessful litigation are expensed.
Potential impairment of goodwill (10.4.5)
Potential impairment of goodwill exists only if the carrying amount (including goodwill) of a reporting unit is greater than its fair value.
R&D (10.5.1)
R&D costs much be expensed as incurred. Research - Planned search or critical investigation aim at discovery of new knowledge with the hope that it will be useful in developing a new product, service, process, or technique. Development - Translation of research findings or other knowledge into a plan or design for a new or improved product or process. It includes conceptual formulation, design, and testing of product alternatives; prototype construction; and operation of pilot plants.
R&D Funded by Others (10.5.5)
Sometimes an entity's R&D is funded wholly or partly by others. f the entity is obligated to repay any of the funds provided by the other party regardless of the outcome of the project, it recognizes a liability. If repayment depends on the results of the R&D having future economic benefit, the entity accounts for its obligation as a contract to perform R&D for others.
Software to be used internally - Subsequent sale (10.7.3)
Sometimes software developed for internal use will be sold. The net proceeds from these sales reduce the carrying amount of the capitalized software costs. Once software costs reach $0, any further net proceeds are recognized as revenue.
Measuring FV of a reporting unit (10.4.4)
The best evidence of fair value is a quoted market price in an active market. Such prices should be used if available. Another valuation method is estimation of fair value based on multiples of a performance measure, such as earnings or revenue.
Franchisee Accounting (10.3.2)
The franchisee should capitalize the costs of acquiring the franchise. These costs are amortized over their estimated useful life if the life is finite.
Goodwill Impairment Test (10.4.5)
The goodwill impairment test includes an optional qualitative test and a two-step quantitative test. 1. Qualitative test - The entity may choose to assess whether qualitative factors indicate that it is more likely than not (probability > 50%) that the fair value of the reporting unit is less than its carrying amount. 2. Quantitative test - The quantitative test need not be performed if the qualitative assessment does not indicate impairment. If potential impairment is found in the qualitative step, a 2 step quantitative test is performed.
Intangible assets definition (10.1.1)
The lack physical substance. They are not financial assets. They give the holder a contractual or legal right to receive future economic benefits. Common examples are patents, trademarks, copyrights, and franchise arrangements.
