Intangibles

Development costs of internally developed commercial software incurred after reaching technological feasibility but before commercial production are capitalized.

Amortization of this software equals the larger amount of the straight-line method or relative sales value method.

What is the frequency of impairment testing related to intangible assets with finite lives?

As needed -Patent -Copyright

Under the revaluation model allowed under IFRS for the accounting for identifiable intangible assets:

Assets are periodically revalued and adjusted to their fair values and are amortized in between revaluation dates.

What is the frequency of impairment testing related to intangible assets with indefinite lives?

At least annually -Goodwill -Trademark renewed indefinitely

Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?

Because Northstar expects to renew the trademark indefinitely, it is considered an intangible asset with an indefinite useful life, and therefore not subject to amortization.

Which of the following costs should not be included in research and development? A. Facility costs. B. Personnel costs. C. Administrative costs. D. Indirect costs

C. Administrative costs. There must be a causal and direct link between a research and development (R&D) activity and a cost incurred for that cost to be classified as R&D. R&D costs typically include materials, personnel, facility, contract services, purchased and developed intangibles, and an allocation of indirect costs.

For a public business entity, the goodwill impairment test is required to be performed A. Only at the end of the fiscal year. B. Only at the beginning of the fiscal year. C. Any time during the last quarter of the fiscal year. D. Any time during the fiscal year, provided it is performed at the same time every year.

D. Any time during the fiscal year, provided it is performed at the same time every year. CV>FV = Impairment

o comply with segmented reporting requirements, goodwill is assigned to the reporting unit (ie, operating segment or one level below) that receives the benefit (eg, name recognition, customer loyalty) of an acquired business.

Entities are required to test goodwill at least annually to confirm that it continues to provide a benefit to the reporting unit. If the reporting unit no longer receives a benefit from the acquisition, goodwill must be impaired by recognizing an impairment loss on the income statement and reducing goodwill's book value.

Determining useful life of intangibles with a definite life

Expected use of the asset by the entity Legal, regulatory, or contractual provisions that may limit the useful life Effects of obsolescence, competition, and other economic factors Expected maintenance expenditures required

Patent expenses under GAAP Capitalize Purchase price (acquired patents) Legal fees (successful defense of patent) Filing fees

Expense Research and development (internally developed patents) Legal fees (unsuccessful defense of patent)

A copyright is an intangible asset that provides legal protection of artistic works for the life of the creator plus 70 years.

For accounting purposes, intangible assets with finite lives are amortized over their estimated useful lives, which may or may not extend to the full period of copyright protection.

Operating segments have separate business activities with discrete financial information that is reviewed by management.

Goodwill is assigned (and impairment of goodwill must be evaluated) to any reporting unit (ie, operating segment or one level below) that receives a benefit from the acquired business.

A trademark is an intangible asset that provides legal protection for the exclusive use to the identifying name of a product or process. Protection lasts 10 years and can be renewed an unlimited number of times. For accounting purposes, intangible assets with definite lives (including trademarks) are generally amortized over the shorter of their estimated useful or legal lives.

However, if no legal, economic, or other factors limit useful life, the intangible may have an indefinite life. These assets are not amortized but are tested at least annually for impairment.

At least annually, entities must test goodwill for impairment by comparing a reporting unit's fair value against the carrying value, including goodwill.

If fair value is less than the carrying value, an irreversible impairment loss must be recorded. Step 1: Quantitative impairment test Step 2: Asset impaired if CV>FV

A patent is legal protection that guarantees exclusive rights (generally for 20 years) to a product or process that is either purchased or developed internally.

Purchased patents are initially measured at their purchase price plus any legal or filing fees incurred by the acquirer. Patents are intangible assets that are amortized over the shorter of the patent's remaining legal or useful life.

Franchise agreement revenue is recognized only once the franchisor has performed substantially all the material contractual services and collectability is reasonably assured.

Record revenue at present value of future franchise payments.

Commercial software amortization is calculated using a two-step process:

Step 1: Amortization is calculated using both the straight-line method and relative sales value method. The larger amount (ie, most conservative) is recorded as amortization. Step 2: The software's new carrying value (CV) is compared with its net realizable value (NRV). If CV exceeds NRV, the excess is included as an amortization expense.

What is the name of the impairment test related to an intangible asset with indefinite life?

Step 1: Quantitative impairment test Step 2: Asset impaired if CV>FV

What is the name of the impairment test related to an intangible asset with finite life?

Step 1: Recoverability test Step 2: Asset impaired if CV>CF

Intangible assets with finite lives are amortized over their estimated useful lives.

The amount capitalized is the asset's cost minus residual value. An intangible asset has residual value if it can be sold at the end of its useful life.

The recoverability test determines if (but not how much) intangibles with finite lives (eg, patents) have been impaired by comparing an asset's expected future net cash flows with its carrying value.

The test is used only with finite-lived intangibles because they have a defined period or timeline of cash flows.

Under IFRS, in order to capitalize costs incurred in developing an identifiable intangible, a company is required to be able to: (1) demonstrate that completion is technologically feasible (2) the entity has the intent and resources available to complete it (3) the entity has the ability to use or sell the asset (4) it will generate probable future economic benefits, and costs can be reliably measured.

There is no requirement that resources used have alternative uses to the company.

Amortization of internally developed commercial software equals the larger of the straight-line or relative sales value methods. Additional amortization expense may be recorded if the software's new carrying value exceeds its net realizable value.

Using relative sales values, the sales ratio is 40% [$180,000 current sales / ($180,000 + $270,000 expected future sales)]. Amortization using relative sales value is $64,000 ($160,000 CV × 40%).

Costs incurred during commercial production are recognized as

as operating expenses when incurred but are not considered research or development costs.

Most R&D costs, such as costs associated with creating and testing a prototype, are

expensed as incurred.

The copyright period is typically

for the life of the creator plus 70 years.

Under franchise agreements, revenue should be recognized when

the franchisor has substantially performed all material services and conditions, and collectability from the franchisee is reasonably assured.

The capitalized cost of a patent includes

the legal costs of obtaining it and successfully defending the patent's rights against infringement.

intangible asset with an indefinite useful life are not subject to amortization.

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