Wiley - Chapter 13: Current Liabilities and Contingencies

Chapter 12-1

Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets

ChapteChapter r

1212

Chapter 12-2

Intangible Asset IssuesIntangible Asset IssuesIntangible Asset IssuesIntangible Asset Issues

Two Main Characteristics:

Characteristics

(1) They lack physical existence.

(2) They are not financial instruments.

Normally classified as long-term asset.

Common types of intangibles:Patents

Copyrights

Franchises or licenses

Trademarks or trade names

Goodwill

Chapter 12-3


Purchased Intangibles:

Recorded at cost.

Includes all costs necessary to make the intangible asset ready for its intended use.

Valuation

Internally Created Intangibles:

Costs generally expensed as R&D.

Only capitalize direct costs incurred in developing the intangible, such as legal costs defending patent, etc.

Chapter 12-4


Amortization of Intangibles

Limited-Life Intangibles:

Amortize to expense.

Credit asset account or accumulated amortization.

Indefinite-Life Intangibles:

No foreseeable limit on time the asset is expected to provide cash flows.

No amortization.

Chapter 12-5

Types of IntangiblesTypes of IntangiblesTypes of IntangiblesTypes of Intangibles

Six Major Categories:

(1) Technology-related.

(2) Contract-related.

(3) Customer-related.

(4) Artistic-related.

(5) Marketing-related.

(6) Goodwill.

Chapter 12-6


Technology-Related Intangible Assets

Examples are:

patented technology and trade secrets granted by the U.S. Patent and Trademark Office.

Patent gives the holder exclusive use for a period of 20 years.

Capitalize costs of purchasing a patent.

Expense any R&D costs in developing a patent.

Legal fees incurred successfully defending a patent are capitalized to Patent account.

Chapter 12-7


Contract-Related Intangible Assets

Examples are:

franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.

Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at cost and not amortized.

Chapter 12-8


Customer-Related Intangible Assets

Examples are:

customer lists, order or production backlogs, and both contractual and noncontractual customer relationships.

Capitalize acquisition costs.

Limited life -amortized to expense over useful life.

Chapter 12-9


Artistic-Related Intangible Assets

Examples are:

plays, literary works, musical works, pictures, photographs, and video and audiovisual material.

Copyright is granted for the life of the creator plus 70 years.


Limited life -amortized to expense over useful life.

Chapter 12-10


Marketing-Related Intangible Assets

Examples are:

trademarks or trade names, newspaper mastheads, Internet domain names, and noncompetition agreements.

Trademark or trade name has legal protection for indefinite number of 10 year renewal periods.


No amortization if costs to renew are not material

Chapter 12-11


Ex 12-4

Chapter 12-12


Goodwill

Only recorded when an entire business is purchased because goodwill cannot be separated from the business as a whole.

Goodwill is recorded as the excess of ...purchase price overover the FMV of the identifiable net assets acquired.

Internally created goodwill should not be capitalized.

Chapter 12-13


Goodwill

Goodwill considered to have an indefinite life.

Should not be amortized.

Only adjust carrying value when goodwill is impaired.

Chapter 12-14


Goodwill

What if the purchase price is less than the fair value of net assets acquired (bargain purchase)?

Results in a credit, referred to as negative goodwill.

Note that SFAS 141(R) requires that all of the negative goodwill be recorded as a gain beginning with December 2008 fiscal year end

Chapter 12-15

Ex 12-13

Recording GoodwillRecording GoodwillRecording GoodwillRecording Goodwill

Chapter 12-16

Impairment of Intangible AssetsImpairment of Intangible AssetsImpairment of Intangible AssetsImpairment of Intangible Assets

Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets in Chapter 11.

1. If the sum of the expected future net cash flows is less than the carrying amount of the asset, an impairment has occurred (recoverability test).

2. The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (fair value test).

The loss is reported as part of income from continuing operations, “Other expenses and losses” section.

Chapter 12-17


Impairment of Indefinite-Life Intangibles Other than Goodwill

Should be tested for impairment at least annually (unless qualitative assessment indicates that not likely impaired -ASU 2012-02).

Impairment test is a fair value test.

If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference.

Recoverability test is not used.

Chapter 12-18


Impairment of Goodwill

• FASB now gives companies the option to perform a qualitative assessment to determine whether it is more likely than not (i.e., > 50 percent) that the fair value of its reporting unit is less than its carrying amount.

• If qualitative assessment indicates fair value is more likely than not to be greater than the carrying value, the company need not perform the two-step impairment test.

• qualitative assessment intended to reduce both the cost and complexity of goodwill impairment test.

Chapter 12-19


Impairment of Goodwill

Two Step Process:

Step 1: If fair value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment.

Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.

Chapter 12-20

Ex 12-15 (Goodwill Impairment)


Chapter 12-21


Summary of Impairment Tests

Illustration 12-Illustration 12-1111

Chapter 12-22

Research and Development CostsResearch and Development CostsResearch and Development CostsResearch and Development Costs

Frequently results in something that a company patents or copyrights such as:

new product,

process,

idea,

formula,

composition, or

literary work.

Because of difficulties related to identifying costs with particular activities and determining the future benefits, R & D costs are expensed when incurred.

Chapter 12-23

Identifying R & D Activities

Research ActivitiesPlanned search or critical investigation aimed at discovery of new knowledge.

Research ActivitiesPlanned search or critical investigation aimed at discovery of new knowledge.

ExamplesLaboratory research aimed at discovery of new knowledge; searching for applications of new research findings.

ExamplesLaboratory research aimed at discovery of new knowledge; searching for applications of new research findings.

Development ActivitiesTranslation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

Development ActivitiesTranslation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

ExamplesConceptual formulation and design of possible product or process alternatives; construction of prototypes andoperation of pilot plants.

ExamplesConceptual formulation and design of possible product or process alternatives; construction of prototypes andoperation of pilot plants.

Illustration 12-13


Chapter 12-24

Accounting for R & D Activities

Costs included in R&D expense:

Materials, Equipment, and Facilities

unless the R&D equipment or facility has future alternative uses- if so capitalize and apply depreciation to R&D

Personnel

Purchased Intangibles used only for R&D

Contract Services for specific R&D activity

Reasonable allocation of indirect Costs


Chapter 12-25

Accounting for Computer Software Accounting for Computer Software CostsCosts


APPENDIX APPENDIX 12A12ADiversity in Practice

Companies can either

purchase computer software or

create it.

How should companies account for the costs of developing software?

Should they expense such costs immediately, or capitalize and amortize them in the future?

Chapter 12-26



The Profession’s PositionFASB ASC 985-20-05 - Major recommendations of

this pronouncement are:

1. Until a company has established technological feasibility for a software product, it should charge to R&D expense the costs incurred in creating the product.

2. Technological feasibility is established when the company has completed a detailed program design or a working model.

Chapter 12-27



Accounting for Capitalized Software CostsIf companies are to capitalize software costs, then

they must establish a proper amortization pattern.

As a basis for amortization, one of two amounts is used:

1. the ratio of current revenues to current and anticipated revenues (the percent-of-revenue approach), or

2. the straight-line method over the remaining useful life of the asset (straight-line approach).

Must use whichever of those amounts is greater.

Chapter 12-28

Capitalizing Internally Generated Capitalizing Internally Generated Software Costs (Appendix)Software Costs (Appendix)

Capitalizing Internally Generated Capitalizing Internally Generated Software Costs (Appendix)Software Costs (Appendix)

Q 27, BE 12-14, Ex 12-18

Chapter 12-29

RELEVANT FACTS

Like GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not financial instruments. In addition, under IFRS an intangible asset is identifiable. To be identifiable, an intangible asset must either be separable from the company (can be sold or transferred) or it arises from a contractual or legal right from which economic benefits will flow to the company. Fair value is used as the measurement basis for intangible assets under IFRS, if it is more clearly evident.

As in GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and GAAP. Under IFRS, costs in the development phase are capitalized once technological feasibility is achieved.

Chapter 12-30

RELEVANT FACTS

IFRS permits revaluation on limited-life intangible assets. Revaluations are not permitted for goodwill and other indefinite-life intangible assets.

IFRS permits some capitalization of internally generated intangible assets (e.g., brand value) if it is probable there will be a future benefit and the amount can be reliably measured.

IFRS requires an impairment test at each reporting date for long-lived assets and intangibles and records an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value-in-use. Value-in-use is the future cash flows to be derived from the particular assets, discounted to present value.

Chapter 12-31

RELEVANT FACTS

IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of limited-life intangibles. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.

IFRS and GAAP are very similar for intangibles acquired in a business combination. That is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged. In addition, under both GAAP and IFRS, companies recognize acquired in-process research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably.

Wiley - Chapter 13: Current Liabilities and Contingencies

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related intangible

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