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Flashcards in Intangibles Deck (26)
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1

Intangibles with indefinite life

DO NOT AMORTIZE

Problem should state that the company has the right to extend the rights INDEFINITELY

SHOULD BE TESTED FOR IMPAIRMENT every reporting period.

Carrying value -- Future Undiscounted Cash flows

If impaired, write down the asset to FV.

Impairment loss
Asset

2

Journal entry

Amortization expense
Intangible Asset

3

Impairment test process

For intangibles other than goodwill

1. Perform qualitative test

Determine if it is more likely than not that the events and circumstances would result in impairment, then perform step 2 (YES)

If qualitative test shows otherwise (results wont lead to impairment, then no more further tests needed bec the asset is not impaired) NO

2. Perform quantitative assessment if qualitative assessment is YES.
*******************************************************
Compare CV vs. FV - difference is the impairment loss amount.
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4

When to test for impairment

Goodwill VS Other intangibles

GOODWILL-

- test annual basis and between annual tests

- anytime during the company's fiscal year as long as done the same time every year ( it doesn't have to be year end)

- different reporting units may be examined at different times during the year

OTHER INTANGIBLES:

- tested annually EVERY REPORTING PERIOD
or when circumstances changed

5

Qualitative performance - circumstances affecting impairment

1. cost increases negatively affecting cash flows
2. financial performance declines
3. legal, regulatory or contractual changes
4. entity specific events
5. industry and market deterioration
6. other macroeconomic conditions

6

Goodwill impairment test process

1. Perform qualitative test

If CV > FV proceed to step 2

2. Compute fair value of implied goodwill

Fair value of unit
Less: FV of net assets
= Implied goodwill

Carrying amount of goodwill (original at
acquisition date)
Less: implied (new) goodwill
= Impairment loss (new target)

7

GOODWILL
When to test for impairment?

do not amortize
tested annually for impairment at the same time
use two step process
impairment loss cannot be recovered
internally developed goodwill is not capitalized
- expenses right away

8

Other intangibles
Useful lives

Patent - maximum of 20 years / shorter of useful or legal life

Copyright - life of creator + 70 years
- 95 years for works for hire

Trademark - renewable every 10 years

Franchise - depending on contract

If useful life is longer than 10 years, amortize over useful life.

If ranges of lives are given, use the shortest.

Amortize SL unless given otherwise in the problem

9

Research definition

costs aimed at discovery of new knowledge that will result in a new product or process
OR
significant improvement to a new product or process

10

Development costs

conversion of new knowledge into a plan or design for a new product or process

11

Market research and R&D performed for others - how are these recognized?

NOT research and development costs
Considered like cost of sales

12

Market testing activities - research and development cost?

are not research and development costs

13

Fixed assets used in research and development which has future economic benefits

CAPITALIZED and amortized over useful life

Research and development expense
Accumulated amortization

14

Patents - what costs are capitalized?

cost of obtaining legal protection
successful defense in court

maximum life - 20 years
use shorter of useful or legal life

unsuccessful defense - expense

15

Copyright
Life?

protection for artistic works etc
life of creator plus 70 yrs
95 years for works made for hire
amortize over USEFUL LIFE

16

Trademark
Life?

use of identifying name or product
amortize over useful life
usually has indefinite number of renewals

17

franchise
Life?

operation of a business under contractual arrangements

18

Intangibles with indefinite lives

NOT AMORTIZED
tested for impairment annually - use undiscounted present value method to test

CV > FV = Impairment loss

19

Reasons for impairment

unanticipated competition
significant adverse change in business climate
loss of key personnel
expectation that a reporting unit will be sold or otherwise disposed

20

3 methods of amortization of intangibles

SL
Unit of sales
Net realizable value -

use the most conservative - lowest carrying value and highest amortization expense

21

Development stage enterprise

1. devoted entirely to research and development

2. not yet generating significant revenue from any product or service

22

Development stage enterprise financial statements

Report both one year and cumulative results on

Income statement
Statement of cash flows
Balance sheet - report cumulative losses since
inception in Stockholder's equity

23

Organization costs

Expensed immediately
Includes legal costs of incorporation

24

How are legal costs of incorporation related to organization costs/forming a new organization reported?

expensed immediately

25

IFRS - INTANGIBLE ASSETS
Cost Model

Intangible asset
Cash

Amortization expense
Accumulated amortization

Impairment loss - IS
Accumulated amortization of IA
#impairment loss

Accumulated amortization
Impairment recovery - IS
# up to amounts previously recognized
for impairment loss only

26

IFRS - INTANGIBLE ASSETS
Revaluation Model

Intangible asset
Cash

Option to Revaluation Model:

Intangible asset
Revaluation surplus - OCI
#adjustment to FV

Revaluation Surplus - to zero
Revaluation loss -IS
Intangible asset
#impairment loss

Intangible asset
Revaluation surplus-OCI

New carrying value should not exceed the carrying amount before impairment.