FAR-F3-M7-Intangibles Flashcards
How are intangible assets with a definite life tested for impairment?
For intangible assets with a definite life, impairment is tested in 2 steps.
Step 1: The UNDISCOUNTED future net cash flows
MINUS net carrying value
= Positive (no impairment) or negative (impairment)
Step 2: If negative, then impairment must be recognized.
If Assets Held for Use then
FAIR VALUE or DISCOUNTED cash flows
MINUS Carrying value
= Impairment Loss
1. Write asset down.
2. Amortize new cost
3. Restoration of impairment loss not permitted
If Assets held for DISPOSAL or SALE then
FAIR VALUE or DISCOUNTED cash flows
minus carrying value
= Impairment Loss
+Cost of Disposal
= Total Impairment Loss
1. Write asset down
2. No amortization taken
3. Restoration of impairment loss permitted.
Can intangible assets with an indefinite life be tested using the recoverability test?
No, because the recoverability test compares the carrying value of the asset against the undiscounted cash flows generated from the use of the asset. It is impossible to determine the cash flows generated from an intangible asset with an infinite life.
How are intangible assets with an indefinite life tested for impairment?
Intangible assets with an infinite / indefinite life are tested for impairment in 1 step. We compare the fair value of the intangible asset to its carrying value. If the fair value is less than the carrying value, then an impairment loss is recorded in an amount equal to the difference between fair value and carrying value.
Is restoration of previously recognized impairment losses on GOODWILL allowed?
No, impairment losses on goodwill cannot be reversed once recognized.
Are internally developed intangible assets expensed or capitalized?
Internally developed intangible assets are expensed except for certain costs that can be specifically identified. These certain costs can be capitalized such as legal fees to defend an internally developed intangible asset like a Trademark. Or design costs of a trademark, these can be capitalized as well.
Are research and development costs expensed or capitalized?
GAAP requires that R and D costs be expensed when incurred. The ONLY exceptions are when 1. Materials, equipment or facilities developed have alternative future uses OR 2. The R and D costs are undertaken on behalf of others under a contractual agreement.
Are start up costs expensed or capitalized?
Start up costs, including organizational costs are expensed when incurred.
Are initial franchise fees capitalized or expensed?
Initial franchise fees are capitalized and amortized over the expected period of benefit of the franchise. Franchise fees such as those calculated on a percentage of revenue earned by the franchisee and paid to the franchisor are considered operating expenses and are not capitalized.
When are costs for developing computer software to be sold, expensed and capitalized?
Expense costs incurred until technological feasibility is established. Technological feasibility is considered established when a working model is completed or a detailed program design is completed. After technological feasibility is established, you capitalize costs incurred up until the point when the product is available for sale. Once the product is available for sale, the capitalized costs are amortized using the percentage of revenue method or straight line method.
One of the ways capitalized software costs (held for sale) can be amortized is using the percentage of revenue method. What is the formula for this?
Percentage of revenue = total amount capitalized * (current gross revenue for period / total projected gross revenue for period)
How are capitalized software costs held for personal use amortized?
Using the straight line method.
Can all intangible assets be amortized?
No, only intangible assets with a definite life can be amortized over the useful life of the asset. The useful life is how long the asset will provide a benefit, not necessarily the legal life on paper. Definite life intangibles are amortized over their useful life using the straight line method.
Can goodwill be amortized?
Normally, intangible assets with an indefinite life cannot be amortized as its impossible to determine the useful life of the asset. However, private companies can choose to amortize their goodwill over 10 years on a straight line basis. Public companies cannot amortize goodwill. Goodwill however can be impaired.
Can indefinite life intangibles be amortized?
No, intangibles with an indefinite useful life are not amortized. Goodwill however, can be amortized straight line over 10 year period for NONPUBLIC COMPANIES.
Is restoration of impairment losses on indefinite life intangible assets that are not goodwill, allowed?
Restoration of indefinite life intangible assets, other than goodwill is allowed if the assets are held for disposal (sale). If the assets are held for use, then restoration is not allowed.
