Lecture 9: Intangibles

Question 1

Intangible Assets (ASC 350)

Answer 1

assets of a company which lack physical substance and provide economic benefits through the rights and privileges associated with their possessions.
May be identifiable or unidentifiable, externally acquired or internally developed

Question 2

Intangibles 3 basic forms

Answer 2

• Knowledge
• legal rights and identifiable intangibles
• Goodwill (Unidentifiable)

Question 3

Intangible Form: Knowledge

Answer 3

R&D, pre-production R&D is expensed immediately, post production expenses are capitalized.
-Costs should not be treated as R&D when they are directly related to current revenue: research performed for others for a fee, periodic design change to existing product, cost of setting up production of commercially viable product.

Question 4

Legal Rights and Identifiable Intangibles

Answer 4

patents, copyrights, trademarks, franchises, leasehold improvements

Question 5

patent

Answer 5

the costs incurred to legally protect product and process ideas resulting from research and development.

• capitalize cost of obtaining legal protection,
• unsuccessful legal defense costs are EXPENSED
• cost of defense in court,
• maximum 20-year life, but use shorter of useful or legal life.
• Do Not include R&D of product or process

Question 6

Copyright

Answer 6

protection of artists work, includes books, recordings, computer software. Life of creator plus 70 years but costs are amortized over the useful life

Question 7

Trademark

Answer 7

exclusive use of an identifying name for a product or process. External acquisition costs are amortized over their useful life. Indefinite number of renewal for periods of 10 years.

Question 8

Franchise

Answer 8

operation of a business unit under contractual arrangements with another party

Question 9

Leasehold Improvements

Answer 9

when a tenant has a long-term lease on real estate and has incurred costs to improve the property, the resulting leasehold improvement will be capitalized and amortized over the benefit period. This is the shorter of the useful life of improvements or the legal life of the lease.

Question 10

Finite Useful LIfe Intangibles

Answer 10

subject to amortization. Definite lives and are amortized over their estimated useful life. These are tested annually for impairment

Question 11

Indefinite Useful life intangibles

Answer 11

not subject to amortization. intangible assets and goodwill with indefinite useful lives are NOT amortized but tested annually for impairment.

Question 12

Indications of Impairment:

Answer 12

1. cost factors
2. Financial performance
3. environment
4. Entity-specific events
5. industry and market considerations
6. macroeconomic conditions

Question 13

Intangibles with indefinite useful lives, other than goodwill, are tested for impairment by comparing their _______ of the asset to the ________.

Answer 13

Carrying value, Fair Value

Question 14

Fair Value is determined on basis of the following approaches:

Answer 14

Market Approach: identical or comparable assets
Income Approach: future amounts of asset, revenue flow
Cost Approach: amount to replace asset

Question 15

Assets with indefinite lives (trademarks) are ______but are tested for ______ on an annual basis.

Answer 15

not amortized, impairment

Question 16

Assets with definite useful lives ( LT franchise agreement) are ______over the useful lives.

Answer 16

amortized.

Question 17

Methods of Amortization:

Answer 17

• Straight line: costs recognized equally over useful life
• Units of Sales: cost allocated based on sales to date as a percentage of estimated total sales
• Net Realizable Value: amortization recorded to reduce the CV of the intangible to the estimated remaining future benefits.
• the method chosen should be the most conservative, meaning the one that reduces the CV of the intangible to the lowest amount.

Question 18

Goodwill

Answer 18

the unidentifiable intangible associated with a company. The value cannot be determined. It is represented by the excess that a buyer is willing to pay for a business over the value of the entity’s net identifiable assets. E underlying. The reason why people but coca cola over RC cola, goodwill

Question 19

Calculation for FV of underlying assets, net

Answer 19

*if entity acquires 100% of another:
FV of all identifiable assets, tangible and intangible
(FV of liabilities acquired)
=FV of underlying net assets

Question 20

Goodwill impairment

Answer 20

CV of the reporting unit exceeds the reporting unit’s fair value, tested annually

Question 21

2 Step Impairment Test

Answer 21

1. compare the CV of reporting unit to its FV. If the CV is greater than the FV it is said to be impaired.
2. Determine the FV of the goodwill, find the FV of all the identifiable net assets:
   - cash and cash equivalents: Face Value
   -ST Receivables: NRV
   -Inventory: Replacement Cost subject to ceiling and floor
   -All remaining items are values at the price received if sold asset.
   ~Financial Assets and Liabilities: FV is PV expected CF
   ~Nonfinancial Assets: Highest and best Use

Question 22

Once the GW has been written down to impairment, the impaired becomes the GW new ____________. The amount is used for comparison of future assessments. It is is determined that GW increases, _____ ____ ____ _____.

Answer 22

Carrying Value, recoveries are not recognized.
Dr. Impaiment Loss
Cr. Goodwill (new CV of GW)

Question 23

Computer software to sell, lease, or market as a product:

Answer 23

costs associated with converting technologically feasible (working model) program into a final commercial form are CAPITALIZED. Costs prior to this are expensed as R&D. Amortization is based on most conservative method (Lowest resulting CV): SL, Units of Sales, NRV

Question 24

Costs incurred from beginning to Technological Feasibility (Have a working model)

Answer 24

Costs: Programming, design, coding and testing

These are R&D EXPENSE

Question 25

Costs from technological feasibility to production are:

Answer 25

Costs: Coding and testing after tech feas, product masters (SOFTWARE COSTS)
These are capitalized and ammortized using SL method.

Question 26

Costs after production are:

Answer 26

Costs: Duplication, training material, packaging etc
These costs are PRODUCTION COSTS are are a part of inventory and COGS
*if entity decides to market the software to outsiders, the net proceeds are first applied to the CV and once it reaches 0, can be recognized as revenue.

Question 27

Accrued Revenue or Expense

Answer 27

an amount that is being RECOGNIZED on the IS prior to payment, accrued revenue is a receivable and accrued expense is a payable. 
Dr. AR
   Cr. Revenue 
Payment:
Dr. Cash
     Cr. AR
Dr. Expense
    Cr. Paybale
Dr. Paybale
    Cr. Cash

Question 28

Deferred Revenue/Expense

Answer 28

an amount that is being paid prior to recognition on the IS. A deferred revenue is an unearned revenue and a deferred expense is a prepaid expense.

Dr. Cash
Cr. Deferred/Unearned Revenue
Dr. Deferred/Unearned Revenue
Cr. Revenue

Dr. Deferred/prepaid Expense
Cr. Cash
Dr. Expense
Cr. Deferred/prepaid expense

Question 29

Royalties

Answer 29

includes both accrued and deferred amounts, exg a publisher pays royalties to authors based on book sales that have occured (accrued expenses) and pay the authors advances on expected future book sales (deferred expenses)

Question 30

Life Insurance

Answer 30

a policy may build a cash value or cash surrender value. When life insurance premiums are paid any increase in the cash value is capitlized and remainder is expensed.

Question 31

Franchise Agreements

Answer 31

revenue should be recognized when the franchisor has substantially performed all material servieces and conditions adn collectiability is reasonably assured. Direct franchise costs are deferred until the related revenue is recognized.

Question 32

Sinking Fund

Answer 32

set aside amounts for future repayments of bonds. Cash and earnings will be accumulated in a sinking fund account and classified as a LT assest, earnings are ordinary income

Question 33

Development Stage Enterprises

Answer 33

A company that is currently devoted entirely to R&D and is not yet generating revenue from any product or services. On EXAM: Entity recognizing substantial R&D costs and no revenue= a loss, OR This type of entity should report both one year and cumulative results on the IS and Statement of CF. The balance should report the cumulative losses since inception in SHE

Question 34

Organization Costgs

Answer 34

all expenses associated with forming an organization, Legal costs etc, should be expensed immediately (For tax it will be amortized)

Question 35

Intangibles under IFRS vs GAAP

Answer 35

• Internally generated identifiable intangible assets MAY be capitalized (GAAP, NOT)
• All research costsa re expensed as incurred, but DEV costs may be CAPITALIZED (GAAP R&D are both expensed as incurred)
• Revaluation Method allowed if FV is reasonable estimated (DENTR)
• Intangibles are recognized using cost model, but those with an ACTIVE Market may be based on FV witht he Revaluation Model
• Recoveries of value impaired assets are recognized in income to the extenst of losses previously recognized.