Ch 12 Flashcards by leo Gottlieb

ESG

Sustainability report

Has 3 major categories: environmental, social and
Corporate governance

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Integrated report

Report where company discloses data on dozens of metrics

Beyond conventional balance sheet accounting

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2 main characteristics of intangible assets?

1 they lack physical existence

2 they aren’t financial instruments

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Intangible assets derive their value from…

The rights and privileges granted to the company using them

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How are purchased intangibles recorded?

Companies record at cost intangibles purchased from

Another party

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What are 5 typical costs included in the valuation of intangible assets?

1 all acquisition costs 
2 expenditures to make intangible asset ready for intended use
3 purchase price
4 legal fees
5 incidental expenses

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How is the cost of the intangible determined when it is acquired in an exchange for stock or other assets? 2 possibilities

Fair value of the consideration given

Or fair value of intangible received (whichever is more evident)

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Business combination

Transaction where purchaser obtains control of 1 or more businesses

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What do companies only capitalize when developing the intangible?

Only direct costs incurred such as legal fees

The rest is expensed

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Amortization

Allocation of cost of intangible assets in systematic way

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Which types of intangibles are and are not amortized?

Limited useful life intangibles are amortized

Indefinite useful life intangibles are not amortized

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Evaluating limited life intangibles for impairment

Impairment loss should be recognized if carrying amount

Of intangible is not recoverable and exceeds its fair value

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Indefinite life intangibles

If no factors legal, regulatory, contractual or competitive
Limit useful life of intangible

No foreseeable limit in period of time intangible is expected
To provide cash flow

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Impairment test for limited life intangibles? How often should it be performed?

Only fair value test is performed, not the recoverability test

Should be performed annually

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6 major categories of intangible assets?

1 marketing related intangible assets
2 customer related intangible assets
3 artistic related intangible assets
4 contract related intangible assets
5 technology related intangible assets
6 goodwill

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Marketing related intangible assets, give examples

Used in marketing or promotion of products or services

Ex. Trademarks, newspaper mastheads,
Internet domain names and noncompetition agreements

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Trademark AKA Trade name

Word, phrase or symbol that distinguishes or identifies

A particular company or product

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Registration with the US Patent and Trademark Office provides legal protection for an…

Indefinite number of renewals for periods of 10 years each

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Customer related intangible assets, examples

Result from interaction with outside parties

Ex. Customer lists, order or protection backlogs,
Contractual and noncontractual customer relationships

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Artistic-related intangible assets

Involve ownership rights to plays, literary works, musical
Works, pictures, photographs, video and audiovisual material

Copyrights protect these ownership rights

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Federally granted right that all authors, painters, musicians,
Sculptors and other artists have in their creations and
Expressions

For the life of the creator plus 70 years

Contract related intangible assets, examples

Represent value of rights that arise from contractual arrangements

Ex. Franchise, liscensing agreements, construction permits,
Broadcast rights, service or supply contracts

Franchise

Contractual arrangement where franchiser grants franchisee
The right to sell products or services, use certain trademarks,
Or perform certain functions in designated geographic region

Liscences or permits, examples

Operating rights

Ex. Fox, CBS, NBC paid $27.9 billion for the right to
Broadcast the NFL over 8 years

A company should amortize the cost of a franchise or liscense with a...

Limited life as an operating expense over the life of the | Franchise

Technology-related intangible assets, examples

Relate to innovations or technological advances Ex. Patented technology, trade secrets granted by US Trademark and Patent Office

Patent

Gives holder exclusive right to use, manufacture and sell Product or process for period of 20 years without Interference by others

1 Product patents, 2 process patents

1 Cover actual physical products 2 Govern process of making products

When protecting a patent a company must expense as incurred...

Any R&D costs related to development of product, process, | Or idea that it subsequently patents

Amortization: patents

Companies should amortize cost of patent over its legal Life or it's useful life (period where benefits are received) Whichever is shorter

Goodwill AKA plug, gap filler, master valuation account

``` Excess of cost of purchase over fair value of identifiable Net assets (assets less liabilities) acquired ```

Internally created goodwill

Should not be capitalized in accounts

Capitalizing goodwill only when it is purchased in an arms length transaction and not capitalizing any goodwill generated internally is another example of...

Faithful representation winning out over relevance

Master valuation approach: goodwill

Difference btw [(cost of assets or enterprise acquired) + | fair value of net identifiable assets)] - (liabilities

Companies that recognize goodwill in a business combination consider it to have an...

Indefinite life and should not amortize it

Companies adjust goodwill's carrying value only when...

Goodwill is impaired

Bargain purchase

When purchaser pays less than fair value of the net Identifiable assets Recorded As a gain for purchaser

Impairment, what do they apply to?

Carrying amount of long lived asset (property, plant, equip. Or intangible asset) is not recoverable Therefore write-off needs to be recorded Apply to property, plant and equip. And limited life intangibles

Recoverability test

Company estimates future cash flows expected from use | Of asset and eventual disposal

Fair value test

Test measures the impairment loss by comparing the Asset's fair value with it's carrying amount Impairment loss = carrying amount of asset - fair value of impaired asset

Restoration of impairment losses

Companies may not recognize restoration of previously | Recognized impairment loss

Research and Development Costs

Frequently result in development of patents and copyrights Companies must expense all R&D costs when incurred

IFRS VS GAAP: Research and Development

IFRS requires capitalization of appropriate development | Expenditures, this conflicts with GAAP

5 costs associated with R&D activities

``` 1 materials, equipment and facilities 2 personnel 3 purchased intangibles 4 contract services 5 indirect costs ```

Research and Development accounting treatment: materials, equipment and facilities

Expense entire costs unless items have alternative future Uses If alt. future uses, carry items as inventory + allocate as Consumed or capitalize and depreciate as used

Research and Development accounting treatment: personnel

Expense as incurred salaries, wages and other related | Personnel costs in R&D

Research and Development accounting treatment: purchased intangibles

Recognize and measure at fair value Account with respect to limited or unlimited life of intangible

Research and Development accounting treatment: Contract services

Expense costs with services performed by others in | connection with R&D

Research and Development accounting treatment: indirect costs

Include reasonable allocation of indirect costs in R&D Costs except general and administrative cost which must be clearly Linked

Startup costs, examples

Incurred for one-time activities to start new operation Ex. Open new plant, introduce new product or service, Conduct business in new territory

Organizational costs

Legal and state fees incurred to organize a new business | Entity

Presentation of intangibles on the balance sheet?

The balance sheet should present all intangible items | separately except goodwill