Intangibles Flashcards
(7 cards)
When are R&D costs excluded from capitalization by the buyer?
R&D costs are excluded if not included in the purchase price. ASC 350 states only the amount paid by the buyer is capitalized.
How are copyrights amortized under GAAP?
Copyrights are amortized over their estimated useful life, not their legal life. If the useful life is finite, use straight-line amortization unless another method better reflects usage.
How are costs treated under a cloud computing arrangement (CCA) when no software license is included?
Example:
Alpha Co. signs a $15,000 one-year CCA starting March 1. On Jan 1, it spends $5,000 on implementation costs that improve functionality. The software is amortized over 5 years.
What total expense should Alpha report in Year 1?
If a CCA does not include a software license, it’s treated as a service contract, meaning the subscription fee is expensed as services are received (typically monthly).
Implementation costs that improve functionality are capitalized and amortized over their useful life. All other setup costs are expensed immediately.
$15,000 × 10/12 = $12,500 service expense
$5,000 ÷ 5 = $1,000 amortization
Total = $13,500
Which costs related to a self-developed patent are capitalized under GAAP?
Example:
Alta Co. spends:
$400,000 developing a new idea for a patented product
$40,000 on legal fees to apply for the patent
$50,000 to successfully defend the patent in court
What amount should be capitalized?
Rule:
Capitalize: legal fees to file the patent, and successful legal defense
Expense: costs of developing the idea (treated as R&D), and unsuccessful defense costs
A:
$90,000
Only the $40,000 (application) and $50,000 (successful legal defense) are capitalized.
Which costs related to patents are capitalized, and when are patents tested for impairment?
A:
Capitalize:
* Legal fees to obtain the patent
* Legal fees for successful defense
Expense:
* R&D costs
* Legal fees for unsuccessful defense
Impairment:
* Only test if events suggest the patent may be impaired (not annually)
Which intangible assets are subject to the recoverability test under GAAP?
Only definite-life intangible assets — such as **patents **— use the recoverability test.
Patents → test for impairment in 2 steps (recoverability test, then FV comparison)
Goodwill → tested using different model (reporting unit FV comparison)
Indefinite-life intangibles (e.g., trademarks) → skip recoverability test; go straight to FV
R&D costs → expensed, not tested for impairment
How is purchased software treated under GAAP, including customization and maintenance costs?
Purchased (not customized) → capitalize and amortize
Customization → capitalize only if it enhances functionality
Maintenance & training → always expensed
