Chapter 12: Intangible Assets

Question 1

Intangibles

Answer 1

Lack physical existence and are not financial instruments.

Question 2

Amortization

Answer 2

Allocation of the cost of intangible assets in a systematic way.

Question 3

What costs are included in purchased intangibles?

Answer 3

• Purchase Price
• Legal fees
• Incidental expenses

Question 4

How are internally developed intangibles treated in the financial statements?

Answer 4

• Generally expensed
• Legal costs capitalized

Question 5

Limited-Life Intangibles

Answer 5

Judged to have a limited useful life, which reflects the periods over which these assets will contribute to cash flows.

• Capitalize, if purchased
• Expense, if created
• Amortize over useful life
• Perform recoverability test and then fair value test

Question 6

What factors should be considered in determining useful life of a limited-life intangible?

Answer 6

• Expected use of asset
• Legal limitations
• Ability to renew contracts
• Level of maintenance

Question 7

Indefinite-Life Intangibles

Answer 7

There is no foreseeable limit on the period of time over which they are expected to provide cash flows.

• Capitalize, if purchased
• Expense, if created
• Do not amortize
• Tested for impairment at least annually
• Fair value test only

Question 8

Marketing related intangibles

Answer 8

• Trademarks and trade names renewal periods 10 years
• Capitalize acquistion costs
• No amortization

Question 9

Customer related intangibles

Answer 9

• Capitalize acquistion costs
• Amortized to expense over useful life

Question 10

Artistic related intangibles

Answer 10

• Copyright granted for the life of the creator plus 70 years
• Capitalize costs of acquiring and defending
• Amortized to expense over useful life

Question 11

Contract related intangibles

Answer 11

• Franchise (or license) with a limited life should be amortized to expense over the life of the franchise
• Franchise with an indefinite life should be carried at cost and not amortized

Question 12

Technology related intangibles

Answer 12

• Patent gives holder exclusive use for 20 years
• Capitalize costs of purchasing a patent
• Expense any R&D costs in developing a patent
• Amortize over legal life or useful life, whichever is shorter

Question 13

Goodwill

Answer 13

The excess of cost of a business purchase over fair value of the identifiable net assets acquired.

It represents the future benefits arising from the other assets acquired in a business combination that are not individually identified.

Important Characteristics:

• Has indefinite life
• Not amortized
• Only adjust for impairment

Question 14

Bargain Purchase

Answer 14

Purchase price < Fair value of net assets acquired

Amount recorded as gain by purchaser

Question 15

Fair value test

Answer 15

If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference.

Question 16

What is the process to determine impairment on goodwill?

Answer 16

1. Compare the FMV of the reporting unit to its BV
   
   • FMV > BV - no impairment
   • FMV < BV - may be impaired
2. Determine the fair value of the implied value of goodwill
   
   • Fair Value of reporting unit - Net identifiable assets (excluding goodwill) = Implied value of goodwill
3. Compare implied value of goodwill to carrying amount of goodwill
   
   • Implied value > BV - no impairment
   • Implied value < BV - impairment
     
     • Implied value of goodwill - Carrying amount of goodwill = Loss on impairment

Question 17

What are research & development costs?

How are they treated in the financial statements?

Answer 17

Research: Investigation aimed to discover new knowledge

Development: Research is turned into a plan to create a new product or improve a product

All R&D costs are expensed in period incurred because of:

Uncertain benefits

Difficult to match to revenues

Question 18

What is expensed under R&D costs?

Answer 18

1. Materials, equipment, and facilities
   
   • Unless the items have alternative future uses - capitalize
     
     • Depreciation on items are expensed
2. ​Personnel
3. Contract services
4. Indirect costs, except G&A unless related

Question 19

How are purchased R&D treated if:

Developed technology

In-Process R&D

R&D costs after purchase

What type of disclosures are required?

Answer 19

Developed technology: capitalized and amortized

In-Process R&D: capitalized at fair value & considered indefinite

• If successful - amortize
• If unsuccessful - expense

R&D costs after purchase: expensed

Disclosure of total R&D expense incurred during period required.

Question 20

What are some costs that are similar to R&D?

Answer 20

• Start-up costs for a new operation
• Initial operating losses
• Advertising costs
• Computer software costs

Question 21

When should you test for impairment for tangible and finite-life tangible assets?

What is the impairment test?

Answer 21

When events or circumstances indicate book value may not be recoverable.

Step 1: An impairment is required only when book value is not recoverable (undiscounted sum of estimated future cash flows less than book value).

Step 2: The impairment loss is the excess of book value over fair value.

Question 22

When should you test for impairment for indefinite life intangible assets (other than goodwill)?

What is the impairment test?

Answer 22

Test at least annually, or more frequently if indicated.

If book value exceeds fair value, an impairment loss is recognized for the difference.

Question 23

When should you test for impairment for goodwill?

What is the impairment test?

Answer 23

Tested at least annually, or more frequently if indicated.

Step 1: A loss is indicated when the fair value of the reporting unit is less than its book value.

Step 2: An impairment loss is measured as the excess of book value over implied fair value.

Question 24

What is the new goodwill impairment guidance?

Answer 24

• Effective 12/15/2019
• Impairment test is done by comparing the FV of a reporting unit with its BV
• Impairment loss = BV of reporting unit - FV of reporting unit
• Loss recognized should not exceed the total amount of goodwill alloated to that reporting unit