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ACCT351 (ch.10)
Intangible Assets and Goodwill
| Question | Answer |
|---|---|
| what are intangible assets? | long-lived, non-monetary assets whose costs are capitalized and reported as long-term assets on SFP |
| what are the three conditions for an intangible asset? | 1. identifiable, non-monetary, without physical substance 2. controllable by the business (by purchase or creation) 3. from which future benefits are expected to occur |
| is goodwill an intangible asset? | no, they are different |
| what are the 5 examples of intangibles mentioned? | - patents/copyrights - databases, software, web development costs - trademarks and trade names - franchise agreements, initial fees, and closing costs - purchased only customer lists, brands, publishing titles |
| what is a patent? | sole rights granted by the Canadian Patent Office to exclude others from making/using/selling an invention. Expiry after 20 years |
| what are copyrights? | grant exclusive legal right to the author to copy, publish, perform, film, or record literary, artistic, or music material. Protects authors during their lives and 50 years after |
| what are trademarks? | a symbol, logo, brand emblem, words established to represent a company or product. Renewable after 15 years |
| what are the two criteria to measure and capitalize intangibles? | 1. probability that benefits will flow to the business 2. asset cost can be reliably measured *if both aren't met, item is expensed |
| what are the 5 ways intangibles can be acquired mentioned in the textbook? | 1. as a separate purchase 2. as part of a business combination (through purchase of assets, or controlling shares of the business) 3. exchange of assets 4. government grants 5. self-creation |
| what are the two phases for internally developed intangibles? | - research phase - development phase |
| how are costs treated when they are incurred during the research phase? | they are all expensed (doesn't relate to identifiable product or process) |
| which phase is applied by default if there is uncertainty about which is appropriate? | research phase |
| what activities are included in the research phase? | all original/planned investigation activities including evaluation/selection of products or processes from several possible alternatives |
| what activities are included in the development phase? | - where application of research findings begin before commercial production - includes designing/testing/constructing prototypes, models, pilot plans chosen from alternatives in the research phase, as well as costs for new tools, templates, castings |
| what are the 6 criteria for costs to be capitalized during the development phase? | 1. technical feasibility of finishing intangibles 2. management intent to complete it for use/sale 3. entity able to use or sell it 4. adequate resources are available 5. established probability of future economic benefits 6. costs reliably measured |
| if costs are expensed because they don't meet the 6 criteria for capitalization in the development phase, can they be capitalized later if they meet the criteria? | no they cannot |
| what are the 7 costs ineligible for capitalization? | - business start-up costs - training - advertising and promotion - internal generated branding/customer lists - relocation - reorganizing costs - costs after asset ready for use/sale |
| what 3 types of costs are eligible for capitalization after the 6 criteria have been met? | - direct materials - direct labor - other direct costs and directly attributable overhead |
| how are intangibles subsequently measured under IFRS and ASPE? | ASPE: cost model only IFRS: cost model. revaluation model can be used if asset's fair value can be determined in an active market (rarely exists) |
| what is the cost model of subsequently measuring intangibles? | - asset initially recorded at costs - subsequently CV will be cost, less accumulated amortization and impairment loss since acquisition if any - on disposal, CV is removed from accounts and any gain/loss is recorded as net income (POD-CV) |
| what are the two methods for measuring amortization of intangibles? | units of production or straight-line (usually residual of 0) |
| what are the three main criteria for estimating useful life of intangibles? | - expected use of assets - limits imposed by law/contract - impact of obsolecense and tech advances |
| when does amortization of intangibles begin and end? | begins: when asset is ready for use ends: when asset is sold |
| how are changes in useful life, residual value, and amortization method applied for intangibles? | prospectively as changes in estimates |
| when are intangibles reviewed for impairment under ASPE and IFRS? | ASPE: whenever circumstances indicate CV of asset might not be recoverable IFRS: at end of each reporting period |
| what methods are used for impairment and derecognition of intangibles under IFRS and ASPE? | ASPE: cost recovery impairment model IFRS: rational equity model |
| when is impairment recognized under cost-recovery model (ASPE)? | only when circumstances indicate CV might not be recoverable |
| what is the recoverability test under the cost-recovery model (ASPE)? | if CV is greater than undiscounted future cash flows, asset is impaired |
| what is the calculation of impairment loss under cost-recovery model (ASPE)? | Asset CV - FV |
| are impairment reversals allowed under cost recovery model (ASPE)? | not permitted |
| what is the assets recoverable amount under the rational equity impairment model (IFRS)? | higher of value in use (discounted cash flows), and FV less costs to sell |
| how is impairment recognized under rational equity model (IFRS)? | assessment made as end of each reporting period to see if asset is impaired |
| how is impairment loss calculated under rational equity model (IFRS)? | if CV > recoverable amount, impairment is the difference |
| are reversals of impairment allowed under the rational equity model (IFRS)? | if recoverable amount increased, reversal is allowed but can't exceed assets CV excluding impairments |
| what is the journal entry for impairment under IFRS and ASPE? | loss on impairment----------------------------------$$$ accumulated impairment losses - X asset-------------$$$ |
| what is the revised amortization calculation under the rational equity model (IFRS)? | revised amortization = (CV after impairment - residual value)/estimated remaining life |
| how are value in use/discounted cash flows calculated using a financial calculator? | N= # years I/Y= discount rate PMT= annual cash flows FV= costs to sell (negative value) |
| when does goodwill arise? | when a company purchases another business and pays more than the FV of it's net identifiable assets (excess is goodwill) |
| what are net identifiable assets? | total identifiable assets - total identifiable liabilities |
| are goodwill and intangibles identified together? | no, they're identified separate because goodwill is not separately identifiable and has no contractual or legally enforceable rights |
| when is the only circumstance goodwill can be recognized? | third-party purchase |
| how are identifiable assets and liabilities reported on date of purchase of a business? | at their fair values |
| what are the three assets exempt from recording as goodwill upon purchase of a business? | - land - inventory - patents |
| what happens to accumulated amortization or depreciation for PPE when purchased and recorded at fair value? | it disappears and starts over again |
| how should A/R and AFDA be recorded on sale of a business? | they should be reported as they are (not netted out) |
| is goodwill amortized? | no because it has an indefinite life. It is however, evaluated for impairment (annual for IFRS, whenever circumstances indicate impairment for IFRS) |
| how is impairment applied to goodwill? | because it's not separately indentifiable, it's allocated to reporting lines (ASPE), or CGU's (IFRS) expected to benefit rom business acquisition on acquisition date |
| how is impairment to goodwill applied under ASPE? | after testing and adjusting individual assets of the CGU, impairment is applied to the whole reporting unit. If CV > FV, difference is impairment |
| how is impairment to goodwill applied under IFRS? | if CV of CGU > recoverable amount, difference is impairment. Impairment allocated first to goodwill, with further excess to remaining CGU asset's CV's on a proportional basis |
| is impairment of goodwill reversable? | no, reversals of goodwill impairment are not allowed under IFRS and ASPE |
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