Far 2-Intangibles

Intangible assets refer to assets of a company which lack physical substance and provide economic benefits through the rights and privileges associated with their possession. They may be identifiable or unidentifiable. They may also be externally acquired(purchased at fair value) or internally developed(ASC350). They come in 3 basic forms:

• 1. Knowledge
• 2. Legal rights & identifiable intangibles
• 3. Goodwill(unidentifiable intangibles)

Knowledge is developed by a process of R&D. knowledge intangibles are simply R&D and they are expensed immediately. R&D are costs used in making a new product or testing the new product usually before technically feasible stage happens.

• Costs that shouldn't be treated as research and development when they are directly related to current revenue such as:
• -research performed for others for a fee.
• -periodic design changes to existing products.
• -costs for setting up production of a commercially viable product.
• *These costs are part of sales, and will be capitalized and recognized as appropriate.

Journal entry for R&D intangibles simply:

• Expense 10,000
•     Cash 10,000

these types of intangibles include: patents, copyrights, trademarks, franchises, leasehold improvements and licenses.

• Patents- costs incurred to legally protect product and process ideas resulting from R&D are not part of it but are instead a form of legal right known as a patent. Some important points with patents:
• -Capitalize cost of obtaining legal protection
• -include cost of successful defense in court
• -unsuccessful defense is expensed
• -Max 20 year life, but use shorter legal life or useful life.

Copyrights-protection of artistic works, include books, recording, and computer software. The copyright period is for the life of the creator plus 70years, but the chosts should be amortized over its useful life.

Trademarks- exclusive use of an identifying name for a product or process. External acquisition costs are amortized over their useful life. Idefinite number of renewals for periods of 10years each.

Franchises- Operation of a business unit under contractual arrangements with another party.

*All similarily recorded to patents. With defense of intangible to be capitalized, however they adjust on what is amortized over what.

Leasehold Improvements- leasehold improvements should be capitalized and amortized over the benefit period. This will be the shorter of the: useful life of the improvements or legal life of the lease, including extensions that are reasonably assured.

All these intangibles should be amortized the same cost less residual equals the amount amortized and they all should be tested for impairment annually. The life used to amortize should usually be the shorter alternative to keep conservatism in check.

No. only finite life intangible assets are subject to amortization as infinite assets will never end , so how can you amortize.

• the 3 methods of amortization that can be used are the following:
• 1. Straight-line-costs recognized equally
• 2. Units of Sales-costs are allocated based on the sales to date as a percentage of estimated total sales.
• 3. Net realiable value- amortize to bring the carrying value down to the NRV(FV-Costs to sell)

Goodwill is the unidentifiable intangibles that make something worth more than the sum of its identifiable assets. Its value cannot be directly determined, so instead its the excess a buyer is willing to pay for something over what its worth. Goodwill like land doesn't depreciate or amortize.

• To calculate is simply:
• Purchase price 600
• FMV of NA 500
• BV of NA 300

Goodwill is excess of FMV in Purchase in this case Goodwill will be 100

Impairment for all intangibles other than goodwill is simply CV vs FV and write down to FV if CV valued to high.

• Goodwill is tested a little differently. To test goodwill follow these 3 steps:
• 1. CV vs FV to see it loss
• 2. If loss then we look at how much greater purchase price is greater than FMV this gives us Implied Goodwill now
• 3. Compare CV to Implied Goodwill to get loss. So goodwill is written down to implied goodwill. To record simply:
• Loss x
•     Goodwill x
• *goes to continuing operations in I/S.

• GAAP gives and exception to how we record computer software costs. So basically and R&D computer software costs that are past the date of tech feasibility are capitalized, however any before tech feasibility are still expensed. Software costs are capitalized and amortized over the larger of:
• 1. Straightline or
• 2. Ratio of Revs/total revs

• Example, 5years
• so
• 1. Straightline = 1/5 = 20%
• 2. Ratio of Revs = 100/400 = 25%
• so we chose 2 because higher percentage.

this is an amount that is being recognized because you have earned them. So accrued expense means you have already done something that incurred that expense, while accrued revenue is some revenue you have earned, just haven't got the money.

this is when money is transferred but you haven't incurred the expense or revenue. So a deferred revenue is a liability because you got the money but haven't earned it yet.

when a corporation takes out life insurance out on an officer there is usually cash surrender value(this is money that can be pulled out without the death). This is recorded as an asset. for example below

assume a policy has a cash surrender value of 10,000 at the beg of year. During the year, a premium of 50,000 is paid and the cash surrender value is increased to 16,000. The entry is:

• Cash surrender value 6,000(asset)
• insurance expense 44,000
•     Cash 50,000

Intangibles may use either the CM or RM model, however in order to use the RM model the intangible asset must be traded with active prices.

Under IFRS all intangibles are tested for impairments by comparing CV and Recoverable amount. So if the CV is greater then we have impairment and you must impair to the recoverable amount.