Ch12-181108171610 - the solution of the book of intermediate accounting IFRS EDITION second edition PDF

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the solution of the book of intermediate accounting IFRS EDITION second edition chapter 12...

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CHAPTER 12 Intangible Assets ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics

Questions

1.

Intangible assets; concepts, definitions; items comprising intangible assets.

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14

2.

Patents; franchise; organization costs; trade name.

9, 10, 11, 25

3.

Goodwill.

4. 5.

Brief Exercises

Concepts Exercises Problems for Analysis 1, 2, 3, 5, 6

1, 2, 3, 4

1, 2, 3

1, 2, 3, 4, 7, 12, 13

4, 5, 6, 7, 8, 9, 10, 11, 13

1, 2, 3, 4, 6

1, 2

12, 13, 14, 18

5, 7, 8

6, 12, 13, 15

5, 6

Impairment of intangibles.

15, 16, 17, 18

6, 7, 8

14, 15

6

Research and development costs and similar costs.

19, 20, 21, 22, 23, 24

9, 10, 11, 12

4, 16, 17

1, 2, 3

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12-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives

Brief Questions Exercises Exercises Problems

1. Describe the characteristics of intangible assets.

1

2. Identify the costs to include in the initial valuation of intangible assets.

2, 24

1, 2, 3, 4

5, 7, 9, 10, 11

1, 2, 3, 6

1, 2

3. Explain the procedure for amortizing intangible assets.

3, 7, 8, 10, 15, 25

1, 2, 3, 4, 12, 13

4, 5, 6, 7, 9, 10, 11, 13

1, 2, 3, 6

2

4. Describe the types of intangible assets.

4, 11, 15

5. Explain the accounting issues for recording goodwill.

5, 12, 13, 14, 18

5

12, 13, 15

5, 6

6. Explain the accounting issues related to intangible-asset impairments.

6, 7, 16, 17, 18

6, 7, 8

14, 15

5, 6

7. Identify the conceptual issues related to research and development costs.

10, 19, 24

8. Describe the accounting for research and development and similar costs.

9, 20, 21, 22, 23, 24

9.

12-2

Indicate the presentation of intangible assets and related items.

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1, 2, 3

Concepts for Analysis 1, 2, 3, 4

1, 2, 3

1

5, 9

9, 10, 11, 12 13

4, 6, 8, 16, 17

3, 4

4

3, 4

4, 6

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ASSIGNMENT CHARACTERISTICS TABLE Description

Level of Difficulty

Time (minutes)

E12-1 E12-2 E12-3 E12-4 E12-5 E12-6 E12-7 E12-8 E12-9 E12-10 E12-11 E12-12 E12-13 E12-14 E12-15 E12-16 E12-17

Classification issues —intangibles. Classification issues —intangibles. Classification issues —intangible asset. Intangible amortization. Correct intangible asset account. Recording and amortization of intangibles. Accounting for trade name. Accounting for organization costs. Accounting for patents, franchises, and R&D. Accounting for patents. Accounting for patents. Accounting for goodwill. Accounting for goodwill. Copyright impairment. Goodwill impairment. Accounting for R&D costs. Accounting for R&D costs.

Moderate Simple Moderate Moderate Moderate Simple Simple Simple Moderate Moderate Moderate Moderate Simple Simple Simple Moderate Moderate

15–20 10–15 10–15 15–20 15–20 15–20 10–15 10–15 15–20 20–25 15–20 20–25 10–15 15–20 15–20 15–20 10–15

P12-1 P12-2 P12-3 P12-4 P12-5 P12-6

Correct intangible asset account. Accounting for patents. Accounting for franchise, patents, and trade name. Accounting for R&D costs. Goodwill, impairment. Comprehensive intangible assets.

Moderate Moderate Moderate Moderate Complex Moderate

15–20 20–30 20–30 15–20 25–30 30–35

CA12-1 CA12-2 CA12-3 CA12-4

Accounting Accounting Accounting Accounting

Moderate Moderate Moderate Moderate

20–25 25–30 25–30 20–25

Item

for pre-opening costs. for patents. for research and development costs. for research and development costs.

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SOLUTIONS TO CODIFICATION EXERCISES CE12-1 According to the Master Glossary: (a) Intangible assets are assets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.) (b) An asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized. For ease of reference, this term also includes the immediate charge recognized by not-for-profit entities in accordance with paragraph 958-805-25-29. (c) Research and Development: Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (referred to as product) or a new process or technique (referred to as process) or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives, construction of prototypes, and operation of pilot plants. (d) A development stage entity is an entity devoting substantially all of its efforts to establishing a new business and for which either of the following conditions exists: 1. Planned principal operations have not commenced. 2. Planned principal operations have commenced, but there has been no significant revenue therefrom.

CE12-2 See FASB ASC 350-30-35. In the discussions related to “Determining the Useful Life of an Intangible Asset” 35-1

The accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized.

35-2

The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity. The useful life is not the period of time that it would take that entity to internally develop an intangible asset that would provide similar benefits. However, a reacquired right recognized as an intangible asset is amortized over the remaining contractual period of the contract in which the right was granted. If an entity subsequently reissues (sells) a reacquired right to a third party, the entity includes the related unamortized asset, if any, in determining the gain or loss on the reissuance.

12-4

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CE12-2 (Continued) 35-3

The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of all pertinent factors, in particular, all of the following factors with no one factor being more presumptive than the other: a. The expected use of the asset by the entity. b. The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate. c. Any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. Thus, the useful lives of such intangible assets cannot extend beyond the length of their legal rights and may be shorter. d. The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph. e. The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels). f. The level of maintenance expenditures required to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life). As in determining the useful life of depreciable tangible assets, regular maintenance may be assumed but enhancements may not. Further, if an income approach is used to measure the fair value of an intangible asset, in determining the useful life of the intangible asset for amortization purposes, an entity shall consider the period of expected cash flows used to measure the fair value of the intangible asset adjusted as appropriate for the entity-specific factors in this paragraph.

35-4

If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon —that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity. Such intangible assets might be airport route authorities, certain trademarks, and taxicab medallions.

CE12-3 According the FASB ASC 730-10-50: 50-1

Disclosure shall be made in the financial statements of the total research and development costs charged to expense in each period for which an income statement is presented. Such disclosure shall include research and development costs incurred for a computer software product to be sold, leased, or otherwise marketed.

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CE12-4 According the FASB ASC 926-720-25, General Overall Deals 25-1

An entity may enter into an overall deal arrangement. An entity shall charge the costs of overall deals that cannot be identified with specific projects to expenses as they are incurred over the related time period. > Exploitation Costs

25-2

12-6

An entity shall account for advertising costs in accordance with the provisions of Subtopic 720-35. That is, expense as incurred.

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ANSWERS TO QUESTIONS 1. The two main characteristics of intangible assets are: (a) they lack physical substance. (b) they are not a financial instrument. 2. If intangibles are acquired for stock, the cost of the intangible is the fair value of the consideration given or the fair value of the consideration received, whichever is more clearly evident. 3. Limited-life intangibles should be amortized by systematic charges to expense over their useful life. An intangible asset with an indefinite life is not amortized. 4. When intangibles are created internally, it is often difficult to determine the validity of any future service potential. To permit deferral of these types of costs would lead to a great deal of subjecttivity because management could argue that almost any expense could be capitalized on the basis that it will increase future benefits. The cost of purchased intangibles, however, is capitalized because its cost can be objectively verified and reflects its fair value at the date of acquisition. 5. Companies cannot capitalize self-developed, self-maintained, or self-created goodwill. These expenditures would most likely be reported as selling expenses. 6. Factors to be considered in determining useful life are: (a) The expected use of the asset by the entity. (b) The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate. (c) Any legal, regulatory, or contractual provisions that may limit useful life. (d) Any legal, regulatory or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost. (e) The effects of obsolescence, demand, competition, and other economic factors. (f) The level of maintenance expenditure required to obtain the expected future cash flows from the asset. 7. The amount of amortization expensed for a limited-life intangible asset should reflect the pattern in which the asset is consumed or used up, if that pattern can be reliably determined. If the pattern of production or consumption cannot be determined, the straight- line method of amortization should be used. 8. This trademark is an indefinite life intangible and, therefore, should not be amortized. 9. The $190,000 should be expensed as research and development expense in 2014. The $91,000 is expensed as selling and promotion expense in 2014. The $45,000 of costs to legally obtain the patent should be capitalized and amortized over the useful or legal life of the patent, whichever is shorter. 10. Amortization Expense ....................................................................... Patents (or Accumulated Patent Amortization) ...........................

35,000 35,000

Straight-line amortization is used because the pattern of use cannot be reliably determined. 11. Artistic-related intangible assets involve ownership rights to plays, pictures, photographs, and video and audiovisual material. These ownership rights are protected by copyrights. Contract-related intangible assets represent the value of rights that arise from contractual arrangements. Examples are franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.

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Questions Chapter 12 (Continued) 12. Varying approaches are used to define goodwill. They are (a) Goodwill should be measured initially as the excess of the fair value of the acquisition cost over the fair value of the net assets acquired. This definition is a measurement definition but does not conceptually define goodwill. (b) Goodwill is sometimes defined as one or more unidentified intangible assets and identifiable intangible assets that are not reliably measurable. Examples of elements of goodwill include new channels of distribution, synergies of combining sales forces, and a superior management team. (c) Goodwill may also be defined as the intrinsic value that a business has acquired beyond the mere value of its net assets whether due to the personality of those conducting it, the nature of its location, its reputation, or any other circumstance incidental to the business and tending to make it permanent. Another definition is the capitalized value of the excess of estimated future profits of a business over the rate of return on capital considered normal in the industry. A bargain purchase (or negative goodwill) occurs when the fair value of the assets purchased is higher than the cost. This situation may develop from a market imperfection. In this case, the seller would have been better off to sell the assets individually than in total. However, situations do occur (e.g., a forced liquidation or distressed sale due to the death of the company founder), in which the purchase price is less than the value of the identifiable net assets. 13. Goodwill is recorded only when it is acquired by purchase. Goodwill acquired in a business combination is considered to have an indefinite life and therefore should not be amortized, but should be tested for impairment on at least an annual basis. 14. Many analysts believe that the value of goodwill is so subjective that it should not be given the same status as other types of assets such as cash, receivables, inventory, etc. The analysts are sim ply stating that they believe that presentation of goodwill on the balance sheet does not provide any useful information to the users of financial statements. Whether this is true or not is a difficult point to prove, but it should be noted that it appears contradictory to pay for the goodwill and then immediately write it off, denying that it has any value. 15. Accounting standards require that if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, then the carrying amount of the asset should be assessed. The assessment or review takes the form of a recoverability test that compares the sum of the expected future cash flows from the asset (undiscounted) to the carrying amount. If the cash flows are less than the carrying amount, the asset has been impaired. The impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset. The fair value of assets is measured by their fair value if an active market for them exists. If no market price is available, the present value of the expected future net cash flows from the asset may be used. 16. Under U.S. GAAP, impairment losses on assets held for use may not be restored. 17. Impairment losses are reported as part of income from continuing operations, generally in the “Other expenses and losses” section. Impairment losses (and recovery of losses for assets to be disposed of) are similar to other costs that would flow through operations. Thus, gains (recoveries of losses) on assets to be disposed of should be reported as part of income from continuing operations. 18. The amount of goodwill impaired is $40,000, computed as follows: Recorded goodwill .................................................. $400,000 Implied goodwill ...................................................... (360,000) Impaired goodwill .................................................... $ 40,000

12-8

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Questions Chapter 12 (Continued) 19. Research and development costs are incurred to develop new products or processes, to improve present products, or to discover new knowledge. R&D expenditures present problems of (1) identifying the costs associated with particular activities, projects, or achievements, and (2) determining the magnitude of the future benefits and the length of time over which such benefits may be realized. R&D activities may incur costs classified as follows: (a) materials, equipment, and facilities, (b) personnel, (c) purchased intangibles, (d) contract services, and (e) indirect ...