Chpter 12 - Handout - Mervat Saleh, CA CHAPTER 12...

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Unformatted text preview: Mervat Saleh, CA CHAPTER 12 INTANGIBLE ASSETS AND GOODWILL A. Nature of Intangible Assets: 1. Intangibles are categorized by these characteristics: a. Separately identifiable b. Non physical existence c. Non-monetary d. High degree of uncertainty concerning future benefits. 2. Intangible assets: 0 Provide economic benefits over a period of years c Classified as long term assets 0 Often classified into 5 major categories (excluding goodwill): o Trademarks: Marketing-related intangible assets 0 Customer lists: Customer-related intangible assets 0 Copyrights: Artistic-related intangible assets 0 Franchises or licenses: Contract-based intangible assets 0 Patents: Technology-based intangible assets B. Recognition and Measurement: I- At Acquisition: 1. Intangible assets are recognized when: 0 it is probable that the entity will receive the expected future economic benefits, 0 the asset’s cost can be measured reliably Initially, o Intangibles should be recorded at cost. 0 Acquired for consideration other than cash, the cost is the FMV 2. Borrowing costs can be capitalized if directly attributable to the asset and incurred during the acquisition, construction, or development stage. 1 Mervat Saleh, CA 3. Prepayments are recognized as an asset only when an entity pays for goods before their delivery. 4. Internally created intangible assets are generally expensed as incurred due to the uncertainty of the future benefits. 0 Exception: IFRS allows costs for internally generated assets to be capitalized when certain criteria are met: 0 Research phase — generally expensed 0 Development phase — capitalized when future benefits are reasonably certain — 6 criteria must be met, including: 1. Technical feasibility of completing the asset 2. The entity’s intention to complete it for use or sale 3. The entity’s ability to use or sell it. 4. Availability of technical, financial, and other resources needed to complete it, and to use or sell it 5. The existence of a market for the asset if it will be sold, or its usefulness to the entity if it will be used internally 6. The ability to reliably measure the costs associated with and attributed to the asset during its development ll - Amortization 0 Using either the cost model or revaluation model. 0 Residual value is generally assumed to be zero due to uncertainties, unless there is an observable market for the asset 0 Factors to consider the useful life: The expected use of the asset; Any legal or regulatory provisions that may limit the useful life; Any legal or regulatory provision that enable renewal or extension of useful life; The effects of obsolescence, competition, and other economic factors; 999.69: The level of maintenance expenditure required to obtain the expected level of cash flows from the asset. 2 Mervat Saleh, CA lll - After Acquisition Measurement: 0 In general, most after acquisition costs are expensed. - Two models are used to measure intangibles after acquisition: the cost model (CM) and the revaluation model (RM). 0 GAAP allows only the Cost Model and it is the most widely used. 0 IFRS allows both: - The revaluation model can only be used if the asset has an active FMV. - Accounting under these two models is the same for assets with both limited and unlimited lives - For unlimited lives, the amortization amount would be 0. C. Impairment 1. Both limited-life and unlimited life intangibles are evaluated for impairment. - An impairment loss is recognized if the intangible’s carrying amount exceeds its fair value (Cost recovery impairment model used for GAAP) - Or its carrying amount is less than its recoverable amount (used for IF RS). Limited-life intangibles: 0 Timing of impairment testing: i. whenever events and circumstances indicate the carrying value may not be recoverable ( GAAP), or ii. At the end of each reporting period (IFRS). 0 Method of applying the test: i. the cost recovery impairment model (GAAP), or ii. Rational entity impairment model (IFRS). 1. Reversal of the impairment loss is limited and only applicable under IFRS, the rational entity model. Mervat Saleh, CA 2. Recoverability test: applicable under GAAP only under the cost recovery impairment model 3. Indefinite-LifeIntangibles: a. Under GAAP, they are tested for impairment whenever events and circumstances indicate the carrying value may not be recoverable, but the Fair Value Test is applied. - The indefinite-life intangible’s carrying amount is compared directly with its fair value and written down where fair value is lower. - The recoverability test does not apply to indefinite-life intangibles, as it would be impossible to measure the future cash flows objectively. b. Under IFRS, the testing must be done at least annually. 4. Derecognition 0 An intangible asset is derecognized when it is disposed of or is no longer expected to generate future economic benefits 0 The gain or loss recognized in income. D. Goodwill: 1. Goodwill is only recorded when an entire business entity is purchased. 2. Recording goodwill: a. Goodwill = Purchase Price — FMV of the net assets. b. Negative goodwill, Bargain price, arises when the fair market value of the net assets acquired is higher than the purchase price of the assets. - When negative goodwill exists, the excess is recognized as a gain. 3. Under GAAP: o Goodwill is assigned to a reporting unit. 0 The carrying amount of the goodwill is reduced when it is found to be impaired or is associated with assets to be sold or disposed of. o A goodwill impairment reversal is not allowed under either IFRS or GAAP. 4 Mervat Saleh, CA 0 The impairment test compares the carrying amount of the reporting unit with its fair value. 4. Under IFRS: o Goodwill is assigned to a cash generating unit (CGU) and 0 An assessment of the estimated value of goodwill be done on an annual basis or on an interim basis if circumstances indicate the CGU may be impaired. o A goodwill impairment test compares the carrying amount of the CGU with its recoverable amount. 0 The entry to record an impairment of goodwill is: Loss on impairment of goodwill XXX Accumulated impairment losses, goodwill XXX E. Presentation, Disclosure, Analysis, and Comparison of IFRS and GAAP 1. Disclosure: o GAAP is limited because users can assess additional information available to them. 0 Under IFRS, disclosure needs to be sufficient to allow users to assess the changes in the different classes of intangible assets, how the changes came about, the use of fair value measurements, and impairment calculations. 0 Other financial reports provided regarding intangible assets that do not appear on the balance sheet. 2. On the balance sheet: 0 Goodwill is the only intangible requiring separate, single line item disclosure. 0 All other intangibles should be aggregated and reported as a separate line item. 0 The amortization methods and rates used, and the amount of amortization expense. 10. Illustration 12-15 comparison of IFRS and GAAP. Ignore Appendix 12A Mervat Saleh, CA At acquisition After acquisition On disposal At acquisition After acquisition Revaluation increase Revaluation decrease Revaluation 0n disposal Revaluation Surplus account balance Cost Model (CM) Recognized and measured at cost. Carried at cost less accumulated amortization and any accumulated impairment losses. Difference between asset’s canying amount and proceeds on disposal is gain or loss reported in net income. Revaluation Model (RM) Recognized and measured at cost. Carried at fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent impairment losses. Record credit to Revaluation Surplus (Other Comprehensive Income) unless this reverses a previous decrease recognized in income. If so, recognize the increase in income to the extent of the prior decrease. Record debit to Revaluation Surplus (Other Comprehensive Income) to extent there is a balance associated with the same asset. Any remaining amount is recognized in income. Apply either the proportional method (both asset and accumulated amortization balances continue and are adjusted so that net amount is asset’s new fair value) or the asset adjustment method (accumulated amortization is closed to asset account and begins again at zero; asset is revalued to new amount). Either (a) bring asset to its fair value at the date of disposal, account for the revaluation increase or decrease as above, and recognize no gair or loss on disposal; or (b) recognize a gain or loss on disposal in net income equal to the difference between the proceeds on disposal and the asset’s carrying amount on the date of disposal. Either transfer amounts directly to Retained Earnings each period (equal to the difference between amortization expense determined on the cost model basis and amortization expense determined on the revaluation model basis), or wait until asset is disposed of and transfer balance remaining in the account directly to Retained Earnings. Mervat Saleh, CA II Concept Recoverability test Impairment loss Entry to record loss Subsequent amortization Reversal of impairment loss If no single-asset identifiable cash flows Concept Recoverability test Impairment loss Entry to record loss under cost model Subsequent amortization Reversal of impairment loss If no single-asset identifiable cash flows Cost Recovery Impairment Model Assumes asset will continue to be used; it is impaired only if the asset’s canying amount is not recoverable from the future undiscounted cash flows from use and eventual sale. If undiscounted future cash flows 2 carrying amount, asset is not impaired. lf undiscounted future cash flows < carrying amount, asset is impaired. Proceed to calculate impairment loss. Asset’s carrying amount — fair value = impairment loss; fair value is a discounted cash flow, market-based concept. impairment Loss $ Accumulated Impairment Losses $ Review carrying amount to be amortized, useful life, and pattern of amortization and determine new periodic rate. Reversal not permitted. The fair value to which the asset is written down becomes the asset’s new cost basis. Combine with other assets into an asset group, test for impairment and, if impaired, calculate impairment loss using same approach as for an individual asset. Allocate loss only to long-lived assets, based on their relative carrying amounts, within limits. Rational Entity lmpainnent Model Assumes management will use the asset or dispose of it currently, whichever results in a higher return to the entity. it is impaired only if its carrying amount is not recoverable from the more profitable/less costly of the two options. No separate test. Calculate recoverable amount = higher of value in use and fair value less costs to sell, both of which are discounted cash flow concepts. lf recoverable amount 2 carrying amount, no impairment loss. If recoverable amount < carrying amount, impairment loss = the difference. Impairment Loss $ Accumulated Impairment Losses $ Review canying amount to be amortized, useful life, and pattern of amortization and determine new periodic rate. Reversal of loss is required if estimates underlying recoverable amount have changed. Reversal amount is limited. Combine with other assets into a cash-generating group and calculate impairment loss using same approach as for an individual asset. Allocate loss to assets based on their relative carrying amounts, within limits. ...
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Chpter 12 - Handout - Mervat Saleh, CA CHAPTER 12...

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