Fair Market Value of Net Assets Fair Market Value of Assets Total Liabilities

Fair market value of net assets fair market value of

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Fair Market Value of Net Assets = Fair Market Value of Assets – Total Liabilities Purchase Price - Fair Market Value of Net Assets Goodwill to be reported 401,000 - 331,000 70,000 576,000 245,000 331,000 A A A A A A L L Cash 43,000 Accounts Receivable 55,000 Inventory 23,000 Customer List 7,000 Patent 203,000 Accounts Payable 25,000 PPE 245,000 Notes Payable 220,000 Goodwill 70,000 Cash 401,000
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Goodwill Goodwill Amortization Goodwill considered to have an indefinite life Should not be amortized Only adjust carrying value when goodwill is impaired Bargain Purchase Purchase price less than the fair value of net assets acquired The seller would have been better off to sell the assets individually than in total The excess amount is recorded as a gain by the purchaser
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Today’s Topic Overview of Intangible Assets Types of Intangible Assets Impairments of Intangible Assets Research and Development costs
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Impairment of Intangible Assets An intangible asset is impaired when a company is not able to recover the asset’s carrying amount either through using it or by selling it Three cases 1. Impairment of limited-life intangibles 2. Impairment of indefinite-life intangibles (except for goodwill) 3. Impairment of goodwill
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Impairment of Intangible Assets Impairment of limited-life intangibles Test carried out when there exist indicators of impairment The impairment procedure is the same as that of tangible assets
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Impairment of Intangible Assets Impairment of indefinite-life intangibles other than goodwill Test for impairment at least annually The impairment procedure is the same as that of limited-life intangibles. That is, Compare the recoverable amount of the intangible asset with the asset’s carrying value If the recoverable amount is less than the carrying amount, the company recognizes an impairment
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Impairment of intangibles - Example On January 1, 2020, Ferrari Corp purchased a trademark from Volkswagen Corp for $45,000. On December 31, 2020, the Ferrari Corp determines that the fair market value of the trademark is $38,000. Assume that the trademark has an indefinite useful life. Should the trademark be impaired? $45,000 $38,000 $38,000 Unknown $7,000 Impairment Loss
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Impairment of Intangible Assets Impairment of goodwill Goodwill cannot exist apart from the tangible and identifiable intangibles and does not generate cash flows independently of other assets or group of assets Direct valuation is infeasible Impairment test is conducted based on the cash-generating unit to which the goodwill is assigned Cash-generating unit = smallest identifiable group of assets that generate cash flow Impairment loss should be attributed to Goodwill first
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Impairment of Intangible Assets Impairment of goodwill Companies must perform impairment test for goodwill at least annually Note: no amortization is allowed because goodwill is considered to have indefinite life Estimation of the recoverable amount is usually based on value-in-use estimates i.e., Present value of future cash flows of the cash-generating unit Goodwill impairment loss reversals are not permitted.
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