Chapter 12 - accounting theory II

What are the 3 main characteristics of intangible assets?

1. Identifiability

2. non-physical existence

3. and nonmonetary nature

For an intangible assets to be identifiable—it should have at least one of the following characteristics:

• It comes from legal/contractual rights

• OR can be separated and sold, transferred, licensed, rented, or exchanged.

To recognize intangible items as assets, the company has to be able to

control access to the future benefits and restrict others’ access

What is goodwill, and when is it recognized?

Goodwill is future economic benefits from assets acquired in a business combination that cannot be separately identified. It is only recognized when a business is purchased.

Why are intangible assets considered nonmonetary?

Because they do not give the company a right to receive a fixed or determinable amount of money in the future.

Do intangible assets provide future economic benefits?

Yes. They provide economic benefits over a period of years.

Can internally generated goodwill be capitalized/recognized as an asset?

No. Internally generated goodwill is not recognized because it is created within the business and is difficult to measure reliably.

What are the recognition criteria for intangible assets?

Probable future economic benefits and reliable measurement of cost.

How are purchased intangible assets initially measured?

At cost

Intangible assets may be

• Purchased outright

• Acquired as part of a business combination

• Developed internally

What costs are included in the cost of a purchased intangible?

Purchase price and direct costs needed to make the asset ready for use, such as legal fees.

What costs are NOT capitalized for purchased intangibles?

• Product promotion

• administration costs

• general overhead

• initial operating losses

• costs after the asset is ready for use

What happens in a basket purchase of intangibles?

Several intangibles bought together and the cost is allocated based on relative fair values.

What is a business combination?

When one entity gains control of another by buying its net assets or equity interests/shares.

How are identifiable intangibles treated in a business combination?

They are recognized separately at fair value, even if they were internally generated.

What happens to intangibles that are not separately identifiable?

They are included in goodwill.

What are the two phases of internally developed intangibles?

Research phase and development phase.

What is the research phase?

Planned investigation to gain new scientific or technical knowledge or better understanding.

What is the development phase?

Turning research findings or knowledge into a plan/design for new or improved products, processes, systems, or services.

What are the main recognition and measurement issues for internally developed intangibles?

Whether future cash flows are probable, and whether the costs can be reliably measured.

When can development costs be capitalized?

Only when all six development criteria are met.

An intangible asset can be recognized from the development stage of an internal project if the company can meet the following six conditions:

1. Technical feasibility

2. intention to complete

3. ability to use/sell

4. resources available to complete/use/sell it

5. future benefits likely

6. costs reliably measurable

If you are unsure whether an activity is research or development, how is it classified?

Research.

What development costs can be capitalized?

• Materials

• services

• direct labour

• registration fees

• amortization of related intangibles

• borrowing costs

What development costs are excluded?

• Selling

• admin

• training

• initial operating losses

• incorporation

• relocation

• reorganization

• advertising

• promotion costs

What are the two models for measuring intangibles after acquisition?

Cost model and revaluation model.

Which model for measuring intangibles after acquisition is allowed under ASPE?

Cost model only.

When can the revaluation model be used?

Only when fair value can be determined in an active market.

When does amortization begin for Intangible Assets with a Limited Life?

When the asset is ready for use as management intends.

When does amortization stop for Intangible Assets with a Limited Life

at the earlier of when it is derecognized or classified as held for sale

What is the residual value of most intangibles assumed to be?

zero

How often must useful life and amortization method be reviewed under ASPE and IFRS?

ASPE: at least annually. IFRS: at least at the end of each financial year.

When is impairment assessed under ASPE?

When events or circumstances indicate the carrying value may not be recoverable.

When is impairment assessed under IFRS?

At the end of each reporting period.

When is an intangible asset derecognized?

When it is disposed of or when continuing use/disposal is not expected to generate future economic benefits.

How is the gain or loss on disposal of an intangible asset calculated? Where is the gain or loss on disposal recognized

Proceeds on disposal − carrying amount; In income in the period of disposal.

How do you calculate purchased goodwill?

Purchase price − fair value of identifiable net assets acquired = goodwill

What is a bargain purchase / negative goodwill?

When the fair value of acquired identifiable net assets is higher than the consideration paid.

How is negative goodwill recorded?

It is recognized immediately as a gain in net income after reassessing the amount.

Is goodwill amortized after acquisition?

No. Goodwill has an indefinite life and is not amortized.

How is goodwill valued after acquisition?

It stays on the statement of financial position at the original amount recognized less any impairment losses.

Why is goodwill assigned to a reporting unit/CGU for impairment testing?

Because goodwill does not generate its own cash flows.

• Under ASPE, it is assigned to a reporting unit.

• Under IFRS, it is assigned to a CGU, which is the smallest group of assets that creates mostly independent cash inflows.

Is goodwill impairment similar to other intangible assets?

Yes, goodwill impairment is similar to indefinite-life intangible assets, except goodwill must first be assigned to a unit.

Under IFRS, when do you test goodwill for impairment?

Every year, and whenever there is a sign of impairment.

How is goodwill impairment determined under ASPE vs. IFRS?

• ASPE: carrying amount of reporting unit including goodwill > fair value.
  IFRS: carrying amount of CGU including goodwill > recoverable amount. Recoverable amount is the higher of value in use and fair value less costs to sell.

Under ASPE vs. IFRS, what happens to development costs for internally generated intangible assets?

ASPE: can choose to capitalize or expense.
IFRS: must capitalize if criteria are met.

What impairment model is used under ASPE vs. IFRS?

ASPE: cost recovery model.
IFRS: rational entity model.

Can impairment losses be reversed under ASPE vs. IFRS?

• ASPE: no reversals for intangible assets or goodwill.

• IFRS: reversals are allowed for intangible assets, but not for goodwill.