Whitney & Amuta - Intangible Assets

8/2/2019 Whitney & Amuta - Intangible Assets

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GAAP v.s. IFRS

Intangible Assets

SFAS 142 and IAS 38

Amanda Whitley

Nneka Amuta


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SFAS 142

Intangible Assets


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SFAS 142 - Intangible Assets

Definition Intangible Assets are identifiable non-

financial assets that lack physicalsubstance.

Examples include goodwill, developmentcosts, research and development,patents, copyrights, and advertising.

Grant Thornton, (June, 30, 2008). Comparison Between U.S GAAP and International Financial Reporting Standards , from GrantThorntons Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Grant_Thornton_GAAP_v_IFRS_Comparison.pdf


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SFAS 142 Initial Recognition

RecognitionIn order to be recognized as an intangible asset, anasset must:

Have costs and characteristics that can bemeasured with sufficient reliability.

Have future economic benefits that are probable. Be controlled by an entity.

Have relevant information that is neutral, verifiable,and have representational faithfulness.

Have arisen from an event or transaction that hasalready occurred.

Grant Thornton, (June, 30, 2008). Comparison Between U.S GAAP and International Financial Reporting Standards , from Grant

Thorntons Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Grant_Thornton_GAAP_v_IFRS_Comparison.pdf


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SFAS 142 Measurement AfterRecognition

The Cost Modelis used to account forintangibles. Calculation: assets are recorded at historical

cost less accumulated amortization andimpairment losses.

Intangible assets that are bought outside ofa business are recognized at fair value.

The Revaluation Modelis never usedto account for intangibles.

Deloitte, (April, 2, 2008). IFRS In Your Pocket 2008. Retrieved September 13, 2008, from Deloitte's IAS Plus Site Web site:http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Deloitte_IFRSpocket2008.pdf


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SFAS 142 Accounting for IntangibleAssets

Goodwill is measured as a residual and only recognized ina business combination.

Acquired goodwillis treated as an asset with anindefinite life, so it is tested for impairment. Goodwillimpairment is tested using the following approach:

1.) The fair value and carrying value of the reporting unitare measured. If the carrying value is greater than the fairvalue, a goodwill impairment loss is calculated andaccounted for

2.) Goodwill loss impairment is the excess of the carryingvalue of goodwill over the implied fair value of goodwill.

Source:Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student Companion Website, 2007,

slide 29


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SFAS 142 Impairment of IntangibleAssets

Source: Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student

Companion Website, 2007, slide 29Chapter12-29

Impairment of Intangible AssetsImpairment of Intangible AssetsImpairment of Intangible Assets

LO 7 Explain the accounting issues related to intangibleLO 7 Explain the accounting issues related to intangible--asset impairments.asset impairments.

E12-15 Instructions

(a) Prepare the journal entry (if any) to record theimpairment at December 31, 2007.

Loss on impairment 15,000,000Goodwill 15,000,000

(in millions)Fair value 335$Carrying amount, net of goodwill 150

Implied goodwill 185

Carrying value of goodwill 200

Loss on impairment (15)$

Step 1: The fairvalue of thereporting unit isbelow its carryingvalue. Therefore, animpairment hasoccurred.

Step 2:

Source:Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student Companion Website,2007, slide 29


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SFAS 142 Expenses After InitialRecognition

Research and development costsareimmediately expensed when incurred,unless they have an alternative future use.

The costs of software developed forexternal useor sale are capitalized when itis established to be technologically feasible.

The costs of software developed for

internal useare capitalized only whensuch costs are incurred during theapplication development stage.

KPMG, (May 2008). IFRS compared to U.S. GAAP: an overview. Retrieved September 13, 2008, from KPMG IFRS Institute Web site:http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/KPMG_US-GAAP-IFRS_Comparison.pdf


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SFAS 142 Other Expenses

Advertising Costs (other than DirectResponse Advertising) and PromotionalCostsare either expensed as incurred, orare delayed and then expensed when theadvertising actually takes place.

Some Direct Response AdvertisingCostsare capitalized and amortized whenthere is a probable future economic benefit.

Costs to develop customer lists, trainingcosts, and start-up costsare notcapitalized as intangible assets.

Pricewaterhouse Coopers, (September, 2008). IFRS and US GAAP similarities and differences*. Retrieved September 22, 2008, from PWC

IFRS Site W eb site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/PwC_IFRS_USGAAPSep08.pdf


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IAS 38

Intangible Assets


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IAS 38 Intangible Assets Recognition

In order to be recognized as an intangibleasset, the asset must:

Fit within the definition of an intangible asset.

Meet the recognition criteria.

This requirement applies to:

Initial costs to acquire or internally generate

an intangible asset. Costs incurred to add, replace, or maintain

the asset.

IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved September 13, 2008, from IFRS andIAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf


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Expenses on intangible assets should berecognized as they are incurred providing:

Costs meets the recognition criteria.

The item is acquired in a business

combination. Cannot be recognized as an intangible

asset.

If this is the case, the amount is recognized as

goodwill at the acquisition date (see IFRS 3).

IAS 38 Internally Generated IntangibleAssets



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Cost Model Same as GAAP

Revaluation model:

Intangible assets carried at FV at revaluationdate less accumulated amortization and

impairment loss.Use fair value according to an active market.

Revaluations made annually at year end.

When there is an increase or decrease

because of revaluation, the difference isrecognized in Other Comprehensive Incomeand accumulated in equity under the headingof Revaluation Surplus.

IAS 38 Intangible Assets MeasurementAfter Recognition



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IAS- 38 Intangible Asset Transactions

Example:Global Corporation purchased the net assets of

Local Company for $300,000 on December 31, 2007. Thebalance sheet of Local Company just prior to acquisition is:

Assets Cost FMV

Cash 15,000$ 15,000$

Receivables 10,000 10,000Inventories 50,000 70,000

Equipment 80,000 130,000

Total 155,000$ 225,000$

Liabilities and Equities

Accounts payable 25,000$ 25,000$Common stock 100,000

Retained earnings 30,000

Total 155,000$ 25,000$

FMV of NetAssets =

$200,000

Kieso, Weygandt, Warefield, Chapter 12 - Intangible Assets. Retrieved September 13, 2008, from http://bcs.wiley.com/he-bcs/Books?action=chapter&bcsId=2995&itemId=0471749559&chapterId=22171 Web site:

http://higheredbcs.wiley.com/legacy/college/kieso/0471749559/ppt/ch12.ppt


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Calculation of Goodwill:

Book value of net assets of Local:Assets 155,000$

Liabilities (25,000)

Book value of net assets 130,000

Under (Over) valued asset or liabilities:

Inventory 20,000

Equipment 50,000

FMV of net assets of Local 200,000

Price paid for Local 300,000

Goodwill 100,000$

IAS- 38 Intangible Asset Transactions

Book Value = $130,000

Fair Value = $200,000

Purchase Price = $300,000

Revaluation $70,000

Goodwill $100,000

*Assuming thereis an activemarket, IFRSwould use the

RevaluationAmount.

Kieso, Weygandt, Warefield, Chapter 12 - Intangible Assets. Retrieved September 13, 2008, from http://bcs.wiley.com/he-bcs/Books?action=chapter&bcsId=2995&itemId=0471749559&chapterId=22171 Web site:

http://higheredbcs.wiley.com/legacy/college/kieso/0471749559/ppt/ch12.ppt


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An entity shall assess whether the useful lifeof an intangible asset is finite or indefinite.

Finite Useful Life:

Depreciable Amount cost of an asset less

its residual value; all allocated by useful life.

The amortization method used reflects theconsumption pattern of future economicbenefits by the entity.

If that pattern cannot be determined reliably,the straight-line method is used.

IAS 38 Intangible Assets Useful Life



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Indefinite Useful Life: An intangible asset with an indefinite useful life is

not amortized.

IAS 36 Impairment of Assets:

Intangible assets with an indefinite useful lifeare tested for impairment annually.

IAS 8 Accounting Policies, Changes inAccounting Estimates and Errors:

If an asset that is indefinite becomes finite based onassessment, the change is considered accountingestimate.

IAS 38 Intangible Assets Useful Life



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The purchase method is used to account for business

combinations. The acquirer recognizes assets and liabilities at the fairvalue of the acquisition date. Expenses associated with intangibles are not capitalizedunless such expenses increase the value or usefulness of theasset. Similar capitalization methods are used for softwaredeveloped for sale or internal use.

The costs of software developed for external use or saleare capitalized when it is established to be technologicallyfeasible.

The costs of software developed for internal use arecapitalized only when such costs are incurred during theapplication development stage.

Goodwill is measured as a residual and only recognized ina business combination.

U.S. GAAP and IFRS Similarities

KPMG, (May 2008). IFRS compared to U.S. GAAP: an overview. Retrieved September 13, 2008, from KPMG IFRS Institute Web site:http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/KPMG_US-GAAP-IFRS_Comparison.pdf

Deloitte, (April, 2, 2008). IFRS In Your Pocket 2008. Retrieved September 13, 2008, from Deloitte's IAS Plus Site Web site:http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Deloitte_IFRSpocket2008.pdf


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U.S. GAAP and IFRS DifferencesDifferences U.S. GAAP IFRS

Definition Intangible Assets are identifiable non-financial

assets that lack physical substance.

Intangible Assets are identifiable non-monetary

assets that lack physical substance and is

controlled by an entity.

Cost and Revaluation Method Uses the cost method, and revaluation is not

allowed.

Revaluation is allowed in some cases, so assets are

revalued to their fair value.

Research and Development

Costs

Research and development costs are normally

expensed as incurred, except in special

cases (computer software).

Costs are reclassified as research phase costs and

development phase costs. Research phase

costs are always expensed, while development

phase costs are capitalized if these 6 criteria

are met:

-Intention to complete the intangible

-Technical feasibility of completing the intangible

-Availability of sufficient resources to complete the

development

-Ability to reliably measure any expenses incurred

in the development of the intangible

-Ability to sell or use the asset-Generate future economic benefit

Start-Up Costs Start-up costs are always expensed. Start-up costs can be capitalized if part of goodwill

in an acquisition or if it is included in the cost

of property, plant, and equipment (IAS 38. 68-

69).

Pricewaterhouse Coopers, (September, 2008). IFRS and US GAAP similarities and differences*. Retrieved September 22, 2008, from PWCIFRS Site Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/PwC_IFRS_USGAAPSep08.pdf


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Goodwill Impairment Loss is calculated by:a. Subtracting the fair value of the reporting unit from

the carrying value of the reporting unit.

b. Subtracting the carrying value of goodwill from thecarrying value of the reporting unit.

c. Adding the implied value of goodwill to the fairvalue of the reporting unit.

d. Subtracting the implied value of goodwill from thecarrying value of goodwill.

e. Adding the implied value of goodwill to the carryingvalue of goodwill.

Multiple Choice Question 1


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Which of the following is a similarity ofGAAP to IFRS accounting for intangibleassets?

a. Start up costs are always expensed.

b. Intangible assets are defined the same way.c. Expenses associated with intangibles are not

capitalized unless they increase the usefulness of theintangible asset.

d. Research and development costs are expensed.

e. Intangible assets are defined differently.



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Which of the following is false concerningthe revaluation model used for therecognition of intangible assets?

a. Increases and decreases in revaluation are

recognized in Other Comprehensive Income.b. Revaluation is used only when an active market

exists.

c. Revaluation is used by both GAAP and IFRS

under certain conditions.d. The revaluation method uses the fair value of an

intangible asset at the revaluation date.


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Assets Cost FMV

Cash 25,000$ 35,000$

Receivables 20,000 20,000

Inventories 70,000 90,000

Equipment 90,000 130,000

Total 205,000$ 275,000$

Liabilities and Equities

Accounts payable 35,000$ 35,000$

Common stock 100,000

Retained earnings 70,000

Total 205,000$ 35,000$

ABC Inc. purchased the net assets of DEF Inc. for$500,000 on December 31, 2008. The balance sheetfor DEF Inc. just prior to the acquisition is thefollowing:


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Multiple Choice Question 4 Continued

What is the net amount of goodwillrecognized under GAAP and IFRS?

a. $270,000 ; $60,000b. $0 ; $240,000

c. $205,000 ; $275,000

d. $205,000 ; $35,000

Documents

Whitney & Amuta - Intangible Assets