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Chapter 12

Chapter 12 – Intangible assets and goodwill.docx

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Ryerson University
ACC 414
Else Grech

Chapter 12 – Intangible assets and goodwill DEFINITION, RECOGNITION< AND MEASUREMENT OF INTAMGIBLE ASSETS  Characteristics o Intangible assets: are identifiable non-monetary assets that lack physical substance. o They must have these characterists to be appropriately recognized as intangible assets  Identifiability: an asset is identifiable if it results from contractual or legal rights; or if it is separable – can be divided or separated and sold, transferred, rented…  Non-physical existence  Value of the intangible asset comes from the rights and priviledges that are granted to the company using them  If the intangible componenent is needed for the physical component to work, it is a PP&E asset. If not, then its an intangible asset  Non-monetary nature  Cannot be monetary assets whose values come from the right or claim to receive fixed or determinable amounts of money in ther future o Intangibles shouldn’t retain such right or claims  Recognition and measurement at acquisition o Measured at cost of acquisition  Probable that the entity will receive the expected future economic benefits  The asset’s cost can be measured reliably **there is although more uncertainty with the future value of an intangible o Purchased intangibles  Cost s includes acquisition cost and all expenditures directly related with making the intangible ready for its intended use.  Direct costs that meet the recognition criteria are incurred after acquisition, these costs are accounted for as additions or replacements and are capitalized o Interest expense would be considered as a financing expense o If the intangible asset is acquired for shares, cost is the asset’s fair value o If the intangible asset is acquired by giving up non monetary assets, the cost of the intangible is the fair value of what is given up or the fair value of the intangible received (whichever is more reliably measured). Assuming that this transaction has commercial substance o If acquired as a government grant, the asset’s fair value usually establishes its cost on the books.  Intangibles purchased in a business combination (basket purchase)  Business combination: when one entity acquires control over one or more businesses.  Only those intangibles that are identifiable can be separately recognized.  GOODWILL: intangibles acquired that are not identifiable  Acquisition cost of each identifiable intangible is its fair value  Internally developed intangible assets  Which cost should be capitalized and recognized as intangible assets when an entity develops such assets internally. o Recognize the costs as internally generated intangible assets when certain criteria are met, expense all other 1 o Recognize all costs of internally generated intangible assets as expense o Recognize expenditures on all internally generated intangible assets as an expense o Allow a choice between the accounting treatments in the first two above  Identifying R&D phase activities o If there is uncertainty about which phase a particular activity relates to when internally creating an intangible, classify as research phase  Accounting for Research phase costs o No costs incurred on research meet the criteria for recognition as an asset.  All costs are therefore expensd o If research is conducted under a contractual arrangement, the contract will should specify that all cost will be reimbursed and therefore such costs can be recorded as an inventory or receivable  Accounting for development phase costs. o All six of the conditions must be demonstrated in order to capitalize costs:  Technical feasibility of completing the intangible asset  The entity’s intention to complete it for use or sale  The enitty’s ability to use or sell it  Availability of technical, financial, and other resources needed to complete it, and to use or sell it  Way in which the economic benefit will be received.  Ability to reliably measure costs associated with and attributed to the intangible asset during its development o Therefore costs are capitalized only when the future benefits are reasonably certain.  only then do the costs begin to be capitalized  Costs included and excluded o Costs begin when the 6 criteria are met  then all costs that are directly attributable costs needed to create, produce, and prepare the inta
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