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Chapter 12

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Department
Rotman Commerce
Course
RSM220H1
Professor
Dragan Stojanovic
Semester
Fall

Description
Chapter 12: Intangible Assets and Goodwill DEFINITION, RECOGNITION, AND MEASUREMENT OF INTANGIBLE ASSETS Characteristics  Intangible assets are o Identifiable Non monetary asset that lack physical substance o Must have 3 characteristics  They are identifiable  If it has at least one of the following characteristics o Results from contractual or other legal rights o It is separable – can be sep or divided from the entity and sold, transferred, licensed, rented or exchanged  In order to reco as assets, need to control access to future benefits and restrict others’ access o Control through  Legally enforceable rights  Having the ability to enter into exchange transactions related to the intangible  They lack physical substance  The value of intangible assets comes from the rights and privileges that are granted to company using them  If intangible component is not part of physical object, then classified as intangible asset  They are non-monetary  Monetary assets are whose value comes from the right or claim to received fixed or determinable amounts of money in future o Intangible assets do not contain any such right or claim Recognition and Measurement at Acquisition  Same criteria as for PPE; can be reco when o Probable that the entity will receive the expected future economic benefits o Assets cost can be measured reliably  Measured at cost at acquisition as well  More uncertainty though Purchased Intangibles  Can be purchased, acquired as part of a business combination, or developed internally  IA purchased are measured at cost o Includes acquisition and all expenditures directly associated w making it ready for use o Costs not capitalized are similar to PPE  Production intro and promotion  Conducting business in new location  Admin and OH o Expenditures incurred after the asset is ready for use are also included o When direct costs incurred after acquisition  Accounted for as additions or replacements and are capitalized o If delayed payment terms, any interest is reco as financing exp not asset cost o If acquired for shares, cost is assets FV  If cannot be determined then shares FV is used o If acquired by giving up nonmonetary assets, cost is the FV of what is given up or the FV of the intangible received  Assumes transaction has commercial substance o If acquired as gov grant, FV usually is the cost  IFRS does not allow to reco 0 or nominal dollar cost Intangibles purchased in a business combination  Business combination: when one entity acquires control over one or more businesses o Through either directly purchasing the net assets o Acquiring the entity interests (shares) that control the entity and its net assets  Intangibles that are not identifiable are considered part of goodwill  Acquisition cost of business combo is its FV o All assets acquired are reco  Examples o Brand names o Patents o Customers relationships o In process R&D Internally developed intangible assets  Alternatives to reco a) Reco the costs as internally generated intangible assets when certain criteria are met, and exp all others b) Reco all costs of internally generated IA as exp c) Reco expenditures on all internally generated IA as an exp, with certain specified exceptions d) Allow a choice btwn the account treatments in a and b ^  A for IFRS and D for private GAAP  Identifying R&D phase activities o Process of generating asset is broken down into  Research phase  Development phase: translation of research findings  Accounting for research phase costs o No costs incurred on research phase of an internal object are reco as an asset o All reco as exp when incurred o If have its own research facility though then  Accounts for these assets as capitalized PPE  Dep and other costs related to such are account for as research related exp o Under a contractual arrangement (research for other companies); costs are recorded as inv or a receivable  Accounting for development phase costs o IA reco only when an entity can demonstrate its technical and financial feasibility and the companys intention and ability to generate economic benefits from it o All 6 need to be demonstrated in order to capitalize costs incurred  Technical feasibility for completing the IA  Entitys intention to compete it for use or sale  Entitys 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 future economic benefits will be received; including 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  Ability to reliably measure the costs associated with and attributed to the intangible asset during its development o Not reco as internally generated IA  Brands  Mastheads  Publishing titles  Customers lists  Costs included and excluded o Cost begins to be accum when 6 criteria are met o From this point on, all expenditures capitalized are ones that are directly attributable to create, produce, and prepare the IA to operate in the way intended by management  Materials and services consumed  Direct costs of personnel; salaries, wages, payroll taxes, related benefits  Fees needed to register a legal right  Amortization of other intangibles needed to generate new asset  Interest or borrowing costs o PG 750** Prepayments  Only reco as asset when entity pays for the goods before their delivery (or other right of access) or for services before receiving those services o Asset is right to receive the goods or services o When received, no longer asset but costs are expensed Recognition and Measurement after Acquisition  Most after acquisition costs are expensed bc just maintenance to maintain benefits  2 cost methods: CM and RM o CM most common and only one under private GAAP o RM not common bc applied only to IA that have a FV determined in an active market  Accounting under the 2 models is same as for PPE  Indefinite life: no foreseeable limit to how long the asset will generate positive net cash flows to the entity o No amortization taken o Retain the asset in accounts until it is determined to be impaired or its life limited Limited life intangibles  IA w finite or limited life is amortized by systematic charges to exp over its useful life whether the CM/RM is used  To determine useful life is similar to PPE o The expected use of the asset and expected useful life of other assets that may affect the useful life of the IA o Any legal, regulatory, or contractual provisions that may either limit the useful life or allow renewal or extension of the assets legal or contractual life without the entity having to pay a substantial cost o Effects of obsolescence, demand, competition, and other economic factors o Level of maintenance expenditure that is needed to obtain future cash flows  Amount to amortize is its CA – RV o RV assumed to be 0 unless expecting to be of use to another entity  Pg 754 Indefinite life intangibles  IA with indefinite life is not amortized  Required to review these events and circumstances and whether it continues to support the assessment of an indefinite life o If later turns
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