Kế toán, kiểm toán - Chapter 12: Intangible assets & goodwill

CHAPTER 12:INTANGIBLE ASSETS & GOODWILL2CHAPTER 12: Intangible Assets and GoodwillAfter studying this chapter you should be able to:Understand the importance of intangible assets and goodwill from a business perspective and describe their characteristics.Identify and apply the recognition and measurement requirements for purchased intangible assets.Identify and apply the recognition and measurement requirements for internally developed intangible assets.Explain how intangible assets are accounted for after initial recognition.Identify and explain the accounting for specific types of intangible assets.Explain and account for impairment of limited-life and indefinite-life intangible assets.Explain how goodwill is measured and accounted for after acquisition.Explain and account for impairment of goodwill.Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.Identify differences in accounting between ASPE and IFRS.3Goodwill and Other Intangible Assets4Characteristics of Goodwill Goodwill is not a tangible asset It can only be recognized when a business is acquired. Cannot be sold separately.It can only be sold when a business is sold. Goodwill is an unidentified excess or residual amount. It can only be calculated in relation to the business as a whole. 5Characteristics of Intangible AssetsIntangible assets must meet all of the following characteristics:They are identifiable, having at least one of the following characteristics: Results from contractual or legal rights, orCan be separated from the entity and sold, rented, exchanged, transferred or licensedThey lack physical substance, andThey are non-monetaryIdentifiable intangibles with similar characteristics should be grouped and reported together6Recognition and Measurement at AcquisitionRecognize if probable future economic benefit, and asset can be measured reliablyInitially recorded at costIntangible assets may be: PurchasedAcquired as part of a business combination, orDeveloped internally7Purchased IntangiblesCost includes all expenditures that are necessary to get the intangible asset ready for its intended use (e.g., purchase price, legal fees)If there are delayed payment terms, recognize financing expense (interest)If acquired for shares, cost is generally measured at asset’s fair value (or value of shares if value of asset cannot be determined)If intangible assets are exchanged for non-monetary assets, the fair value of the item given up or the fair value of the intangible received is used to determine costFor a “basket purchase” of intangibles, the cost is allocated based on fair values8Acquired in Business CombinationBusiness combination: when one business acquires control over one or more other businessesIdentifiable intangible assets acquired are recognized at fair value9PrepaymentsPrepaid asset can be recognized only when an entity has paid for goods before delivery (or other access rights), or for services before receiving/using those servicesPrepaid assets represent the right to receive goods/services, and no longer exist once those goods/services are received (asset is de-recognized)10Prepayments11Internally Developed IntangiblesCosts that a company incurs internally to create intangibles (such as patents and brand names) Internally developed intangibles present significant challenges: Recognition: When to recognize? Is there probability of future cash flows?Measurement: What costs to capitalize vs. expense? How to reliably measure the costs?IFRS requires that costs be capitalized when certain criteria are met, and expense all other costsASPE also allows for an accounting policy option to expense all costs relating to internally generated intangibles12Identifying Research and Development PhasesProcess of generating intangible assets is broken down into two phasesResearch activities:involve planned search or critical investigation aimed at discovery of new knowledgemay or may not be directed towards a specific projectDevelopment activities include:translation of research findings or other knowledge into a plan or design for a new product or process, orsignificant improvement to an existing product or process13Research and Development (R&D) CostsAll research costs are charged to expense when incurredDevelopment costs are charged to expense except in certain defined circumstances14Development CostsDevelopment cost capitalization criteria:Technical feasibilityIntent to complete for use or sale Ability to use or sellAvailability of resources (technical, financial, and other) needed to complete, and to use or sellIf the intent is to sell, a market exists and is clearly defined; if the intent is to use, there is a definable use/needProduct/process clearly defined, and costs can be identified15Development CostsExamples of development costs include the following:Materials and services consumedDirect personnel costs (e.g., salaries)Fees needed to register a legal rightAmortization of other intangibles needed to generate the assetInterest and borrowing costs16Measurement after AcquisitionThere are two models for measuring intangible assets subsequent to initial recognition: Cost model (CM)Revaluation model (RM)Under ASPE, cost model is the only method allowed Revaluation model requires that intangible assets have fair value determined in an active marketBoth models are applied in same way as for property, plant, and equipment17Limited-Life IntangiblesAn intangible asset with limited (or finite) useful life is amortized over its useful lifeIntangibles assumed to have no residual value, unless:There is a commitment to purchase, orThere is an observable marketUseful life and amortization method are reviewed at least annually (under ASPE) or at least at the end of each financial year (under IFRS)18Indefinite-Life IntangiblesAn intangible asset with an unlimited (or infinite) useful life is not amortizedBecause of the potential effect on the financial statements, it is important for management to review whether the intangible asset still has an indefinite lifeIndefinite life is not the same as “infinite” (forever) 19Types of IntangiblesFive major categories for intangibles:1. Marketing-related2. Customer-related3. Artistic-related4. Contract-based5. Technology-based20Marketing-Related IntangiblesUsed in marketing and promotionInclude:Trademarks or trade namesNewspaper mastheadsInternet domain namesNon-competition agreements21Trademarks and Trade NamesTrademarks and trade names are renewable, so the legal life may be unlimited; the useful life, however, may be limitedCosts of acquired trademarks or trade names are capitalizedIf trademarks or trade names are developed by the business, direct costs may be capitalized if all six capitalization requirements are metIf the future benefits of a trademark (such as Coca-Cola) is determined to have an indefinite life, it is not amortized22Customer-Related IntangiblesResult from interactions with third partiesInclude:Customer listsOrder/production backlogsContractual and noncontractual customer relationships23Artistic-Related IntangiblesOwnership rights to artistic endeavoursExamples: literary works, musical works, pictures, photographs and audiovisual materialThese ownership rights are protected by copyrights24CopyrightsCopyrights are granted for the life of the creator, plus 50 yearsCopyrights can be sold or assigned, but cannot be renewedUseful life is generally less than the legal lifeAmortized over period in which benefits accrueCosts of acquiring and defending copyrights may be capitalizedResearch costs associated with a copyright are expensed25Contract-Based IntangiblesValue of a right resulting from a contractual arrangementExamples: licensing arrangement, leaseholds, construction permits, broadcast rights, service or supply contracts, and franchisesA franchise is a contractual agreement where franchisor grants the franchisee the rights to:sell specified products or servicesuse certain trademarks or trade namesperform certain functions within a particular geographical area26Franchises and LicensesA franchise may exist for a limited time or for an indefinite time periodThe cost of a franchise (with a limited life) is amortized over the lesser of the legal or useful lifeA franchise (with an unlimited life) is amortized over:expected useful life if such life is deemed limited, orit is not amortizedAnnual operating payments for a franchise are expensed27LeaseholdsAgreement between the lessor (owner) and the lessee (renter)Gives the lessee the right to use the propertyValid for a specific period of timeThe lessee makes stipulated, usually periodic cash payments28Technology-Based IntangiblesRelate to innovations or technological advancesInclude:Product PatentsPhysical (tangible) productsProcess PatentsProcess by which products are madeComputer Software Costs29PatentsA patent gives exclusive right to the holder for making, selling or using a product or process Patent rights have a legal life of 20 years from the date the patent application is filed with the Patent OfficeCosts of purchasing patents are capitalizedCosts to research and most development costs are expensed as incurred Patents are amortized over the shorter of the legal life (20 years) or their useful livesLegal fees and other costs to successfully defend a patent are capitalized and amortized over the remaining useful life of the patent30Impairment of Limited-Life IntangiblesImpairment of limited-life intangibles is covered by same impairment models and standards as for long-lived tangible assetsPotential impairment is assessedunder ASPE, when events or circumstances indicate that carrying value may not be recoverableUnder IFRS, at the end of each reporting periodTwo impairment models are: Cost recovery impairment model (ASPE)Rational entity impairment model (IFRS)31Cost Recovery Impairment ModelUnder this model, an asset is impaired only if carrying amount cannot be recovered from using and eventually disposing of the asset (recoverability test)i.e. impaired if carrying amount > undiscounted future net cash flowsImpairment loss is then measured as asset’scarrying amount less fair valueImpairment losses cannot be reversedApplied by ASPE and U.S. GAAP32Rational Entity Impairment ModelImpairment loss is measured by comparing the asset’s carrying amount and recoverable amountRecoverable amount is measured as higher ofValue in use, and(present value of future net cash flows)Fair value less cost to sellIf carrying amount recoverable amount, then impairment loss is difference between two valuesImpairment losses may be reversedApplied under IFRS33Impairment of Indefinite-Life IntangiblesASPEUse fair value test onlyFair value of intangible compared to the carrying amountWhen fair value is less than carrying amount, impairment has occurred and loss is recordedThe recoverability test is not used for indefinite-life intangible assetsIFRSCompare carrying value and recoverable amount on an annual basis, whether or not there is indication of impairment. 34GoodwillGoodwill is the excess of the consideration transferred to acquire the business over the fair value of the identifiable tangible and intangible net assets acquired in a business combinationGoodwill can be acquired and sold only when a business combination occursGoodwill cannot be separated from the businessInternally-generated goodwill is not capitalized35Acquired Goodwill: ValuationGiven: Purchase price (cash): $ 400,000 Book value of assets: $ 255,000 Book value of liabilities: $ 55,000 Fair value of net assets: $ 350,000 To determine goodwill, see the following:36Acquired Goodwill: CalculationGoodwill = Consideration paid less fair value of identifiable net assets = $400,000 less 350,000 = $50,000Entry in the books of the Purchaser: Assets (various) 405,000 Goodwill 50,000 Liabilities 55,000 Cash 400,00037Goodwill: Bargain PurchaseA “bargain purchase” or negative goodwill arises when fair value of acquired identifiable net assets is greater than the consideration transferred for those assetsThe current standard requires any negative goodwill be recognized immediately as a gain in net income after a thorough reassessment of the variables used in determining its amount. 38Valuation after AcquisitionThree approaches have been suggested:Charge immediately to expenseResults in consistent accounting for purchased goodwill and internally generated goodwillOne rationale is that it is difficult to identify the useful life Amortize over useful lifeBetter matching of costs to benefitsCarry at cost indefinitely, unless value impairedConsistent with requirements under ASPE and IFRS39Goodwill ImpairmentBecause goodwill is not identifiable and does not generate its own direct cash flows, it is assigned to a reporting or cash generating unit (CGU) in order to be tested for impairment40Goodwill ImpairmentASPEImpairment test done whenever events or changes in circumstances indicate possible impairmentImpairment test for other assets in group is done before the impairment test for goodwillImpairment loss exists if carrying amount of reporting unit including goodwill > fair value of reporting unit Loss is calculated as amount of excessGoodwill impairment losses cannot be reversed41Goodwill ImpairmentIFRSImpairment test done annually and also whenever there is indication that CGU may be impairedImpairment loss exists if carrying amount of unit including goodwill > recoverable amount of unit Loss is calculated as amount of excessImpairment loss is allocated first to goodwill and then to other assets on a relative carrying amount (proportionate) basisGoodwill impairment losses cannot be reversed42Presentation and DisclosureThere are many required disclosures for intangible assets and goodwillAlso, IFRS has many more requirements compared to ASPE43IFRS/ASPE ComparisonWith a few exceptions, accounting for intangible assets under IFRS and ASPE is very similar4445