Kế toán, kiểm toán - Chapter 12: Intermediate accounting: ifrs edition, 2/e

Coby HarmonUniversity of California, Santa BarbaraWestmont CollegeINTERMEDIATE ACCOUNTING: IFRS EDITION, 2/EChapter 12PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 12Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12LO 1CharacteristicsIdentifiable.Lack physical existence.Not monetary assets.Normally classified as non-current asset.Common types of intangibles:PatentCopyrightFranchise or licenseTrademark or trade nameCustomer listGoodwillINTANGIBLE ASSET ISSUESCoca-Cola Company’s (USA) success comes from its secret formula for making Coca-Cola, not its plant facilities.Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12LO 2Purchased IntangiblesRecorded at cost.Includes all acquisition costs plus expenditures to make the intangible asset ready for its intended use.Typical costs include:Purchase price.Legal fees.Other incidental expenses.ValuationINTANGIBLE ASSET ISSUESValuationINTANGIBLE ASSET ISSUESInternally Created IntangiblesCompanies expense all research phase costs and some development phase costs. Certain development costs are capitalized once economic viability criteria are met. IFRS identifies several specific criteria that must be met before development costs are capitalized.LO 2Internally Created IntangiblesILLUSTRATION 12-1Research andDevelopment StagesINTANGIBLE ASSET ISSUESLO 2Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12Amortization of IntangiblesINTANGIBLE ASSET ISSUESLimited-Life IntangiblesAmortize by systematic charge to expense over useful life.Credit asset account or accumulated amortization.Useful life should reflect the periods over which the asset will contribute to cash flows.Amortization should be cost less residual value.Companies must evaluate the limited-life intangibles annually for impairment.LO 3Amortization of IntangiblesINTANGIBLE ASSET ISSUESLO 3Indefinite-Life IntangiblesNo foreseeable limit on time the asset is expected to provide cash flows. Must test indefinite-life intangibles for impairment at least annually.No amortization.ILLUSTRATION 12-2Accounting Treatmentfor IntangiblesAmortization of IntangiblesINTANGIBLE ASSET ISSUESLO 3Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12Six Major Categories:Marketing-related.Customer-related.Artistic-related.Contract-related.Technology-related.Goodwill.TYPES OF INTANGIBLE ASSETSLO 4Marketing-Related Intangible AssetsExamples: Trademarks or trade names, newspaper mastheads, Internet domain names, and non-competition agreements.In the United States trademarks or trade names have legal protection for indefinite number of 10 year renewal periods. Capitalize purchase price. No amortization.TYPES OF INTANGIBLE ASSETSLO 4Companies go to great extremes to protect their valuable intangible assets. Consider how the creators of the highly successful game Trivial Pursuit protected their creation. First, they copyrighted the 6,000 questions that are at the heart of the game. Then they shielded the Trivial Pursuit name by applying for a registered trademark. As a third mode of protection, they obtained a design patent on the playing board’s design as a unique graphic creation. Another example is the iPhone trade name. Cisco Systems (USA) sued Apple (USA) for using the iPhone trade name when Apple introduced its hot new phone in 2007. Not so fast, said Cisco, which had held the iPhone trade name since 2000 and was using it on its own Voice over Internet Protocol (VoIP) products. The two companies came to an agreement for joint use of the name. It was not disclosed what Apple paid for this arrangement, but it is not surprising why Apple would want to settle—to avoid a costly delay to the launch of its highly anticipated iPhone.LO 4KEEP YOUR HANDS OFF MY INTANGIBLE!Source: Nick Wingfield, “Apple, Cisco Reach Accord Over iPhone,” Wall Street Journal Online (February 22, 2007).Customer-Related Intangible AssetsExamples: Customer lists, order or production backlogs, and both contractual and non-contractual customer relationships.Capitalize acquisition costs. Amortized to expense over useful life.TYPES OF INTANGIBLE ASSETSLO 4Illustration: Green Market Inc. acquires the customer list of a large newspaper for €6,000,000 on January 1, 2015. Green Market expects to benefit from the information evenly over a three-year period. Record the purchase of the customer list and the amortization of the customer list at the end of each year.Customer List 6,000,000Jan. 12015 Cash 6,000,000Amortization Expense 2,000,000Dec. 31201520162017 Customer List * 2,000,000TYPES OF INTANGIBLE ASSETS* or Accumulated Amortization LO 4Artistic-Related Intangible AssetsExamples: Plays, literary works, musical works, pictures, photographs, and video and audiovisual material.Copyright granted for the life of the creator plus 70 years.Capitalize costs of acquiring and defending.Amortized to expense over useful life if less than the legal life.Mickey MouseandTYPES OF INTANGIBLE ASSETSLO 4Contract-Related Intangible AssetsTYPES OF INTANGIBLE ASSETSExamples: Franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.Franchise (or license) with a limited life should be amortized as operating expense over the life of the franchise.Franchise with an indefinite life should be carried at cost and not amortized.LO 4Technology-Related Intangible AssetsExamples: Patented technology and trade secrets granted by a government body.Patent gives holder exclusive use for a period of 20 years.Capitalize costs of purchasing a patent.Expense any R&D costs in developing a patent. Amortize over legal life or useful life, whichever is shorter.TYPES OF INTANGIBLE ASSETSLO 4Illustration: Harcott Co. incurs $180,000 in legal costs on January 1, 2015, to successfully defend a patent. The patent’s useful life is 20 years, amortized on a straight-line basis. Harcott records the legal fees and the amortization at the end of 2015 as follows.Patents 180,000Jan. 1 Cash 180,000Patent Amortization Expense 9,000Dec. 31 Patents (or Accumulated Amortization) 9,000TYPES OF INTANGIBLE ASSETSLO 4Patent Amortization Expense = ($180,000 ÷ 20) = $9,000Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12LO 5GoodwillConceptually, represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized.Only recorded when an entire business is purchased.Goodwill is measured as the excess of ... cost of the purchase over the fair value of the identifiable net assets (assets less liabilities) purchased.Internally created goodwill should not be capitalized.TYPES OF INTANGIBLE ASSETSIllustration: Feng, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Feng is interested in buying Tractorling Company. The illustration presents the statement of financial position of Tractorling Company.ILLUSTRATION 12-4RECORDING GOODWILLLO 5Illustration: Feng investigates Tractorling’s underlying assets to determine their fair values.Tractorling Company decides to accept Feng’s offer of $400,000. What is the value of the goodwill, if any?ILLUSTRATION 12-5 RECORDING GOODWILLLO 5ILLUSTRATION 12-6 Illustration: Determination of Goodwill.RECORDING GOODWILLLO 5Property, Plant, and Equipment 205,000Patents 18,000Inventory 122,000Accounts Receivables 35,000Cash 25,000Goodwill 50,000 Liabilities 55,000 Cash 400,000Illustration: Feng records this transaction as follows.RECORDING GOODWILLLO 5Goodwill Write-OffGoodwill considered to have an indefinite life. Should not be amortized.Only adjust carrying value when goodwill is impaired.Bargain PurchasePurchase price less than the fair value of net assets acquired.Amount is recorded as a gain by the purchaser.RECORDING GOODWILLLO 5Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12Impairment of Limited-Life IntangiblesThe impairment loss is the carrying amount of the asset less the recoverable amount of the impaired asset.IMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 11-15Illustration: Lerch, Inc. has a patent on how to extract oil from shale rock, with a carrying value of €5,000,000 at the end of 2014. Unfortunately, several recent non-shale-oil discoveries adversely affected the demand for shale-oil technology, indicating that the patent is impaired. Lerch determines the recoverable amount for the patent, based on value-in-use (because there is no active market for the patent). Lerch estimates the patent’s value-in-use at €2,000,000, based on the discounted expected net future cash flows at its market rate of interest..IMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 11-15€5,000,000€2,000,000Unknown€2,000,000€3,000,000 Impairment LossCalculate the impairment loss (based on value-in-use).IMPAIRMENT OF INTANGIBLE ASSETSLO 6€5,000,000€2,000,000Unknown$2,000,000€3,000,000 Impairment LossCalculate the impairment loss (based on value-in-use).IMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 11-15Loss on Impairment 3,000,000 Patents 3,000,000Lerch makes the following entry to record the impairment.Illustration: The carrying value of the patent after impairment is €2,000,000. Lerch’s amortization is €400,000 (€2000,000 ÷ 5) over the remaining five years of the patent’s life. The amortization expense and related carrying amount after the impairment is shown below:Reversal of Impairment LossILLUSTRATION 12-8 IMPAIRMENT OF INTANGIBLE ASSETSLO 6Early in 2016, based on improving conditions in the market for shale-oil technology, Lerch remeasures the recoverable amount of the patent to be €1,750,000. In this case, Lerch reverses a portion of the recognized impairment loss.Reversal of Impairment LossPatents (€1,750,000 - €1,600,000) 150,000 Recovery of Impairment Loss 150,000IMPAIRMENT OF INTANGIBLE ASSETSLO 6Impairment of Indefinite-Life Intangibles Other than GoodwillShould be tested for impairment at least annually.Impairment test is the same as that for limited-life intangibles. That is, compare the recoverable amount of the intangible asset with the asset’s carrying value. If the recoverable amount is less than the carrying amount, the company recognizes an impairment.IMPAIRMENT OF INTANGIBLE ASSETSLO 6Illustration: Arcon Radio purchased a broadcast license for €2,000,000. The license is renewable every 10 years. Arcon Radio has renewed the license with the GCC twice, at a minimal cost. Because it expects cash flows to last indefinitely, Arcon reports the license as an indefinite-life intangible asset. Recently, the GCC decided to auction these licenses to the highest bidder instead of renewing them. Based on recent auctions of similar licenses, Arcon Radio estimates the fair value less costs to sell (the recoverable amount) of its license to be €1,500,000.IMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 12-9Computation of Loss on Impairment of Broadcast LicenseImpairment of GoodwillCompanies must test goodwill at least annually. Impairment test is conducted based on the cash-generating unit to which the goodwill is assigned.Cash-generating unit = smallest identifiable group of assets that generate cash flow.Because there is rarely a market for cash-generating units, estimation of the recoverable amount for goodwill impairments is usually based on value-in-use estimates.IMPAIRMENT OF INTANGIBLE ASSETSLO 6Illustration: Kohlbuy Corporation has three divisions. It purchased one division, Pritt Products, four years ago for €2 million. Unfortunately, Pritt experienced operating losses over the last three quarters. Kohlbuy management is now reviewing the division (the cash-generating unit), for purposes of its annual impairment testing. Illustration 12-10 lists the Pritt Division’s net assets, including the associated goodwill of €900,000 from the purchase.ILLUSTRATION 12-10IMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 11-15$2,400,000$2,800,000Unknown$2,800,000Kohlbuy determines the recoverable amount for the Pritt Division to be €2,800,000, based on a value-in-use estimate.No ImpairmentIMPAIRMENT OF INTANGIBLE ASSETSLO 6$2,400,000$1,900,000Unknown$1,900,000Assume that the recoverable amount for the Pritt Division is €1,900,000 instead of €2,800,000.LO 7$500,000 Impairment LossIMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 11-15Unknown$1,900,000$2,400,000$1,900,000LO 7$500,000 Impairment LossLoss on Impairment 500,000 Goodwill 500,000IMPAIRMENT OF INTANGIBLE ASSETSLO 6ILLUSTRATION 11-15Kohlbuy makes the following entry to record the impairment.Assume that the recoverable amount for the Pritt Division is €1,900,000 instead of €2,800,000.Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12Frequently results in the development of patents or copyrights such as newproduct, process, idea, formula, composition, orliterary work.Research and development (R&D) costs are not in themselves intangible assets.RESEARCH AND DEVELOPMENT COSTSLO 7Companies spend considerable sums on research and development.RESEARCH AND DEVELOPMENT COSTSLO 7ILLUSTRATION 12-12R&D Outlays, as aPercentage of SalesResearch costs must be expensed as incurred. Development costs may or may not be expensed as incurred. Capitalization begins when the project is far enough along in the process such that the economic benefits of the R&D project will flow to the company (the project is economically viable).RESEARCH AND DEVELOPMENT COSTSLO 7Identifying R & D ActivitiesResearch ActivitiesOriginal and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.ExamplesLaboratory research aimed at discovery of new knowledge; searching for applications of new research findings.Development ActivitiesApplication of research findings or otherknowledge to a plan or design for theproduction of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use.ExamplesConceptual formulation and design of possible product or process alternatives; construction of prototypes andoperation of pilot plants.RESEARCH AND DEVELOPMENT COSTSLO 7ILLUSTRATION 12-13Research Activities versus Development ActivitiesResearch and development investments are the lifeblood of product and process developments that lead to future cash flows and growth. Countries around the world understand this and as a result provide significant incentives in the form of tax credits, “superdeductions” (deductions greater than 100%), and corporate tax rate reductions, including “patent box” rates for companies that own and use patents registered in that country. Here is a summary for seven major economies.GLOBAL R&D INCENTIVESSource: L. Cutler, D. Sayuk, and Camille Shoff, “Global R&D Incentives Compared,” Journal of Accountancy (June 2013).LO 7Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12Accounting for R & D ActivitiesCosts Associated with R&D Activities:Materials, equipment, and facilities.Personnel.Purchased intangibles.Contract Services.Indirect Costs.RESEARCH AND DEVELOPMENT COSTSLO 81. Investment in a subsidiary company.2. Timberland. 3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.4. Lease prepayment (6 months’ rent). 5. Cost of equipment obtained.6. Cost of searching for applications of new research findings.ItemClassificationE12-1: Indicate how items on the list below would generally be reported in the financial statements. Long-term investmentsPP&ER&D expense Prepaid rentPP&ER&D expense RESEARCH AND DEVELOPMENT COSTSLO 8Cost incurred in the formation of a corporation.Operating losses incurred in the start-up of a business.Training costs incurred in start-up of new operation.Purchase cost of a franchise.Goodwill generated internally.Cost of testing in search of product alternatives.ExpenseOperating lossExpenseIntangibleNot recordedR&D expenseItemClassificationRESEARCH AND DEVELOPMENT COSTSLO 8Goodwill acquired in the purchase of a business.Cost of developing a patent (before achieving economic viability).Cost of purchasing a patent from an inventor.Legal costs incurred in securing a patent.Unrecovered costs of a successful legal suit to protect the patent.IntangibleR&D expenseIntangibleIntangibleIntangibleItemClassificationRESEARCH AND DEVELOPMENT COSTSLO 8Cost of conceptual formulation of possible product alternatives.Cost of purchasing a copyright.Development costs incurred after achieving economic viability.Long-term receivables.Cost of developing a trademark.Cost of purchasing a trademark.R&D expenseIntangibleIntangibleLong-term investmentExpenseIntangibleItemClassificationRESEARCH AND DEVELOPMENT COSTSLO 8The requirement that companies expense immediately all R&D costs (as well as start-up costs) incurred internally is a practical solution. It ensures consistency in practice and uniformity among companies. But the practice of immediately writing off expenditures made in the expectation of benefiting future periods is conceptually incorrect. Proponents of immediate expensing contend that from an income statement standpoint, long-run application of this standard frequently makes little difference. They argue that because of the ongoing nature of most companies’ R&D activities, the amount of R&D cost charged to expense each accounting period is about the same, whether there is immediate expensing or capitalization and subsequent amortization. Others criticize this practice. They believe that the statement of financial position should report an intangible asset related to expenditures that have future benefit. To preclude capitalization of all R&D expenditures removes from the statement of financial position what may be a company’s most valuable asset. Indeed, research findings indicate that capitalizing R&D costs may be helpful to investors. The current accounting for R&D and other internally generated intangible assets represents one of the many trade-offs made among relevance, faithful representation, and cost-benefit considerations. The FASB and IASB have completed some limited-scope projects on the accounting for intangible assets, and the Boards have contemplated a joint project on the accounting for identifiable intangible assets (i.e., excluding goodwill). (See Intangible-Assets/Pages/Intangible-Assets.aspx.)Source: See page 24 of the text.RECOGNITION OF R&D AND INTERNALLY GENERATED INTANGIBLESLO 8Costs Similar to R & D CostsStart-up costs for a new operation.Initial operating losses.Advertising costs.RESEARCH AND DEVELOPMENT COSTSLO 8These costs are expensed as incurred, similar to the accounting for R&D costs. Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years. Materials consumed in R&D projects Consulting fees paid to outsiders for R&D projects Personnel costs of persons involved in R&D projects Indirect costs reasonably allocable to R&D projects Materials purchased for future R&D projects$330,00059,000100,000128,00050,00034,000$66,00059,000100,000128,00050,0000R&D Expense$403,000$330,000 / 5 = $66,000 E12-17: Compute the amount to be reported as research and development expense.RESEARCH AND DEVELOPMENT COSTSLO 8For many companies, developing a strong brand image is as important as developing the products they sell. Now more than ever, companies see the power of a strong brand, enhanced by significant and effective advertising investments. As the following chart indicates, the value of brand investments is substantial. Coca-Cola (USA) heads the list with an estimated brand value of about $78 billion. Companies from around the globe are represented in the top 20 brands. Occasionally, you may find the value of a brand included in a company’s financial statements under goodwill. But generally you will not find the estimated values of brands recorded in companies’ statements of financial position. The reason? The subjectivity that goes into estimating a brand’s value. In some cases, analysts base an estimate of brand value on opinion polls or on some multiple of adspending. For example, in estimating the brand values shown above, Interbrand Corp. (USA) estimates the percentage of the overall future revenues the brand will generate and then discounts the net cash flows, to arrive at a present value. Some analysts believe that information on brand values is relevant. Others voice valid concerns about the reliability of brand value estimates due to subjectivity in the estimates for revenues, costs, and the risk component of the discount rate.BRANDEDLO 8Source: Interbrand Corp., Best Global Brands Report (October 2, 2012).Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the accounting issues for recording goodwill.LEARNING OBJECTIVESExplain the accounting issues related to intangible asset impairments.Identify the conceptual issues related to research and development costs.Describe the accounting for research and development and similar costs.Indicate the presentation of intangible assets and related items.After studying this chapter, you should be able to:Intangible Assets12Statement of Financial PositionCompanies should report as a separate item all intangible assets other than goodwill.Reporting is similar to the reporting of property, plant, and equipment. Contra accounts may not normally shown for intangibles.Presentation of Intangible AssetsPRESENTATION OF INTANGIBLESLO 9Income StatementCompanies should reportamortization expense andimpairment losses and reversals for intangible assets other than goodwill separately in net income (usually in the operating section).Notes to the financial statements should include the amortization expense for each type of asset.Presentation of Intangible AssetsPRESENTATION OF INTANGIBLESLO 9Presentation of Intangible AssetsPRESENTATION OF INTANGIBLESLO 9ILLUSTRATION 12-15Nestlé’s Intangible AssetDisclosuresPresentation of Research and Development CostsPRESENTATION OF INTANGIBLESLO 9Companies should disclose the total R&D costs charged to expense each period.ILLUSTRATION 12-16R&D ReportingRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to intangible assets. Similarities• Like U.S. GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not financial instruments. In addition, under IFRS an intangible asset is identifiable. To be identifiable, an intangible asset must either be separable from the company (can be sold or transferred) or it arises from a contractual or legal right from which economic benefits will flow to the company. Fair value is used as the measurement basis for intangible assets under IFRS if it is more clearly evident.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesWith the issuance of a recently converged statement on business combinations (IFRS 3 and SFAS No. 141—Revised), IFRS and U.S. GAAP are very similar for intangibles acquired in a business combination. That is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged. In addition, under both U.S. GAAP and IFRS, companies recognize acquired in-process research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesAs in U.S. GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.DifferencesIFRS permits revaluation on limited-life intangible assets. Revaluations are not permitted for goodwill; revaluation of other indefinite-life intangible assets are rare because revaluations are not allowed unless there is an active market for the intangible asset.GLOBAL ACCOUNTING INSIGHTSDifferencesIFRS permits some capitalization of internally generated intangible assets (e.g., brand value) if it is probable there will be a future benefit and the amount can be reliably measured. U.S. GAAP requires expensing of all costs associated with internally generated intangibles. IFRS requires an impairment test at each reporting date for long-lived assets and intangibles, and records an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and its value-in-use. Value-in-use is the future cash flows to be derived from the particular asset, discounted to present value. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over the asset’s fair value.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesU.S. GAAP gives companies the option to perform a qualitative assessment to determine whether it is more likely than not (i.e., a likelihood of more than 50 percent) that an indefinite-life intangible asset (including goodwill) is impaired. If the qualitative assessment indicates that the fair value of the reporting unit is more likely than not to be greater than the carrying value (i.e., the asset is not impaired), the company need not continue with the fair value test.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesIFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of limited-life intangibles and indefinite-life intangibles other than goodwill. Under U.S. GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for the asset. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal. Under IFRS, costs in the development phase of a research and development project are capitalized once technological feasibility (referred to as economic viability) is achieved. Under U.S. GAAP, all development costs are expensed as incurred.GLOBAL ACCOUNTING INSIGHTSRelevant FactsAbout The NumbersTo illustrate the effect of differences in the accounting for brands, consider the following disclosure by GlaxoSmithKline (GBR) in a recent annual report. Note that GlaxoSmithKline would report lower income by £1.3 billion if it accounted for its brands under U.S. GAAP.GLOBAL ACCOUNTING INSIGHTSOn the HorizonThe IASB has identified a project, in a very preliminary stage, which would consider expanded recognition of internally generated intangible assets. As indicated, IFRS permits more recognition of intangibles compared to U.S. GAAP. Thus, it will be challenging to develop converged standards forintangible assets, given the long-standing prohibition on capitalizing internally generated intangible assets and research and development in U.S. GAAP. Learn more about the timeline for the intangible asset project at the IASB website: ACCOUNTING INSIGHTSCopyright © 2014 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.COPYRIGHT