Accounting for Goodwill and Other Intangibles FASB 141, 142 (June 2001)Initial Measurement of Intangible AssetsAmortization of IntangiblesExamples of Intangibles Recognized Separately from Goodwill:FASB 141 Guidance on Assigning Values to Acquired Assets and LiabilitiesAmortization ProceduresMethodResidual ValueEvaluate Remaining Useful LifeImpairment Test for Intangibles Being AmortizedImpairment Tests for Intangibles Not Subject to AmortizationIntangibles other than goodwillGoodwillTriggering Events for Interim ReviewsImpairment LossReporting UnitWhat is a business?InputsProcessesOutputsFinancial Statement PresentationOther DisclosuresResearch and Development Costs Written OffIntangibles subject to amortization:Intangibles not subject to amortization and impairment losses:Goodwill:Business Acquisitions:Examples - Amortizing Intangible AssetsLecture Notes for Acct 592 Prof. Teresa GordonAccounting for Goodwill and Other IntangiblesFASB 141, 142 (June 2001)Distinctions:Intangibles can be acquired individually or with a group of other assetsGoodwill can only be acquired in conjunction with a business combinationInitial Measurement of Intangible AssetsInitial Value Recognized Goodwill Purchase price is allocated to acquired assets and liabilities based on estimated fair values. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill. Goodwill must be assigned to an operating unit of the acquiring company.Negative Goodwill (potentially recognized as extraordinary gain from business combination)If the fair value of the acquired net assets exceeds the purchase price, the excess is allocated as a pro rata reduction of the amounts that would otherwise have been assigned to assets [excludes financial assets other than equity method investments, assets to be disposed of by sale, deferred tax assets, prepaid assets related to pensions and other retirement benefits, and any other current assets]. If any excess remains after reducing assets to zero, it is recognized as an extraordinary gain.]Other intangibles from abusiness combinationRecognized at fair value if (a) it arises from contractual or other legal rights even if those rights are not transferable or separable, or (b) it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, or exchanged even if there is no intention of doing so.Purchased intangibles not acquired in a business combinationAcquisition cost (fair value) if acquired individually. When acquiredwith a group of other assets, the acquisition cost is allocated to individual assets based on relative fair value. No goodwill is recognized.Internally developed intangiblesExpensedAmortization of IntangiblesFinite Useful Life Indefinite Useful LifeGoodwill N/A Not amortized. Subject to impairment test annually. Anygoodwill impairment is recognized as an expense.Other intangible assets Amortized over expected useful life.Not amortized. Subject to impairment test at least annually. If useful life becomes finite, the carrying value is amortized over useful life. as of 1/28/05 Page 1Lecture Notes for Acct 592 Prof. Teresa GordonExamples of Intangibles Recognized Separately from Goodwill:Intangible Assets Arising from Contractualor Other Legal RightsIntangible Assets Recognized BecauseThey Are SeparableMarketing-related Trademarks, tradenamesTrade dress (unique color, shape, package design)Newspaper mastheadsInternet domain namesNoncompetition agreementsCustomer-related Order or production backlogCustomer contracts and related customer relationships including those of financial institutions [SFAS No. 147]Customer listsNoncontractual customer relationships such as bank depositorsArtistic-related Plays, operas, balletsBooks, magazines, newspapers and other literary worksMuscial works such as compositions, songlyrics, advertising jinglesVideo and audiovisual material including motion pictures, music videos, television programsContract-based Licensing, royalty and standstill agreementsAdvertising, construction, management, service or supply contractsLease agreementsConstruction permitsOperating and broadcast rightsUse rights such as drilling, water, air, mineral, timber cutting, and route authoritiesServicing contracts such as mortgage servicing contractsEmployment contractsTechnology-based Patented technologyComputer software and mask worksTrade secrets such as secret formulas, processes, recipesUnpatented technologyDatabases, including title plantsTrade secrets not protected by lawDefined in FASB 142:The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed.  The amounts assigned are fair values Goodwill includes all intangible assets that do not meet the criteria for recognition as an asset apart from goodwill.Remember -- You only have goodwill if you've purchased another entire company. as of 1/28/05 Page 2Lecture Notes for Acct 592 Prof. Teresa GordonAcquisitions of financial institutions are no longer excluded from guidance of SFAS No. 141 & 142 [see SFAS No. 147, Oct. 2002]. Impairment of customer-relationship intangibles are also nolonger excluded from the impairment tests of SFAS No. 144. as of 1/28/05 Page 3Lecture Notes for Acct 592 Prof. Teresa GordonFASB 141 Guidance on Assigning Values to Acquired Assets and LiabilitiesBalance Sheet Element MeasurementMarketable securities Fair valueReceivables Present values of amount to be received determined at appropriate current interest rates, less allowances for uncollectibility and collection costs, if necessaryInventories – finished goods and merchandiseEstimated selling prices less the sum of (a) costs of disposal and(b) a reasonable profit allowance for the selling effort of the acquiring entityInventories – work-in-process Estimate selling prices of finished goods less the sum of (a) costs to complete, (b) costs of disposal, and (c) a reasonable profit allowance for the completing and selling effort of the acquiring entity based on profit for similar finished goodsInventories – raw materials Current replacement costPlant and equipment to be used Current replacement cost for similar capacity unless the expected future use of the assets indicates a lower value to the acquiring entityPlant and equipment to be sold Fair value less cost to sellIntangible assets recognized (other than goodwill)Estimated fair valueLand, natural resources, nonmarketablesecurities and other