Chapter 12 intangible assets Sommers – ACCT 3311Impairment of IntangiblesExample 7: Impairment of IntangibleExample 7: ContinuedImpairment of Intangibles Other than GoodwillExample 7b: Impairment of IntangibleGoodwill ImpairmentExample 8: Goodwill ImpairmentExample 8: ContinuedExample 8b: Goodwill ImpairmentResearch and Development CostsResearch vs. DevelopmentIFRSIFRSIFRSExample 9Example 9: ContinuedExample 9b: ContinuedExample 9b: ContinuedAmortization of IntangiblesComprehensive Problem SolutionCHAPTER 12 INTANGIBLE ASSETSSommers – ACCT 3311Limited-Life IntangiblesSame as impairment for long-lived assets in Chapter 11.1. If the sum of the expected future net cash flows is less than the carrying amount of the asset, an impairment has occurred (recoverability test).2. The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (fair value test).The loss is reported as part of income from continuing operations, “Other expenses and losses” section.Impairment of IntangiblesExample 7: Impairment of IntangibleAn intangible asset cost $300,000 on January 1, 2013. On January 1, 2014, the asset was evaluated to determine whether it was impaired. As of January 1, 2014, the asset was expected to generate future cash flows of $25,000 per year (at the end of the year). The appropriate discount rate is 8%.Give the entries to record amortization in 2013 and any impairment loss in 2014 assuming that as of January 1, 2013, the asset was assumed to have a total useful life of 10 years and that as of January 1, 2014, there were nine years remaining.Example 7: ContinuedIndefinite-Life Intangibles Other than GoodwillShould be tested for impairment at least annually.Impairment test is a fair value test.►If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference.►Recoverability test is not used.Impairment of Intangibles Other than GoodwillExample 7b: Impairment of IntangibleAn intangible asset cost $300,000 on January 1, 2013. On January 1, 2014, the asset was evaluated to determine whether it was impaired. As of January 1, 2014, the asset was expected to generate future cash flows of $25,000 per year (at the end of the year). The appropriate discount rate is 8%.Now give the entries to record any impairment loss in 2014 assuming that as of January 1, 2013, the asset was assumed to have an indefinite useful life and that as of January 1, 2014, the remaining life was still indefinite.Goodwill ImpairmentTwo Step Process:•Step 1: If fair value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment.•Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.Example 8: Goodwill ImpairmentIn 2009, Alliant Corporation acquired Centerpoint Inc. for $300 million, of which $50 million was allocated to goodwill. Alliant tests for goodwill impairment at the end of each year. At the end of 2011, management has provided the following information:Fair value of Centerpoint, Inc. $220 millionFair value of Centerpoint’s net assets (excluding goodwill) 200 millionBook value of Centerpoint’s net assets (including goodwill) 250 millionDetermine the amount of the impairment loss.Example 8: ContinuedDetermination of implied goodwill:Measurement of impairment loss:Example 8b: Goodwill ImpairmentIn 2009, Alliant Corporation acquired Centerpoint Inc. for $300 million, of which $50 million was allocated to goodwill. Alliant tests for goodwill impairment at the end of each year. At the end of 2011, management has provided the following information: Fair value of Centerpoint, Inc. $270 millionFair value of Centerpoint’s net assets (excluding goodwill) 200 millionBook value of Centerpoint’s net assets (including goodwill) 250 millionDetermine the amount of the impairment loss.Frequently results in something that a company patents or copyrights such as:new product, process, idea, formula, composition, orliterary work.Research and development (R&D) costs are not in themselves intangible assets.Research and Development CostsResearch ActivitiesPlanned search or critical investigation aimed at discovery of new knowledge.Research ActivitiesPlanned search or critical investigation aimed at discovery of new knowledge.ExamplesLaboratory research aimed at discovery of new knowledge; searching for applications of new research findings.ExamplesLaboratory research aimed at discovery of new knowledge; searching for applications of new research findings.Development ActivitiesTranslation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.Development ActivitiesTranslation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.ExamplesConceptual formulation and design of possible product or process alternatives; construction of prototypes andoperation of pilot plants.ExamplesConceptual formulation and design of possible product or process alternatives; construction of prototypes andoperation of pilot plants.Research vs. DevelopmentLike 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.IFRS and 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 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.IFRSIFRS permits revaluation