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CA 12.2 (Continued)
The amount of interest cost for the first nine months of 2019 is part of the 2018 loss resulting from the
tornado. The extension of the construction period to October 2019 because of the tornado does not
warrant its capitalization as construction period interest. It is in effect an uninsured loss resulting from
the tornado. Had it not been for the tornado, the entire amount would have been a normal operating
expense chargeable against the rental revenue that would have been earned during the first nine
months of 2019.
Cost of obtaining tenants. Both the 2018 and 2019 costs of obtaining tenants should be expensed as
CA 12.3
(a) A pound to be received in the future is worth less than a pound received today because of an
interest or discount factor—often referred to as the time value of money. The discounted value of
(b) If the royalty receipts are expected to occur at regular intervals and the amounts are to be fairly
constant, their discounted value can be calculated by multiplying the value of one such receipt by
the present value of an annuity of 1 for the number of periods the receipts are expected. On the
other hand, if receipts are expected to be irregular in amount or if they are to occur at irregular
CA 12.3 (Continued)
(c) The basis of valuation for patents that is generally accepted in accounting is cost. Evidently the
cartons were developed and the patents obtained directly by the client corporation. Those costs
(d) Intangible assets represent rights to future benefits. The ideal measure of the value of intangible
(e) The amortization policy is implied in the definition of intangible assets as rights to future benefits.
As the benefits are received by the firm, the cost or other value should be charged to expense or
(f) The litigation can and should be mentioned in notes to the financial statements. Some indication of
the expectations of legal counsel in respect to the outcome can properly accompany the
statements. It would be inappropriate to record a contingent asset reflecting the expected
damages to be recovered. Costs incurred to September 30, 2019, in connection with the litigation
CA 12.4
(a) Research, as defined in IFRS, is “original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.”
Development, as defined in IFRS, is “application of research findings or other knowledge to a plan
CA 12.4 (Continued)
(b) The current accounting and reporting practices for research and development costs (incurred
before achieving economic viability) were promulgated by the IASB in order to reduce the number
of alternatives that previously existed and to provide useful financial information about research
In reaching this decision, the IASB considered the three pervasive principles of expense recog-
nition: (1) associating cause and effect, (2) systematic and rational allocation, and (3) immediate
recognition. The IASB found little or no evidence of a direct causal relationship between current
(c) The following costs attributable only to research and development should be expensed as incurred:
Design and engineering studies.
Prototype manufacturing costs.
Administrative costs related solely to research and development.
(d) Economic viability indicates that a project is far enough along in the process such that the economic
benefits of the R&D project will probably flow to the company. Development costs incurred from that
CA 12.5
(a) Investors and creditors are concerned with corporate profits, dividends, and cash flow. Employees
in Czeslaw Corporation’s R&D department are concerned about job security if the company begins
(c) Reid should do what is best for Czeslaw Corporation in the long run. He should choose to have the
project done where the work will be done well and at the lowest cost. Whether expenses will appear
in the income statement immediately or will be capitalized and allocated over a period of years should
FINANCIAL REPORTING PROBLEM
(a) M&S shows Intangible Assets on the statement of financial position.
(b) M&S reported selling and administrative expenses of £3,304.8 million
in 2015 and £3,412.9 million in 2016. These expenses were significant
COMPARATIVE ANALYSIS CASE
(a) (1) adidas reports: Goodwill €1,392M, Trademarks €1,628M, and
Other intangibles €188M. Puma reports: Goodwill €240.3M and
(b) (1) adidas amortizes software over 5-7 years and patents,
trademarks, and other 2–15 years. Puma amortizes finite-lived
intangibles over 3–10 years.
(2) adidas had accumulated amortization of €697M and €609M on
(3) adidas identified the composition of its intangible assets as
follows:
Goodwill €1,392M
FINANCIAL STATEMENT ANALYSIS CASE 1
MERCK AND JOHNSON & JOHNSON
(a) The primary intangible assets of a healthcare products company
(b) Many corporate executives complain that investors are too concerned
about the short-term and don’t reward good long-term planning. As a
(c) If a company reports goodwill on its statement of financial position, it
can only have resulted from one thing—the company must have
purchased another company. This is because companies are not
FINANCIAL STATEMENT ANALYSIS CASE 2
(a) The depressed market values (less than book value) suggest that
market participants are not very optimistic about the future prospects
(b) Because the market (fair) value of each company is less than its book
value of its net assets, it fails the first step in the goodwill impairment
test; an impairment should be recorded.
A
B
C
D
E
F
G
H
(Columns C–D)
(Columns B–F)
(Columns D–G)
Company
Market
Value
Book Value
(Net Assets)
Carrying
Value of
Goodwill
ROA
Estimated Fair
Value of Net
Assets
Implied GW
(NA-Market
Value)
Goodwill
Impairment
(c) As indicated in the expanded spreadsheet above, unless their market
value increases dramatically, each of these companies is likely to
E*Trade Entry:
Loss on Impairment ............................................. 2,035
Goodwill ........................................................... 2,035
(d) Impairment losses are reported in operating income. Thus, the impair-
ments will reduce the numerator in the return on asset ratio. Without
There is a full year of amortization on the copyright. There is no amortization
for the trade name, which is considered an indefinite-life intangible.
The recoverable amount of €16,000 is greater than the carrying value. Thus,
the copyright is not impaired: The trade name is tested for impairment using
a recoverable amount test. Thus, Raconteur writes it down to the
ANALYSIS
Impairment losses are recorded in operating income. Because impairment
losses tend to be nonrecurring items, their recognition can make operating
income more volatile from year to year. This volatility effect can be
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
PRINCIPLES
The accounting for impairments provides relevant information about intangible
assets by indicating in a timely fashion that intangible assets have declined
RESEARCH CASE
(a) IFRS 3 addresses goodwill, while IAS 38 addresses intangible assets.
(b) IFRS 3 defines goodwill as “an asset representing the future economic
(c) No, goodwill is not amortized. However, it is subject to impairment
testing, as discussed in IAS 36.
(d) Goodwill recognised in a business combination is an asset representing
the future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately
references also to a group of cash-generating units to which goodwill
is allocated (IAS 36, par. 81).
Applying the requirements in paragraph 80 results in goodwill being
tested for impairment at a level that reflects the way an entity
manages its operations and with which the goodwill would naturally
RESEARCH CASE (Continued)
A cash-generating unit to which goodwill is allocated for the purpose
of impairment testing may not coincide with the level at which
goodwill is allocated in accordance with IAS 21 The Effects of
If the initial allocation of goodwill acquired in a business combination
In accordance with IFRS 3 Business Combinations, if the initial
accounting for a business combination can be determined only
provisionally by the end of the period in which the combination is
effected, the acquirer:
a. accounts for the combination using those provisional values; and
b. recognises any adjustments to those provisional values as a
PROFESSIONAL SIMULATION (Continued)
GAAP PRACTICE
GAAP 12.1. Similarities include (1) in U.S. GAAP and IFRS, the costs associated with research and
development are segregated into the two components; (2) IFRS and U.S. GAAP are similar for
Notable differences are: (1) while costs in the research phase are always expensed under both
IFRS and U.S. GAAP, under IFRS costs in the development phase are capitalized once
GAAP 12.2. As shown in the analysis below, under IFRS, Sophia’s ROA is overstated compared to a
U.S. GAAP company.
IFRS
U.S. GAAP
Net Income
€ 1,125
€ 920*
Average Assets
12,500
12,295**
GAAP 12.3. The IASB has identified a project relating to the accounting for research and develop-
ment that could result in expanded recognition of internally generated intangible assets. IFRS
GAAP PRACTICE (Continued)
GAAP 12.4
(a) ROE = Net Income ÷ Shareholders’ Equity
(b) If some companies capitalize development expenses, this will result
in higher reported assets and income (because R&D expense will be
