CA 12.3 (Continued)
The high degree of uncertainty about whether research and development expenditures will provide
any future benefits, the lack of objectivity in setting criteria, and the lack of usefulness of the
resulting information led the FASB to reject the alternatives of capitalization, selective capitalization,
and accumulation of costs in a special category.
(c) The following costs attributable only to research and development should be expensed as incurred:
Design and engineering studies.
CA 12.4
(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
to hire outside firms rather than have work done internally. Reid must be concerned with his
performance and reputation within the company as well.
FINANCIAL REPORTING PROBLEM
(a) P&G reports Goodwill of $44,699 million for 2017. P&G also reports
(net of amortization) Trademarks and other intangible assets of
$24,187 million in 2017.
COMPARATIVE ANALYSIS CASE
(a) (1) Coca-Cola reports: Trademarks, Goodwill and Other Intangible
Assets of $16,636M. PepsiCo reports: Amortizable Intangible
(b) (1) Coca-Cola amortizes intangible assets that are deemed to have
definite lives over their useful life primarily on a straight-line basis.
(3) Coca-Cola identified the composition of its intangible assets as
follows:
Trademarks with indefinite lives $ 6,729M
Bootlers franchise rights with indefinitive lives 138
Goodwill 9,401
FINANCIAL STATEMENT ANALYSIS CASE 1
MERCK AND JOHNSON & JOHNSON
(a) The primary intangible assets of a healthcare products company
would probably be patents, goodwill and trademarks. The nature of
each of these is quite different; thus, an investor would normally want
to know what the composition of intangible assets is if it is material.
(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 balance sheet, it can only have
resulted from one thing—the company must have purchased another
company. This is because companies are not allowed to record internally
FINANCIAL STATEMENT ANALYSIS CASE 2
(a) The depressed market values (less than book value) suggest that
(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
G
(Columns B–C)
Company
Fair Value of
Company
Book Value of
Net Assets
(including
goodwill)
Carrying Value
of Goodwill
Goodwill Impairment
Sprint Nextel
$36,361
$51,271
$30,718
$14,910
23,941
E Trade Financial
(c) As indicated in the expanded spreadsheet above, unless their market
values increases dramatically, each of these companies is likely to
recognize a goodwill impairment. For Washington Mutual and E-Trade,
the impairment will result in a complete write-off of the goodwill asset.
Apparently, the prior acquisitions from which the goodwill was
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
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.
Amortization expense = $15,000/10 = $1,500
Amortization Expense ……………………………………………..
1,500
Copyrights ……………………………………………………..
1,500
Lost on Impairment …………………………………………………
3,500
Trade Names …………………………………………………..
3,500
Analysis
Impairment losses are recorded in operating income. Because impairments
Principles
The accounting for impairments provides relevant information about
intangible assets by indicating in a timely fashion that intangible assets
CODIFICATION EXERCISES
CE12.1
According to the Master Glossary:
(a) Intangible assets are assets (not including financial assets) that lack physical substance. (The
term intangible assets is used to refer to intangible assets other than goodwill.)
(b) An asset representing the future economic benefits arising from other assets acquired in a
(c) Research and Development:
Research is planned search or critical investigation aimed at discovery of new knowledge with the
(d) A development stage entity is an entity devoting substantially all of its efforts to establishing a new
business and for which either of the following conditions exists:
CE12.2
See FASB ASC 350-30–35. In the discussions related to “Determining the Useful Life of an Intangible
Asset”
35-1 The accounting for a recognized intangible asset is based on its useful life to the reporting
35-2 The useful life of an intangible asset to an entity is the period over which the asset is expected
to contribute directly or indirectly to the future cash flows of that entity. The useful life is not the
CE12.2 (Continued)
35-3 The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of
all pertinent factors, in particular, all of the following factors with no one factor being more
presumptive than the other:
a. The expected use of the asset by the entity.
b. The expected useful life of another asset or a group of assets to which the useful life of the
35-4 If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of
an intangible asset to the reporting entity, the useful life of the asset shall be considered to be
indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful
CE12.3
According the FASB ASC 730-10-50:
50-1 Disclosure shall be made in the financial statements of the total research and development
costs charged to expense in each period for which an income statement is presented. Such
CE12.4
According the FASB ASC 926-720-25,
General
Overall Deals
25-1 An entity may enter into an overall deal arrangement. An entity shall charge the costs of overall
CODIFICATION RESEARCH CASE
(a) FASB ASC 350-10–05.
(b) Codification String: Assets > 350 Intangibles – Goodwill and other >
10 Overall > 20 Glossary
Goodwill
An asset representing the future economic benefits arising from other
(c) Overall Accounting for Goodwill: Codification String; Assets > 350
Intangibles – Goodwill and other > 20 Goodwill > 35 Subsequent
Measurement.
CODIFICATION RESEARCH CASE (Continued)
Quantitative Impairment Test
350–20–35-4 The quantitative goodwill impairment test, used to
identify both the existence of impairment and the
350–20–35-5 The guidance in paragraphs 350-20–35-22 through 35-
350–20–35-6 If the fair value of a reporting unit exceeds its
350–20–35-7 In determining the carrying amount of a reporting
unit, deferred income taxes shall be included in the
350–20–35-8 If the carrying amount of a reporting unit exceeds its
fair value, an impairment loss shall be recognized in
an amount equal to that excess, limited to the total
IFRS CONCEPTS AND APPLICATION
IFRS12.1
IFRS guidance related to intangible assets is presented in IAS 38, “Intangible
IFRS12.2
Similarities include (1) in GAAP and IFRS, the costs associated with research
and development are segregated into the two components; (2) IFRS and
GAAP are similar for intangibles acquired in a business combination. That
is, an intangible asset is recognized separately from goodwill if it represents
brand value), if it is probable there will be a future benefit and the amount
can be reliably measured. GAAP requires expensing of all costs associated
with internally generated intangibles; (3) 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;
IFRS12.3
The IASB and FASB had previously identified a project, in a very preliminary
stage, which would consider expanded recognition of internally generated
IFRS12.4
Research and Development Expense ……………………….
430,000
Accounts Payable …………………………………………..
505,000
IFRS12.5
(a) Capitalize
IFRS12.6
Loss on Impairment ………………………………………………..
190,000
IFRS12.7
Patents [$130,000 – ($110,000 – $11,000)] …………………
Recovery of Loss from Impairment ………………….
IFRS12.8
Because the recoverable amount of the division exceeds the carrying
IFRS12.9
Loss on Impairment ………………………………………………..
50,000
Goodwill ($800,000 – $750,000) ………………………..
IFRS12.10
(a) In accordance with IFRS, the $325,000 is a research and development
(b)
Patents ……………………………………………………….
36,000
Research and Development Expense ……………………….
94,000
Cash ……………………………………………………….
130,000
(to record research and development costs)
Patents ……………………………………………………….
24,000
Cash ……………………………………………………….
Amortization Expense ……………………………………………..
12,000
Patents ($60,000 / 5 years) …………………………..
IFRS12.10 (Continued)
(c)
Patents …………………………..………………………………………
47,200
Cash ………………………………………………………………
47,200
(To record legal costs of successfully
defending patent)
11,900
11,900
(d) Additional engineering and consulting costs required to advance the
design of a product to the manufacturing stage are R&D costs. As
indicated in the chapter it is R&D because it translates knowledge into
IFRS12.11
(a) IFRS 3 addresses goodwill, while IAS 38 addresses intangible assets.
(b) IFRS 3 defines goodwill as “an asset representing the future economic
IFRS12.11 (Continued)
(d) Goodwill recognised in a business combination is an asset represent–
ing the future economic benefits arising from other assets acquired in
a business combination that are not individually identified and
separately recognised. Goodwill does not generate cash flows
independently of other assets or groups of assets, and often
contributes to the cash flows of multiple cash-generating units.
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 Changes in
Foreign Exchange Rates for the purpose of measuring foreign currency
gains and losses. For example, if an entity is required by IAS 21 to
IFRS12.11 (Continued)
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
IFRS12.12
(a) M&S shows Intangible Assets on the statement of financial position. In
its footnotes, M&S reports Goodwill, Brands, and Computer Software.
Intangible assets of £709 million were reported at 1 April 2017.