CA 12-2 (Continued)
Developments between the balance sheet date and the date that the financial statements are
released would properly be reflected in notes to the statements as post-balance sheet (or
subsequent events) disclosure.
CA 12-3
(a) Research, as defined in GAAP (FASB ASC 730–10-25), is “planned search or critical investigation
aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing
(b) The current accounting and reporting practices for research and development costs were
promulgated by the Financial Accounting Standards Board (FASB) in order to reduce the number
of alternatives that previously existed and to provide useful financial information about research
and development costs. The FASB considered four alternative methods of accounting: (1) charge
In reaching this decision, the FASB considered the three pervasive principles of expense
recognition: (1) associating cause and effect, (2) systematic and rational allocation, and
(3) immediate recognition. The FASB found little or no evidence of a direct causal relationship
between current research and development expenditures and subsequent future benefits. The
FASB also stated that the high degree of uncertainty surrounding future benefits, if any, of
(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.
The cost of equipment produced solely for development of the product ($315,000).
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
(b) Ethical issues include long-term versus short-term profits, concern for job security, loyalty to fellow
employees, and an efficient operation.
(c) Reid should do what is best for Czeslaw Corporation in the long run. He should choose to have the
FINANCIAL REPORTING PROBLEM
(a) P&G reports Goodwill of $57,562 million for 2011. P&G also reports
(net of amortization) Trademarks and other intangible assets of
$32,620 million in 2011.
COMPARATIVE ANALYSIS CASE
(a) (1) Coca-Cola reports: Trademarks, Goodwill and Other Intangible
(2) Coca-Cola: Intangible assets are 34.60% of total assets.
PepsiCo: Intangible assets are 45.61% of total assets.
(3) At Coca-Cola, intangible assets increased $2,024M from
$25,645M to $27,669M. At PepsiCo, intangibles increased $4,776M
(2) Coca-Cola had accumulated amortization of $445M and $316M
(3) Coca-Cola identified the composition of its intangible assets as
follows:
Trademarks with indefinite lives $ 6,430M
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
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
F
G
H
(Columns C–D)
(Columns B–F)
(Columns D–G)
Company
Market
Value
Book Value
(Net Assets)
Carrying
Value of
Goodwill
Estimated Fair
Value of Net
Assets
Implied GW
(NA-Market
Value)
Goodwill
Impairment
Sprint Nextel
$15,808
E Trade Financial
4,104
$26,007
(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,
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
tend to be nonrecurring items, their recognition can make operating income
Principles
The accounting for impairments provides relevant information about
intangible assets by indicating in a timely fashion that intangible assets
PROFESSIONAL RESEARCH
(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.
(d) Codification String: Assets > 350 Intangibles – Goodwill and other >
20 Goodwill > 35 Subsequent Measurement
35–48 All goodwill recognized by a public or nonpublic subsidiary
(subsidiary goodwill) in its separate financial statements that
PROFESSIONAL RESEARCH (Continued)
with impaired goodwill resides must be tested for impairment if
the event that gave rise to the loss at the subsidiary level would
PROFESSIONAL SIMULATION
Journal Entries
January 2, 2014
Patents …………………………………………………….. 80,000
Cash …………………………………………………… 80,000
July 1, 2014
Measurement
Computation of impairment loss:
The book value of $34,125 is greater than net cash flows of $25,000.
Therefore the franchise is impaired. The impairment loss is computed as
follows:
PROFESSIONAL SIMULATION (Continued)
Financial Statements
Intangible assets as of December 31, 2013
Note that the net loss and all organization costs are expensed in 2013.
Intangible assets as of December 31, 2014
IFRS CONCEPTS AND APPLICATION
IFRS12-1
IFRS guidance related to intangible assets is presented in IAS 38, “Intangible
Assets.” IFRS related to impairments is found in IAS 36, “Impairment of
Assets.”
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
Notable differences are: (1) while costs in the research phase are always
expensed under both IFRS and GAAP, under IFRS costs in the development
phase are capitalized once technological feasibility is achieved; (2) IFRS
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. GAAP requires expensing of all costs associated
with internally generated intangibles; (3) IFRS requires an impairment test at
IFRS12-3
The IASB and FASB have 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
(b) Expense
(c) Capitalize
(d) Expense
(e) Expense
IFRS12-6
Loss on Impairment ………………………………………………..
190,000
Patents ($300,000 – $110,000) ………………………….
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
amount of the assets, goodwill is not considered to be impaired. No entry is
necessary.
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 ………………………………………………………………
Note: The cost of defending the patent is capitalized because the
defense was successful and because it extended the useful life of the
patent.
Amortization Expense ……………………………………………..
11,900
Patents ……………………………………………………….
11,900
(To record one year’s amortization expense:
(d) Additional engineering and consulting costs required to advance the
design of a product to the manufacturing stage are R&D costs. As
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.
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
be associated. Therefore, the development of additional reporting
systems is typically not necessary (par. 82).
If the initial allocation of goodwill acquired in a business combination
cannot be completed before the end of the annual period in which the
business combination is effected, that initial allocation shall be
completed before the end of the first annual period beginning after
the acquisition date (par. 84).
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:
In such circumstances it might also not be possible to complete the
initial allocation of the goodwill recognised in the combination before
IFRS12–12
(a) M&S shows Intangible Assets on the statement of financial position. In
its footnotes, M&S reposts Goodwill, Brands, and Computer Software.