Continuing Case Solution
Chapter 12
Part I
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Goodwill and R&D Costs
Date: January 20, 2013
Goodwill: Goodwill is defined as the excess cost over the fair value of the
identifiable net assets acquired when an entire business is purchased.
According to FASB ASC 350-20-35-1 through 350-20-35-3:
Goodwill shall not be amortized. Goodwill shall be tested for impairment at a
level of reporting referred to as a reporting unit. (Paragraphs 33 46 of FASB
According to the transition guidance in FASB ASC 350-20-65-1, an entity may,
based on qualitative factors, deem the two-step impairment test unnecessary
under certain conditions. These qualitative factors are described in FASB ASC
350-20-35-3A through 35-3G. This assessment of qualitative factors has been
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Continuing Case Solution
two-step impairment test described below.
Step one of the two-step impairment test for goodwill consists of comparing
the fair value of a reporting unit containing goodwill to its carrying value. If the
An internally developed trade name, such as CM2, cannot be recorded and
reported as an asset. FASB ASC 350-30-25-3 Costs of internally
developing, maintaining, or restoring intangible assets that are not specifically
Continuing Case Solution
* Part II
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Goodwill and R&D Costs
Date: January 20, 2010
Software R&D: FASB ASC 985-730 explains the accounting for software
research and development costs. The statement requires that costs incurred
before reaching technological feasibility must be expensed as research and
development.
FASB ASC 985-20-25: All costs incurred to establish the technological
feasibility of a computer software product to be sold, leased, or otherwise
marketed are research and development costs. Those costs shall be charged to
After technological feasibility has been reached, but before release to the general
public, software development costs incurred can be capitalized and amortized
after release.
Of the $200,000, 15% ($30,000) represents intangible software costs that can be
capitalized and amortized (once the product is being sold) over the greater of the
ratio of current revenues to current and future anticipated revenues or the useful