11.7 Chapter Summary

LO 1: Describe intangible assets and goodwill and their role in accounting and business.

Intangible assets and goodwill can have significant balances reported in a company’s SFP/BS. To be classified as an intangible asset, it must be identifiable, non-monetary, without physical substance, be controllable by business, and with expected future benefits. Some examples of intangible assets are patents, copyrights, trademarks, and purchased customer lists. Goodwill, on the other hand, can only occur because of a purchase of another company’s net identifiable assets. Any excess proceeds paid over the total fair value of these net identifiable assets will be classified and reported separately as goodwill.

LO 2: Describe intangible assets and explain how they are recognized and measured.

To be recognized as an intangible asset for accounting purposes, there must be a prob- ability that future benefits will accrue to the business and that they can be reliably measured. If not, the item is expensed as incurred. Intangible assets can be acquired as a separate purchase or as part of a business combination, in exchange for other assets, as part of a government grant or as internally developed. Intangible assets are initially measured at cost. Initial costs that can be capitalized to the asset are any direct costs required to get the asset ready for use. Any costs incurred after the asset is put into use are expensed.

Intangible assets that are internally developed are subject to more stringent criteria and are separated into research and development phases. Research phase costs are expensed as incurred because there is no identifiable product or process yet. Development phase costs meeting all six criteria can be capitalized.  Initial costs that can be capitalized are any direct costs required to get the asset ready for use. All other costs are expensed and cannot be capitalized at later.

Once the asset is in use, it is usually subsequently measured at amortized cost or cost (ASPE or IFRS) or, less often, using the fair-value based revaluation model (IFRS only). Definite-life intangible assets are amortized on a systematic basis the same as property, plant, and equipment. Indefinite-life assets are not amortized but the indefinite-life status is subject to review.

Evaluation for impairment is undertaken at certain points over time for all intangible assets the same as is done for property, plant, and equipment. For definite life intangibles, ASPE evaluates for indicators of impairment only when circumstances indicate impairment is a possibility as determined by a recoverability test that compares the carrying value with the undiscounted future cash flows. If impaired, the asset’s carrying value is reduced to equal the fair value at that date and the loss on impairment is reported in net income. Impairment reversals are not permitted.

IFRS evaluates for indicators of impairment at the end of each year. There is no impairment test. If impaired, the asset carrying value is reduced to equal the recoverable amount (the higher of the value in use and the fair value less costs to sell). Impairment reversals are limited and cannot exceed the asset’s carrying value without any impairment adjustments.

For indefinite intangible assets, ASPE evaluates for indicators of impairment only when circumstances indicate impairment is a possibility as determined by a fair value test that compares the carrying value with the fair value. If impaired, the asset’s carrying value is reduced to equal the fair value at that date and the loss on impairment is reported in net income. As was the case for definite-life intangibles, impairment reversal is not permitted.

For IFRS, indefinite-life intangibles are treated the same as definite-life intangibles regarding impairment evaluation and measurement.

Amortization is based on the adjusted carrying value after impairment, the revised residual value, and the estimated remaining useful life.

On disposal, the asset is removed from the accounts and any gain or loss reported in net income.

LO 3: Describe goodwill and explain how it is recognized and measured.

Goodwill can only arise from a third-party purchase of another company’s net identifiable assets. Goodwill is calculated as the difference between the consideration price (e.g., cash, other assets, notes payable, shares) and the fair value of the net identifiable assets; it is reported separately as a long-term asset on the SFP/BS. The purchaser records all the net identifiable assets at their fair values and any resulting goodwill on the SFP/BS as at the purchase date. If the purchase price were to be less than the fair value of the net identifiable assets, the difference would be credited as a gain from the acquisition of assets in net income.

Goodwill is considered to have an indefinite life, so it is not amortized. Goodwill is assigned as part of a reporting or cash-generating unit (CGU), and the whole unit is assessed for impairment using the same measurement criteria as for intangible assets with an indefinite life. The only difference is that goodwill impairment reversals are not allowed for either ASPE or IFRS.

LO 4: Identify the disclosure requirements for intangible assets and goodwill.

For reporting purposes, intangible assets are usually grouped with other intangibles with similar characteristics. For ASPE, the disclosures are simpler than for IFRS companies. Most of the disclosures are made in the notes to the financial statements. Disclosures include separate reporting into various classes for definite-life and indefinite-life intangibles, with goodwill being reported separately. Amortization and capitalization policies, amortization amounts, impairment assessments and amounts, and reconciliations of be- ginning to ending balances for each class of intangible asset disclosures are also required. Amounts expensed for amortization expense and research and development costs are also disclosed.

LO 5: Describe how intangible assets and goodwill affect the analysis of company performance.

Comparability is affected by the differences between how the accounting standards are applied for purchased assets versus internally developed intangibles and goodwill for both ASPE and IFRS companies. Any changes in accounting policies are treated prospectively, making comparability within a company or between companies over time more difficult. Valuation issues are significant regarding unreported intangible assets that have been expensed because the conditions and criteria identified in the ASPE and IFRS standards to qualify as an asset were not met. Since these are not reported on the SFP/BS, valuation of these companies becomes increasingly more difficult.

LO 6: Explain the similarities and differences between ASPE and IFRS for recognition, measurement, and reporting for intangible assets and goodwill.

The differences between ASPE and IFRS arise regarding the following.

1. There is a choice to capitalize or expense internally developed intangible assets for ASPE companies. For IFRS, there is no choice: if they meet the conditions and criteria, then these expenses are to be capitalized.
2. Evaluation and measurement of impairment losses.
3. The extent of the required disclosures in the financial statements.