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J. Goodwill and Other Intangible Assets

J. Goodwill and Other Intangible Assets

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Module 11: Fixed Assets



Amortization of intangibles. Intangible assets that have a definite useful life are amortized by crediting the

intangible account directly (ordinarily, contra accounts are not used).

Amortization expense

Intangible asset



a. The method of amortization of intangibles should mirror the pattern that the asset is consumed. If the

pattern cannot be reliably determined, the straight-line basis should be used.


Determination of Useful Life of an Intangible Asset

Yeager Communications owns several radio stations and has $5,000,000 recorded as the carrying value of broadcast rights. The rights have a legal life of 7 more years but may be extended upon appropriate application for an

indefinite period. Since the company has the right and intent to extend the rights indefinitely, the useful life of the

asset should be considered indefinite and the rights should not be amortized.


Impairment of intangible assets. An intangible asset that is amortized should be tested for impairment.

a. An intangible asset that is determined to have an indefinite useful life should not be amortized. However, it

should be reevaluated every reporting period to determine if facts and circumstances have changed creating

a limited life and requiring it to be amortized. Also, such intangible assets should be tested for impairment

annually or more frequently if facts and circumstances indicate that impairment may have occurred. In

assessing impairment, an entity may choose to qualitatively assess (a likelihood of more than 50%) whether

a quantitative impairment assessment is necessary. Events and circumstances to be qualitatively examined

include, but are not limited to: cost increases negatively effecting future cash flows; financial performance

declines; legal, regulatory, or contractual changes; entity specific events; industry and market deterioration;

and other macroeconomic conditions. If it is not more likely than not that the events and circumstances lead

to impairment, then a quantitative assessment is unnecessary. However, if the qualitative assessment reveals

that it is more likely than not that the indefinite-lived intangible asset is impaired, a quantitative assessment

(described below) is necessary.

(1) If the carrying value of the intangible asset exceeds its fair value, an impairment loss should be recorded

in the amount of the difference.


Impairment of an Intangible Asset with an Indefinite Life

Wilson Company acquired a trademark for a major consumer product several years ago for $50,000. At the time

it was expected that the asset had an indefinite life. During its annual impairment test of this asset, the company

determined that unexpected competition has entered the market that will significantly reduce the future sales

of the product. Based on an analysis of cash flows, the trademark is determined to have a fair market value of

$30,000 and is expected to continue to have an indefinite useful life. The $20,000 ($50,000 – $30,000) impairment loss should be recognized as shown below.

Impairment loss





Impairment of goodwill. The goodwill assigned to a reporting unit should be examined for impairment on an

annual basis and between annual tests in certain circumstances. The annual examination may be performed any

time during the company’s fiscal year as long as it is done at the same time every year. Different reporting units

may be examined at different times during the year. An entity has the option to first qualitatively determine

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Module 11: Fixed Assets


if it is more likely than not (greater than 50%) that the fair value of a reporting unit is less than its carrying

value, including goodwill. Circumstances to be examined include, but are not limited to, examination of:

macroeconomic conditions, industry and market considerations, cost factors, overall financial performance,

entity-specific events, reporting unit events, and share price decreases. If it is found that it is not more likely

than not that the fair value of the reporting unit is less than its carrying value, the goodwill impairment tests are

deemed unnecessary. Then entity can choose to bypass the qualitative assessment and proceed directly to the

first step of the goodwill impairment test. The test of impairment is a two-step process as described below.

a. Compare the fair value of the reporting unit with its carrying amount.

(1) To determine fair value, a valuation premise should be used that is consistent with the asset’s highest and

best use. The valuation premise can either be an in-use or an in-exchange premise. An in-use premise is

used if the asset is used in a business in combination with other assets, such as a reporting unit.

(a) If the carrying amount of the unit is greater than zero and exceeds its fair value, the second step is


(b) If the carrying amount of the unit is zero or negative, step 2 of the goodwill impairment test should

be performed if it is more likely than not that a goodwill impairment exists.

b. Compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.

(1) The implied fair value of goodwill is determined in the same manner as the amount of goodwill

recognized in a business combination. That is, all assets in the segment are valued, and the excess of the

fair value of the reporting unit as a whole over the amounts assigned to its assets and liabilities is the

implied goodwill.

(a) If the implied value of goodwill is less than its carrying amount, goodwill is written down to its

implied value and an impairment loss is recognized.


Test of Impairment of Goodwill

Dunn Corporation is performing the test of impairment of the Communications reporting unit at 9/30/Y1. In performing the first step in the test of impairment, the Communications reporting unit is valued through a multiple of

earnings approach at $4,450,000. The carrying amount of the unit at 9/30/Y1 is $4,650,000, requiring the second

step to be performed. The fair value of the assets and liabilities are valued as shown below.

Communications Reporting Unit

Estimated Fair Values 9/30/Y1 (In 000s)

Fair value



Accounts receivable


Net Equipment




Customer contracts


Current liabilities


Fair value of net assets


The implied value of goodwill is $50,000 ($4,450,000 – $4,400,000) and this is less than the carrying amount of

$300,000. Therefore, an impairment of goodwill should be recognized as shown below.

Impairment loss





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Module 11: Fixed Assets


K. Reporting on the Costs of Start-Up Activities

Start-up costs, including organization costs, are to be expensed as incurred. Start-up costs are defined as one-time

activities related to opening a new facility or new class of customer, initiating a new process in an existing facility, or

some new operation. In practice, these are referred to as preopening costs, preoperating costs, and organization costs.

Routine ongoing efforts to improve existing quality of products, services, or facilities, are not start-up costs.

L. Research and Development Costs

1. R&D costs are expensed as incurred except for intangibles or fixed assets purchased from others having

alternative future uses. These should be capitalized and amortized over their useful life. Thus, the cost of

patents and R&D equipment purchased from third parties may be deferred and amortized over the asset’s useful

life. Internally developed R&D may not be deferred.

2. Finally, R&D done under contract for others is not required to be expensed. The costs incurred would be

matched with revenue using the completed-contract or percentage-of-completion method.

M. Computer Software Costs

Costs of Computer Software

Excepted to Be Sold, Leased, or Otherwise Marketed






What cost to include

When to expense costs

How to expense costs

How to amortize costs


of cost

Product reaches



All costs until


feasibility established

In the period occurred

R & D expense




Product has



All costs incurred once technological Costs incurred for duplicating

software and physical

feasibility established until product

packaging of product

has market feasibility

After market feasibility

As the product is sold

Annual amortization

Cost of goods sold


1. Greater of

a. SL amortization, or

Current revenue

× cost


Expected revenue

2. Ceiling for carrying amount =

NRV of asset. If carrying

amount exceeds NRV,

defference is written off

* Software creation process includes a detail program design.

** Product ready for release to customers.

1. Software developed for sale or lease. If software is developed for sale or lease, the costs incurred to internally

create software should be expensed as research and development until technological feasibility is established.

Thereafter, all costs should be capitalized and reported at the lower of unamortized cost or net realizable value.

Capitalization should cease when the software is available for general release to customers.

a. The annual amortization of capitalized computer software costs will be the greater of the ratio of current revenues

to anticipated total revenues or the straight-line amortization which is based on the estimated economic life.

b. Once the software is available for general release to customers, the inventory costs should include costs for

duplicating software and for physically packaging the product.

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c. The cost of maintenance and customer support should be charged to expense in the period incurred.


Software developed for internal use. Software must meet two criteria to be accounted for as internally

developed software.

a. First, the software’s specifications must be designed or modified to meet the reporting entity’s internal

needs, including costs to customize purchased software.

b. Second, during the period in which the software is being developed, there can be no plan or intent to market

the software externally, although development of the software can be jointly funded by several entities that

each plan to use the software internally.

(1) In order to justify capitalization of related costs, it is necessary for management to conclude that it is

probable that the project will be completed and that the software will be used as intended.

(a) Absent that level of expectation, costs must be expensed currently as research and development

costs are required to be.

(b) Entities which historically were engaged in both research and development of software for internal

use and for sale to others would have to carefully identify costs with one or the other activity, since

the former would (if all conditions are met) be subject to capitalization, while the latter might be

expensed as research and development costs until technological feasibility had been demonstrated.

b. Under terms of the standard, cost capitalization commences when an entity has completed the conceptual

formulation, design, and testing of possible project alternatives, including the process of vendor selection

for purchased software, if any. These early-phase costs (referred to as “preliminary project stage”) are

analogous to research and development costs and must be expensed as incurred. These cannot be later

restored to an asset account if the development proves to be successful.

c. Costs incurred subsequent to the preliminary stage, and which meet the criteria under GAAP as long-lived

assets, can be capitalized and amortized over the asset’s expected economic life. Capitalization of costs will

begin when both of two conditions are met.

(1) First, management having the relevant authority authorizes and commits to funding the project and

believes that it is probable that it will be completed and that the resulting software will be used as


(2) Second, the conceptual formulation, design, and testing of possible software project alternatives (i.e.,

the preliminary project stage) have been completed.

N. Development Stage Enterprises

1.A development stage enterprise is defined as one devoting substantially all of its efforts to establishing a new

business and (1) planned principal operations have not commenced, or (2) planned principal operations have

commenced, but there has been no significant revenue.

NOTE: Generally accepted accounting principles are to be followed in preparing the financial statements of a

development stage enterprise. Therefore, no special treatment is allowed concerning capitalization or deferral

of costs; only costs that may be deferred for an established enterprise may be capitalized by a development

stage enterprise.

a. The balance sheet should show cumulative losses since inception under stockholders’ equity.

b. The income statement and statement of cash flows should include both current period and cumulative

amounts, since inception, of revenues, expenses, losses, and cash flows.

c. The financial statements must be identified as those of a development stage enterprise.

NOTE: The first fiscal year after the development stage, a disclosure is required in the financial statements

stating that the entity was previously in the development stage.


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