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Prepared by: Patricia Zima, CA Mohawk College of Applied Arts and Technology
Intangibles: Characteristics
CICA Handbook, Section 3062, broadly defines intangible assets as: 1. Assets that are lacking in physical substance, and 2. Assets that are not financial instruments Examples of intangible assets: patents, copyrights, franchises, and trademarks
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Types of Intangibles
Six major categories for intangibles: 1. Marketing-related 2. Customer-related 3. Artistic-related 4. Contract-based 5. Technology-based 6. Goodwill
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Marketing-Related Intangibles
Used in marketing and promotion Include: Trademarks or trade names Newspaper mastheads Internet domain names Non-competition agreements
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Customer-Related Intangibles
Result from interactions with third parties Include: Customer lists Order/production backlogs Contractual and noncontractual customer relationships
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Artistic-Related Intangibles
Ownership rights to artistic endeavours Examples: literary works, musical works, pictures, photographs and audiovisual material These ownership rights are protected by copyrights
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Copyrights
Copyrights are granted for the life of the creator, plus 50 years Copyrights can be sold or assigned, but cannot be renewed Useful life is generally less than the legal life Amortized over period in which benefits accrue Costs of acquiring and defending copyrights are capitalized Research costs associated with a copyright are expensed
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Contract-Based Intangibles
Value of a right resulting from a contractual arrangement Examples: licensing arrangement, leaseholds, construction permits, broadcast rights, service or supply contracts, franchises and licenses A franchise is a contractual agreement where franchisor grants the franchisee the rights to: sell specified products or services use certain trademarks or trade names perform certain functions within a particular geographical area
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Leaseholds
Agreement between the lessor (owner) and the lessee (renter) Gives the lessee the right to use the property Valid for a specific period of time The lessee makes stipulated, periodic cash payments which are normally expensed Capital Leases: if the lease agreement transfers all benefits and risks to the lessee For capital leases, the PV of all future payments is recorded as a tangible asset and as a longterm liability
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Technology-Based Intangibles
Relate to innovations or technological advances Include: 1. Product Patents Physical (tangible) products 2. Process Patents Process by which products are made 3. Computer Software Costs
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Patents
A patent gives exclusive right to the holder for making, selling or using a product or process Costs of purchasing patents are capitalized Costs to research and most development costs are expensed as incurred Patents are amortized over the shorter of the legal life (20 years) or their useful lives Legal fees and other costs to successfully defend a patent are capitalized and amortized over the remaining useful life of the patent
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Goodwill
Goodwill is the excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired in a business combination Goodwill can be acquired and sold only when a business combination occurs Goodwill cannot be separated from the business Internally-generated goodwill is not capitalized Goodwill is the only intangible requiring separate disclosure on the balance sheet
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Negative Goodwill
Negative goodwill or a bargain purchase arises when fair value of acquired net assets is greater than the purchase price The current standard requires that: 1. The excess is used to reduce the amounts assigned to other acquired assets that are generally non-financial in nature, and 2. Any excess remaining is treated as an extraordinary gain
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Recoverability test? Indicates impairment (since $3,500,00 < $6,000,000) Impairment loss? $6,000,000 $2,000,000 = $4,000,000
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Remaining carrying amount amortized over expected useful life Future increases in value of intangible are not recognized
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Goodwill Impairment
Two-step process 1. Fair value of the reporting unit compared to carrying amount of the reporting unit, including goodwill When fair value greater than carrying amount, no impairment When fair value less than carrying amount, then a second step is required 2. Determine if goodwill is impaired (see next slide)
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Goodwill Impairment
Compare implied current fair value of goodwill with carrying amount of goodwill Implied current fair value of goodwill: Fair value of the whole reporting unit is compared to the fair value of the identifiable net assets When the fair value is less than carrying amount, impairment is recognized Goodwill impairment loss is reported separately in the income statement before extraordinary items and discontinued operations
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Deferred Charges
Intangibles that may be recorded as deferred charges include: deferred development costs, pre-operating and start-up costs and organization costs CICA Handbook, Section 3070, Deferred Charges, removed from the handbook in 2005 Deferred charges are not as common as previously, as the costs must now meet the definition of an asset
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Pre-Operating Costs
Costs incurred prior to start of formal operations EIC-27 allows for the deferral of pre-operating costs if three conditions are met: 1. The expenditure relates directly to placing the new business in service 2. It would not have been incurred if not for the new business 3. The amount is likely to be recovered from future operations of the new business Amortized over maximum of 5 years
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International Comparison
Canadian and international GAAP are substantially converged for intangible assets Some differences still exist related to the treatment of negative goodwill, preoperating costs, internally developed intangibles and impairment models of goodwill and other intangibles
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COPYRIGHT
Copyright 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
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