GAAP v.s.

IFRS
Intangible Assets SFAS 142 and IAS 38
Amanda Whitley Nneka Amuta

SFAS 142 Intangible Assets

SFAS 142 - Intangible Assets

Definition Intangible Assets are identifiable nonfinancial assets that lack physical substance. Examples include goodwill, development costs, research and development, patents, copyrights, and advertising.

Grant Thornton, (June, 30, 2008). Comparison Between U.S GAAP and International Financial Reporting Standards , from Grant Thorntons Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Grant_Thornton_GAAP_v_IFRS_Comparison.pdf

SFAS 142 Initial Recognition

Recognition

In order to be recognized as an intangible asset, an asset must: Have costs and characteristics that can be measured with sufficient reliability. Have future economic benefits that are probable. Be controlled by an entity. Have relevant information that is neutral, verifiable, and have representational faithfulness. Have arisen from an event or transaction that has already occurred.

Grant Thornton, (June, 30, 2008). Comparison Between U.S GAAP and International Financial Reporting Standards , from Grant Thorntons Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Grant_Thornton_GAAP_v_IFRS_Comparison.pdf

SFAS 142 Measurement After Recognition

The Cost Model is used to account for intangibles.

Calculation: assets are recorded at historical cost less accumulated amortization and impairment losses. Intangible assets that are bought outside of a business are recognized at fair value.

The Revaluation Model is never used to account for intangibles.

Deloitte, (April, 2, 2008). IFRS In Your Pocket 2008. Retrieved September 13, 2008, from Deloitte's IAS Plus Site Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Deloitte_IFRSpocket2008.pdf

SFAS 142 Accounting for Intangible Assets

Goodwill is measured as a residual and only recognized in a business combination. Acquired goodwill is treated as an asset with an indefinite life, so it is tested for impairment. Goodwill impairment is tested using the following approach: 1.) The fair value and carrying value of the reporting unit are measured. If the carrying value is greater than the fair value, a goodwill impairment loss is calculated and accounted for 2.) Goodwill loss impairment is the excess of the carrying value of goodwill over the implied fair value of goodwill.

Source: Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student Companion Website, 2007, slide 29

SFAS 142 Impairment of Intangible Assets

Impairment of Intangible Assets Impairment of Intangible Assets
E12-15 Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2007.
Step 1: The fair value of the reporting unit is below its carrying value. Therefore, an impairment has occurred.
Fair value Carrying amount, net of goodwill Implied goodwill Carrying value of goodwill Loss on impairment $

Step 2:

(in millions) $ 335 150 185 200 (15)

Loss on impairment Goodwill

Chapter Companion Website, 2007, slide 29 LO 7 Explain 12-29

15,000,000

15,000,000

Source: Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student

the accounting issues related to intangible - asset impairments.

Source: Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student Companion Website, 2007, slide 29

SFAS 142 Expenses After Initial Recognition

Research and development costs are immediately expensed when incurred, unless they have an alternative future use. The costs of software developed for external use or sale are capitalized when it is established to be technologically feasible. The costs of software developed for internal use are capitalized only when such costs are incurred during the application development stage.

KPMG, (May 2008). IFRS compared to U.S. GAAP: an overview. Retrieved September 13, 2008, from KPMG IFRS Institute Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/KPMG_US-GAAP-IFRS_Comparison.pdf

SFAS 142 Other Expenses

Advertising Costs (other than Direct Response Advertising) and Promotional Costs are either expensed as incurred, or are delayed and then expensed when the advertising actually takes place. Some Direct Response Advertising Costs are capitalized and amortized when there is a probable future economic benefit. Costs to develop customer lists, training costs, and start-up costs are not capitalized as intangible assets.

Pricewaterhouse Coopers, (September, 2008). IFRS and US GAAP similarities and differences*. Retrieved September 22, 2008, from PWC IFRS Site Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/PwC_IFRS_USGAAPSep08.pdf

IAS 38 Intangible Assets

IAS 38 Intangible Assets Recognition

In order to be recognized as an intangible asset, the asset must:

Fit within the definition of an intangible asset. Meet the recognition criteria.

This requirement applies to:

Initial costs to acquire or internally generate an intangible asset. Costs incurred to add, replace, or maintain the asset.

IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved September 13, 2008, from IFRS and IAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf

IAS 38 Internally Generated Intangible Assets Expenses on intangible assets should be recognized as they are incurred providing:

Costs meets the recognition criteria. The item is acquired in a business combination. Cannot be recognized as an intangible asset.

If this is the case, the amount is recognized as goodwill at the acquisition date (see IFRS 3).

IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved September 13, 2008, from IFRS and IAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf

IAS 38 Intangible Assets Measurement After Recognition

Cost Model Same as GAAP Revaluation model:

Intangible assets carried at FV at revaluation date less accumulated amortization and impairment loss. Use fair value according to an active market. Revaluations made annually at year end. When there is an increase or decrease because of revaluation, the difference is recognized in Other Comprehensive Income and accumulated in equity under the heading of Revaluation Surplus.

IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved September 13, 2008, from IFRS and IAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf

IAS- 38 Intangible Asset Transactions

Example: Global Corporation purchased the net assets of

Local Company for $300,000 on December 31, 2007. The balance sheet of Local Company just prior to acquisition is:
Assets Cash Receivables Inventories Equipment Total Liabilities and Equities Accounts payable Common stock Retained earnings Total $ 25,000 100,000 30,000 $ 155,000 $ 25,000 $ Cost 15,000 10,000 50,000 80,000 $ 155,000 $ FMV 15,000 10,000 70,000 130,000 $ 225,000

FMV of Net Assets = $200,000

25,000

Kieso, Weygandt, Warefield, Chapter 12 - Intangible Assets. Retrieved September 13, 2008, from http://bcs.wiley.com/hebcs/Books?action=chapter&bcsId=2995&itemId=0471749559&chapterId=22171 Web site: http://higheredbcs.wiley.com/legacy/college/kieso/0471749559/ppt/ch12.ppt

IAS- 38 Intangible Asset Transactions

Calculation of Goodwill: Book value of net assets of Local: Assets Liabilities Book value of net assets Under (Over) valued asset or liabilities: Inventory Equipment FMV of net assets of Local Price paid for Local Goodwill 20,000 50,000 200,000 300,000 $ 100,000 $ 155,000 (25,000) 130,000

*Assuming there is an active market, IFRS would use the Revaluation Amount.

Book Value = $130,000

Revaluation $70,000

Fair Value = $200,000 Purchase Price = $300,000

Goodwill $100,000

Kieso, Weygandt, Warefield, Chapter 12 - Intangible Assets. Retrieved September 13, 2008, from http://bcs.wiley.com/hebcs/Books?action=chapter&bcsId=2995&itemId=0471749559&chapterId=22171 Web site: http://higheredbcs.wiley.com/legacy/college/kieso/0471749559/ppt/ch12.ppt

IAS 38 Intangible Assets Useful Life

An entity shall assess whether the useful life of an intangible asset is finite or indefinite. Finite Useful Life:

Depreciable Amount cost of an asset less its residual value; all allocated by useful life. The amortization method used reflects the consumption pattern of future economic benefits by the entity.

If that pattern cannot be determined reliably, the straight-line method is used.

IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved September 13, 2008, from IFRS and IAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf

IAS 38 Intangible Assets Useful Life

Indefinite Useful Life:

An intangible asset with an indefinite useful life is not amortized. IAS 36 Impairment of Assets: Intangible assets with an indefinite useful life are tested for impairment annually. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors:

If an asset that is indefinite becomes finite based on assessment, the change is considered accounting estimate.

IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved September 13, 2008, from IFRS and IAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A363-9E84920D6EED/0/IAS38.pdf

U.S. GAAP and IFRS Similarities

The purchase method is used to account for business combinations. The acquirer recognizes assets and liabilities at the fair value of the acquisition date. Expenses associated with intangibles are not capitalized unless such expenses increase the value or usefulness of the asset. Similar capitalization methods are used for software developed for sale or internal use. The costs of software developed for external use or sale are capitalized when it is established to be technologically feasible. The costs of software developed for internal use are capitalized only when such costs are incurred during the application development stage. Goodwill is measured as a residual and only recognized in a business combination.

Deloitte, (April, 2, 2008). IFRS In Your Pocket 2008. Retrieved September 13, 2008, from Deloitte's IAS Plus Site Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Deloitte_IFRSpocket2008.pdf KPMG, (May 2008). IFRS compared to U.S. GAAP: an overview. Retrieved September 13, 2008, from KPMG IFRS Institute Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/KPMG_US-GAAP-IFRS_Comparison.pdf

U.S. GAAP and IFRS Differences

Differences Definition U.S. GAAP Intangible Assets are identifiable non-financial assets that lack physical substance. Uses the cost method, and revaluation is not allowed. Research and development costs are normally expensed as incurred, except in special cases (computer software). IFRS Intangible Assets are identifiable non-monetary assets that lack physical substance and is controlled by an entity. Revaluation is allowed in some cases, so assets are revalued to their fair value. Costs are reclassified as research phase costs and development phase costs. Research phase costs are always expensed, while development phase costs are capitalized if these 6 criteria are met: -Intention to complete the intangible -Technical feasibility of completing the intangible -Availability of sufficient resources to complete the development -Ability to reliably measure any expenses incurred in the development of the intangible -Ability to sell or use the asset -Generate future economic benefit Start-up costs can be capitalized if part of goodwill in an acquisition or if it is included in the cost of property, plant, and equipment (IAS 38. 6869).

Cost and Revaluation Method

Research and Development Costs

Start-Up Costs

Start-up costs are always expensed.

Pricewaterhouse Coopers, (September, 2008). IFRS and US GAAP similarities and differences*. Retrieved September 22, 2008, from PWC IFRS Site Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/PwC_IFRS_USGAAPSep08.pdf

Multiple Choice Question 1

Goodwill Impairment Loss is calculated by:
a.

b.

c.

d.

e.

Subtracting the fair value of the reporting unit from the carrying value of the reporting unit. Subtracting the carrying value of goodwill from the carrying value of the reporting unit. Adding the implied value of goodwill to the fair value of the reporting unit. Subtracting the implied value of goodwill from the carrying value of goodwill. Adding the implied value of goodwill to the carrying value of goodwill.

Multiple Choice Question 2 Which of the following is a similarity of GAAP to IFRS accounting for intangible assets?
a.

b.
c.

d. e.

Start up costs are always expensed. Intangible assets are defined the same way. Expenses associated with intangibles are not capitalized unless they increase the usefulness of the intangible asset. Research and development costs are expensed. Intangible assets are defined differently.

Multiple Choice Question 3

Which of the following is false concerning the revaluation model used for the recognition of intangible assets?
a.

b.

c.

d.

Increases and decreases in revaluation are recognized in Other Comprehensive Income. Revaluation is used only when an active market exists. Revaluation is used by both GAAP and IFRS under certain conditions. The revaluation method uses the fair value of an intangible asset at the revaluation date.

Multiple Choice Question 4

ABC Inc. purchased the net assets of DEF Inc. for $500,000 on December 31, 2008. The balance sheet for DEF Inc. just prior to the acquisition is the following:
Assets Cash Receivables Inventories Equipment Total Liabilities and Equities Accounts payable Common stock Retained earnings Total $ $ 35,000 100,000 70,000 205,000 $ 35,000 $ 35,000 $ $ Cost 25,000 20,000 70,000 90,000 205,000 $ $ FMV 35,000 20,000 90,000 130,000 275,000

Multiple Choice Question 4 Continued

What is the net amount of goodwill recognized under GAAP and IFRS?

a. $270,000 ; $60,000 b. $0 ; $240,000 c. $205,000 ; $275,000 d. $205,000 ; $35,000