Lecture Notes for Acct 592
Prof. Teresa Gordon
Accounting for Goodwill and Other Intangibles
FASB 141, 142 (June 2001)
Distinctions:
Intangibles can be acquired individually or with a group of other assets
Goodwill can only be acquired in conjunction with a business combination
Initial Measurement of Intangible Assets
Goodwill
Negative Goodwill
(potentially recognized
as extraordinary gain
from business
combination)
Other intangibles from a
business combination
Purchased intangibles
not acquired in a
business combination
Internally developed
intangibles
Initial Value Recognized
Purchase price is allocated to acquired assets and liabilities based on
estimated fair values. Any excess of cost over the fair value of the
net assets acquired is recorded as goodwill. Goodwill must be
assigned to an operating unit of the acquiring company.
If the fair value of the acquired net assets exceeds the purchase
price, the excess is allocated as a pro rata reduction of the amounts
that would otherwise have been assigned to assets [excludes financial
assets other than equity method investments, assets to be disposed of by sale,
deferred tax assets, prepaid assets related to pensions and other retirement
benefits, and any other current assets]. If any excess remains after reducing assets
to zero, it is recognized as an extraordinary gain.]
Recognized at fair value if (a) it arises from contractual or other
legal rights even if those rights are not transferable or separable, or
(b) it is capable of being separated or divided from the acquired
entity and sold, transferred, licensed, or exchanged even if there is
no intention of doing so.
Acquisition cost (fair value) if acquired individually. When
acquired with a group of other assets, the acquisition cost is
allocated to individual assets based on relative fair value. No
goodwill is recognized.
Expensed
Amortization of Intangibles
Finite Useful Life
Goodwill
N/A
Other intangible assets
Amortized over expected
useful life.
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Indefinite Useful Life
Not amortized. Subject to
impairment test annually.
Any goodwill impairment is
recognized as an expense.
Not amortized. Subject to
impairment test at least
annually. If useful life
becomes finite, the carrying
value is amortized over useful
life.
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Lecture Notes for Acct 592
Prof. Teresa Gordon
Examples of Intangibles Recognized Separately from Goodwill:
Marketing-related
Customer-related
Artistic-related
Contract-based
Technology-based
Intangible Assets Arising from
Contractual or Other Legal Rights
Trademarks, tradenames
Trade dress (unique color, shape, package
design)
Newspaper mastheads
Internet domain names
Noncompetition agreements
Order or production backlog
Customer contracts and related customer
relationships including those of
financial institutions [SFAS No. 147]
Plays, operas, ballets
Books, magazines, newspapers and other
literary works
Muscial works such as compositions, song
lyrics, advertising jingles
Video and audiovisual material including
motion pictures, music videos,
television programs
Licensing, royalty and standstill
agreements
Advertising, construction, management,
service or supply contracts
Lease agreements
Construction permits
Operating and broadcast rights
Use rights such as drilling, water, air,
mineral, timber cutting, and route
authorities
Servicing contracts such as mortgage
servicing contracts
Employment contracts
Patented technology
Computer software and mask works
Trade secrets such as secret formulas,
processes, recipes
Intangible Assets Recognized Because
They Are Separable
Customer lists
Noncontractual customer relationships
such as bank depositors
Unpatented technology
Databases, including title plants
Trade secrets not protected by law
Defined in FASB 142:
The excess of the cost of an acquired entity over the net of the amounts assigned to assets
acquired and liabilities assumed.
 The amounts assigned are fair values
 Goodwill includes all intangible assets that do not meet the criteria for
recognition as an asset apart from goodwill.
Remember -- You only have goodwill if you've purchased another entire company.
Acquisitions of financial institutions are no longer excluded from guidance of SFAS No. 141 &
142 [see SFAS No. 147, Oct. 2002]. Impairment of customer-relationship intangibles are also no
longer excluded from the impairment tests of SFAS No. 144.
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Lecture Notes for Acct 592
Prof. Teresa Gordon
FASB 141 Guidance on Assigning Values to Acquired Assets and Liabilities
Balance Sheet Element
Marketable securities
Receivables
Inventories – finished goods and
merchandise
Inventories – work-in-process
Inventories – raw materials
Plant and equipment to be used
Plant and equipment to be sold
Intangible assets recognized (other
than goodwill)
Land, natural resources, nonmarketable
securities and other assets
Accounts and notes payable, long-term
debt, etc.
Liabilities related to pension and other
retirement benefits
Accruals for warranties, vacation pay,
deferred compensation and the like
Other liabilities including unfavorable
contracts and plant closing expense
Goodwill on books of acquired
company
Deferred income taxes
Other intangible assets (whether or not
reported on acquired company’s
books)
Research and development assets
assigned to a particular research and
development project
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Measurement
Fair value
Present values of amount to be received determined at
appropriate current interest rates, less allowances for
uncollectibility and collection costs, if necessary
Estimated selling prices less the sum of (a) costs of disposal and
(b) a reasonable profit allowance for the selling effort of the
acquiring entity
Estimate selling prices of finished goods less the sum of (a)
costs to complete, (b) costs of disposal, and (c) a reasonable
profit allowance for the completing and selling effort of the
acquiring entity based on profit for similar finished goods
Current replacement cost
Current replacement cost for similar capacity unless the
expected future use of the assets indicates a lower value to the
acquiring entity
Fair value less cost to sell
Estimated fair value
Appraised values
Present values of amounts to be paid determined at appropriate
current interest rates
Measured in accordance with relevant standards (SFAS No. 87
and SFAS No. 106)
Present values of amounts to be paid determined at appropriate
current interest rates
Present values of amounts to be paid determined at appropriate
current interest rates
No value is assigned
New value is determined based on differences between the
assigned values and the tax bases of the recognized assets
acquired and liabilities assumed in the business combination
Recognized at fair value if (a) it arises from contractual or other
legal rights even if those rights are not transferable or separable
or (b) it is capable of being separated or divided from the
acquired entity and sold, transferred, licensed, or exchanged
even if there is no intention of doing so. However, an
assembled work force shall NOT be recognized as an intangible
asset apart from goodwill.
Charged to expense if there is no alternative future use (FIN 4)
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Lecture Notes for Acct 592
Prof. Teresa Gordon
FASB 142 Guidance on Determining Useful Life of Intangibles
Estimate of useful life should be based on all pertinent factors, in particular:
1. Expected use by the organization
2. Expected useful life of similar or related assets (example: mineral rights to depleting assets)
3. Legal, regulatory, or contractual provisions that might limit useful life
4. Renewal or extension provisions under laws, regulations or contracts (if such modifications can be
accomplished without materially changing existing terms and conditions)
5. Effects of obsolescence, demand, competition and other economic factors such as known technological
advances, legislative action that results in uncertain or changing regulatory environment, changes in
distribution channels, stability of the industry, etc.
6. Level of maintenance expenditures required to obtain the expected future cash flows from the asset (high
future costs would suggest very limited useful life)
If the precise length of the useful life is not known, use the best estimate of the useful life.
If no known factors limit the useful life, the useful life is considered to be indefinite.
Note that indefinite does not mean infinite.
Amortization Procedures
For intangibles with a finite life (not including goodwill), the asset is amortized over its useful
life to the reporting entity.
Method
The amortization method should reflect the pattern in which the economic benefits are
consumed or used up.
If the pattern is not known, use straight-line
Residual Value
The residual value is presumed to be zero unless at the end of the useful life to the reporting
entity the asset is expected to have a useful life to another entity (1) which has committed to
purchase the asset for determinable price or (2) the residual value can be determined by an
existing market for that asset which is expected to exist at the end of the assets useful life.
Evaluate Remaining Useful Life
Each reporting period, evaluate estimated remaining useful life changes. If a revision is
needed, handle as a change in accounting estimate. That is, amortize the carrying amount
over the revised remaining useful life.
Impairment Test for Intangibles Being Amortized
Follow FASB 121 and write the intangible down to fair value if the anticipated future cash
flows from the asset are less than its carrying value.
Note that an intangible asset is not written down or off in the period of acquisition unless it
becomes impaired (except for certain research and development intangibles associated with
a particular project)
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Lecture Notes for Acct 592
Prof. Teresa Gordon
Impairment Tests for Intangibles Not Subject to Amortization
Intangibles other than goodwill
Intangible assets not amortized are tested for impairment in value at least annually.
The estimated fair value of the intangible is compared to its carrying amount. If the carrying amount exceeds
the fair value, an impairment loss is recognized in an amount equal to the excess.
After an impairment loss is recognized, the adjusted carrying value becomes the new accounting basis. Once
written down, the intangible can not be written up (no reversals permitted).
Goodwill
At the same time each year, the goodwill of a reporting unit is subjected to a two-step impairment test. [See below
for what constitutes a reporting unit.]
1.
The fair values of all identifiable tangible and intangible assets (other than goodwill) and all liabilities are
determined. If the fair value is greater than the carrying value (including goodwill) of the unit’s net assets,
there is no impairment. If the fair value is less than carrying value, the second step is performed to determine
amount of impairment.
2.
Implied goodwill is the difference between the fair values (without goodwill) determined in step 1 and the
carrying value of all net assets (excluding goodwill). In essence, implied goodwill is determined by following
essentially the same procedures used when a company is acquired. The only exception is that other intangible
assets are recognized based or written up based on the impairment test. When implied goodwill is less than the
carrying value of goodwill, an impairment loss is recognized.
Note:
a.
b.
c.
Detailed evaluation can be carried forward to the next year without change if
No significant changes in assets and liabilities in the reporting unit
Most recent evaluation indicated substantial margin of implied goodwill over the carrying value of goodwill
The likelihood that a current fair value determination would be less than the current carrying value is
considered remote
Triggering Events for Interim Reviews
A test for goodwill impairment should be conducted between annual reviews if events and circumstances
indicate that impairment is more likely than not.
Examples:
Adverse change in business climate
Unanticipated competition
Loss of key personnel
Adverse action or assessment by a regulator
Impairment Loss
If the carrying value of goodwill exceeds the implied goodwill, the excess is recognized as an impairment loss.
The aggregate amount of goodwill impairment losses is presented in the income statement as a separate line
item before the subtotal for income from continuing operations.
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Lecture Notes for Acct 592
Prof. Teresa Gordon
Reporting Unit
Given that goodwill is a residual value after all other assets and liabilities have been measured,
an impairment test is only conducted for groups of assets that generate cash flows. The annual or
more frequent goodwill impairment test is conducted at the level of a reporting unit.
Reporting unit: operating segment or one-level below an operating segment (a component) that
constitutes a business for which discrete financial information is available and regularly
reviewed by segment management.
What is a business?
A business is a self-sustaining integrated set of activities and assets conducted and managed for the purpose of
providing a return to investors. [EITF 98-3]
The elements necessary to conduct normal operations will vary by industry and by the operating strategies of
the unit. In general, a business consists of inputs, processes and outputs:
Inputs
Long-lived assets, including intangible assets, or rights to the use of long-lived assets.
Intellectual property.
The ability to obtain access to necessary materials or rights.
Employees.
Processes
The existence of systems, standards, protocols, conventions, and rules that act to define the processes
necessary for normal, self-sustaining operations, such as
1. strategic management processes,
2. operational processes, and
3. resource management processes.
Outputs
The ability to obtain access to the customers that purchase the outputs of the component unit.
Financial Statement Presentation
Goodwill
Balance Sheet
Separate line item
Other intangible assets
One or more separate lines
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Income Statement
Impairment loss on separate
line before income from
continuing operations
Amortization expense and
impairment losses presented in
income statement line items in
the continuing operations
section
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Lecture Notes for Acct 592
Prof. Teresa Gordon
Other Disclosures
Disclosures related to intangible assets and goodwill are much more extensive under the new
standards:
Research and Development Costs Written Off
Amount of R&D assets acquired and written off during period and the line item in which the amount was included
on the income statement
Intangibles subject to amortization:
In total and by any major intangible asset classes:
Amount
Residual value
Weighted-average amortization period
Gross carrying amount and accumulated amortization
Aggregate amortization expense for period
Estimated amortization expense for each of the next five years
Intangibles not subject to amortization and impairment losses:
In total and by any major intangible asset classes:
Carrying amount
For each impairment loss
A description of the asset and circumstances leading to loss
Amount of impairment loss and method for determining fair value
Caption in income statement for account in which loss is included
Goodwill:
Changes in carrying amount of goodwill during the period including
Aggregate amount of goodwill acquired
Aggregate amount of impairment losses recognized
Amount of goodwill included in gain or loss on disposal of reporting unit
For each goodwill impairment loss
A description of the asset and circumstances leading to loss
Amount of impairment loss and method for determining fair value of the associate reporting unit
If estimate of loss has not been finalized, explain why and report any adjustments to losses initially estimated
in a prior year
Business Acquisitions:
Material business combinations (not a complete list):
Name and description of entity acquired
Reasons for acquisition
Period for which results of acquired company are included in income statement
Cost of the acquired entity, with details
Condensed balance sheet of acquired entity with fair values at acquisition
Related contingencies
Individually immaterial business combinations (not a complete list):
Number of entities acquired with brief description
Aggregate cost of acquired entities, with details
Related contingencies
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Lecture Notes for Acct 592
Prof. Teresa Gordon
Examples - Amortizing Intangible Assets
1.
A company acquires a broadcast license that expires in 5 years. The license is renewable
every 10 years if the license holder provides at least an average level of service and
complies with Federal Communication Commission (FCC) rules and policies. The previous
owner renewed the license twice. The new owner intends to renew the license in the
foreseeable future.
What is the useful life? Should the cost be amortized or subject only to an annual impairment
test?
2.
The company in example 1 operates the television station for 10 years (easily obtaining a
renewal license as expected). The FCC decides that it will no longer renew licenses.
Instead, broadcast rights will be put up for bid. The current license has five years before it
expires.
What is the useful life? Should the cost be amortized or subject only to an annual impairment
test?
3.
A direct mail marketing company acquires a customer list and expects to be to derive benefit
from the information for at least one year but no more than three years. The acquiring
company intends to add customer names and other information to the list in the future.
Management’s best estimate of the useful life of the names on the list at acquisition (given
the pattern in which the expected benefits will be consumed) is about 18 months.
What is the useful life? Should the cost be amortized or subject only to an annual impairment
test?
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