Financial Accounting Statement 142
Intangible assets are an increasingly important economic resource for many businesses. Intangible assets have also become a greater portion of assets gained in an acquisition or business combination. Therefore, more useful information about intangible assets is needed for both those involved in the transaction and potential investors in the public community. Statement 142 replaces Accounting Principles Board (APB) Opinion No. 17, Intangible Assets in order to produce better information on which the public can rely.
APB Opinion No. 17 was issued in August of 1970 and involves intangible assets acquired from companies or individuals. The Opinion states that the cost of the acquisition of intangible assets should be classified as intangible assets. For intangible assets that are not easily identifiable, the Opinion states that the cost of developing these assets should be charged against income as they occur. However, intangible assets that are developed internally will not be added as an asset to the balance sheet according to Opinion 17. Finally, the Opinion’s policy on amortization is as follows: intangible assets should be amortized over the period of benefits; however amortization should not exceed forty years. Therefore, the theory behind this amortization rule is that the value of the intangible assets will disappear over the period of amortization.
“Statement 142 addresses the financial accounting and reporting acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets.” The Statement was issued in June 2001 in order to improve and change policies of Opinion 17 for intangible assets, and to specify how to treat goodwill. The Statement discusses how assets that are gained upon acquisition, either individually or with a group of assets should be accounted for in financial statements. Upon acquisition intangible assets should be recorded at fair value on the balance sheet. (Fair value is the amount at which the asset can be sold in a current transaction between willing parties, such as a quoted market price. ) However, internally developed intangible assets should not be recognized on the balance sheet, and should be recognized as an expense when incurred (just as stated in Opinion 17).
The Statement says that intangible assets with a limited life should be amortized over the useful life period. The useful life of an intangible asset is the period in which that asset is expected to contribute to future cash flows of the entity. In order to determine the useful life many factors are to be considered: how long the entity is expecting to use the asset, how long a comparable asset has lasted in the company, and legal and economic factors, to name a few.
Lowe's Home Improvement counted intangible assets in their acquisitions section. The total amount of intangible assets was $1,413,000,000. Intangible asset types at Lowe's Home Improvement include trademarks, dealer relations, goodwill, and other assets.
There was a trend in rise of the net property & equipment related assets since 2002 to 2004. This boost in net property and equipment assets was related to the acquisition strategy conducted by Applebee’s. For the $34 millions acquisitions of 21 restaurants in Washington D.C. area on November 7, 2002; $24 millions has been allocated to the fair value of property and equipment plus $10 millions in goodwill. This has caused a jump in net property & equipment assets for 2002 to jumped 16% and Intangibles assets to jumped 12% when compared to 2001. Since most of the purchased are by cash, this has caused a 31% decreased in the Cash & Equivalents for Applebee’s balance sheet. For the 11 Applebee’s restaurants acquisitions in Illinois, Indianan, Kentucky, and Missouri for $21.8 million on March 24, 2003, $7.9 millions were allocated to the fair value of property and equipment, the other $16.6 millions went to goodwill, plus a net liabilities in additions of $1.3...
In the operating budget, the organization prepares to include the costs of acquisition of items to assist in providing goods and services in more than one fiscal year. In the case of Denison, the organization considers a capital purchase of $500,000 in oncology equipment to better serve their patients. The purchase of the new equipment will be paid immediately, however, the equipment maintains a five-year life span and expected to be used evenly over that life time (Finkler et al., 2013). After the five-year life of the equipment, the value amounts to zero because the capital item charges as an expense on a straight-line depreciation—the cost of asset spread over the useful life (Hui, 2013). The following graph illustrates the depreciation expense of the oncology equipment purchased by Denison Hospital.
The fair value of identifiable net assets includes four accounts classified under unrecognized intangibles. In order to determine which unrecognized intangibles is included in goodwill, ASC 805.20.55 was consulted. The Customer List had a fair value of $10M and was not included in goodwill. ASC 805-20-55-4 states that customer lists are licensed and can be sold; hence meeting the first criterion of an identifiable asset and not included in goodwill. Assembled Workforce was among the unrecognized intangibles. According to ASC 805-20-55-6, assembled workforce is included goodwill because it does not meet neither of the identifiable asset criterions. Trademark is not included into goodwill due to the fact that it meets the first criteria of an identifiable asset (ASC 805-20-55-17). The Licensing Agreement is a contractual agreement, meeting the second criteria of the identifiable asset; therefore not incorporated into goodwill (ASC 805-20-55-31). Lastly, In-Process Research & Development is not subsumed into goodwill because technology processes can be sold or exchanged; meeting the first criteria of an identifiable asset (ASC
The carrying value of goodwill and many other intangible assets was 28.1 billion and 9.8 billion as of December 31,2014. Goodwill unswervingly impacts the asset turnover ratio by cumulative amounts, hence the reason why it is incessantly beneficial to grasp what the adjusted total asset turnover is and how it compares to other businesses within the industry.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
Add up the fair market value of all tangible assets of the business and subtract this value from the sale value to determine the value of goodwill.
The Firm’s testing to ensure accurate useful life and disclosure were inaccurate (10). The client did not maintain information on which customers correspond to the intangibles, which raised an existence question regarding the assets. The auditors should have used confirmation with these customers to figure who was listed as an asset. The auditors should have also used more professional skepticism on making sure these customers actually existed. Auditors often rely too much on what management tells them instead of investigating it themselves. The concern with this deficiency was the effectiveness of internal
B) assets are generally listed on the balance sheet at their historical cost, not their current value.
Lange, Fornaro, and Buttermilch (2015) focused their research on the FASB Accounting Standards Update (ASU) 2011-08, in regards to Intangibles – Goodwill and Other: Testing Goodwill for Impairment. The authors elaborated on how reporting has been done in the past and how the changes made for private companies has helped ease the financial reporting of goodwill. In addition, the authors discussed the definition of a public business entity. This helps to allow private companies to determine the proper way to report their financial
A consolidated financial statement can be defined as the financial statements of a parent and its subsidiaries combined to form a single economic entity (AASB 10, 2011). The entity, which acquires the other entity, is known as the parent and the entity, which has been acquired, is known as the subsidiary. Consolidation financial reports arise when one entity purchases another entity, to then form a group.
As a result of increased number of merger and acquisition (M&A) over the years, there is nothing that companies feel pains more than controversial goodwill accounting. Goodwill is a special asset that only exists when an acquisition takes place. So why would firms choose to make deals over M&A and create headache? Usually, companies have options to grow internally through making better operation or diverse investment projects, but more often companies choose to expand externally to create synergy value. Companies agrees to pay more than a company’s perceived fair market value by little premium or even high premium to obtain control over the net assets, it is betting on the potential growth of the purchased companies. M&As are very complex and high risk processes due to many aspects.
...ciates its assets on a straight line basis. Both IAS 16 and GAAP, depreciates assets over its expected useful life.
Accounting for goodwill within the balance sheet has now been considered to be one of the most controversial aspects of financial reporting as there is no provision within the balance sheet for non-purchased goodwill.
The FAS has made changes throughout the years in the way to account for goodwill. Goodwill is when a company attempts to merge with another company to obtain the valuable intangible assets. These assets are anything that can 't be seen or touched. Valuable intangibles can be anything like a company name because it is well known. Many times companies will decide to merge because it can be beneficial to them to merge with well-known entities. This can also be less costly and less time-consuming versus building a brand new business on its own. On many occasions, gooodwill is amortized on accounting records. Amortization is not the most favorable approach for companies who are trying to attract investors. This because when amortization is not present in the books, it means that there aren 't high physical cash profits for shareholders.