Investment Analysis Factors

Questions and Answers

What should be reported separately on the statement of financial position if it is present?

Intangible assets other than goodwill

Goodwill (correct)

Amortization expenses

Research and development costs

Where should amortization expense for intangible assets other than goodwill be presented?

In the operating section of net income (correct)

As an equity adjustment

In the notes to the financial statements

As a part of total liabilities

Which of the following is not considered an intangible asset?

Patents

Copyrights

Goodwill

Research and development costs (correct)

What information should the notes to the financial statements include regarding acquired intangible assets?

Changes in the carrying amount during the period Signup and view all the answers

Which of the following best describes why goodwill and intangible assets differ significantly from other assets?

Their disclosure influences users of financial statements Signup and view all the answers

What is the current status of the project addressing inconsistent treatments of intangible assets?

It is on hold. Signup and view all the answers

Which of the following is NOT considered a cost that has characteristics similar to research and development costs?

Lottery expenses. Signup and view all the answers

How should start-up costs be accounted for according to the accounting guidelines?

Expense them as incurred. Signup and view all the answers

Which of the following best describes the reasoning behind expensing start-up costs upon incurrence?

To reflect uncertainty in future benefits. Signup and view all the answers

Which of the following would be classified as a start-up cost?

Legal fees to organize a business. Signup and view all the answers

What is a primary challenge in determining how to treat start-up costs?

The difficulty in estimating future benefits. Signup and view all the answers

In the context of the Hilo Beverage Company's expansion, what are travel-related costs considered?

Start-up costs. Signup and view all the answers

Which publication critiques the accounting for intangible assets?

The End of Accounting Signup and view all the answers

Which of the following costs is typically expensed as incurred similar to R&D costs?

Advertising costs Signup and view all the answers

What is the initial purchase price recorded for the patent acquired by Sky ASA?

€40,000 Signup and view all the answers

Which intangible asset has an indefinite life according to the information provided?

Exclusive Internet connection process Signup and view all the answers

What is the gain that a purchaser recognizes in a bargain purchase situation?

The fair value of the acquired assets exceeds the purchase price. Signup and view all the answers

How much goodwill was recorded when Sky ASA purchased the small circuit board manufacturer?

€90,000 Signup and view all the answers

Under what circumstances is an intangible asset considered to be impaired?

When the carrying amount exceeds the recoverable amount. Signup and view all the answers

Which type of intangible asset follows the same impairment rules as property, plant, and equipment?

Limited-life intangibles. Signup and view all the answers

At what date was research and development cost reported for Sky ASA?

September 1, 2023 Signup and view all the answers

What amount of impairment should be recorded for the license on December 31, 2023?

€6,000 Signup and view all the answers

What may indicate that an impairment test should be performed on limited-life intangibles?

Internal adverse performance changes. Signup and view all the answers

What is required of companies that recognize a gain from a bargain purchase?

They should disclose the nature of the gain transaction. Signup and view all the answers

What is the term used for costs like start-up costs and initial operating losses that are expensed similarly to R&D costs?

Operating expenses Signup and view all the answers

What constitutes an impairment loss?

The difference between the carrying amount and the recoverable amount. Signup and view all the answers

What amount should be reported as intangible assets at December 31, 2023?

A combination of licenses, patents, and good will Signup and view all the answers

What is an example of a situation that could lead to a bargain purchase?

A forced liquidation due to a company's financial distress. Signup and view all the answers

What must a company do at each statement of financial position date for limited-life intangibles?

Review them for impairment. Signup and view all the answers

What must Disney demonstrate in order to renew or extend an asset?

Evidence to support renewal or extension must be present. Signup and view all the answers

Which factor could indicate a limited useful life of an asset?

A significant level of required maintenance in relation to the asset's value. Signup and view all the answers

How should the amortization expense for a limited-life intangible asset be determined?

Follow the pattern in which the company consumes the asset, if determinable. Signup and view all the answers

What approach should Second Wave Ltd. take if it cannot determine the pattern of production for an intangible asset?

Utilize the straight-line method for amortization. Signup and view all the answers

What is the residual value assumed to be for an intangible asset at the end of its useful life?

Zero, unless there is value to another company. Signup and view all the answers

How should U2D Co. calculate amortization after selling an intangible asset to Hardy Co. considering residual value?

Consider fair values and subtract the residual value from the total cost. Signup and view all the answers

What action is required under IFRS regarding intangible assets?

Companies must assess these factors at least annually. Signup and view all the answers

If the useful life of a limited-life intangible asset changes, what should be considered?

Amortization should be recalculated based on the new useful life. Signup and view all the answers

Study Notes

Renewal and Extension of Intangible Assets

Evidence is required to support renewal or extension of intangible assets without altering existing terms.
High maintenance expenditures relative to carrying amount may indicate limited useful life.
Legal, regulatory, or contractual provisions can restrict useful life.
Useful life assessments may relate to other assets, like lease rights.

Amortization of Intangible Assets

Amortization must reflect usage patterns of intangible assets, such as licenses.
If usage patterns can't be determined, firms should adopt the straight-line amortization method.
Amortization expenses and reductions in associated asset accounts are necessary when writing down intangible costs.
The amount to amortize is typically the asset cost minus any residual value, often assumed to be zero.

Residual Values and Annual Assessment

Residual value should be reassessed annually according to IFRS standards.
If the market value is less than the carrying amount due to distress, the purchaser recognizes a "bargain purchase" gain.
Example: A proposed merger between Deutsche Bank and Commerzbank included projected gains exceeding €16 billion.

Impairment of Intangible Assets

An intangible asset is considered impaired if its carrying amount exceeds its recoverable amount.
Procedures vary between limited-life and indefinite-life intangibles (e.g., goodwill).
Regular reviews of limited-life intangibles are necessary, responding to internal and external performance indicators.

Presentation of Intangible Assets

Companies must report intangible assets separate from goodwill on financial statements.
Amortization expenses and impairment losses must be presented distinctly in the income statement.
Notes to financial statements should discuss acquired intangible assets, including amortization and carrying amount changes.

Research and Development Costs

R&D costs are not classified as intangible assets but may lead to valuable intangibles like patents.
The accounting treatment for R&D costs usually results in expensing them as incurred.
Examples of expenses similar to R&D include start-up costs, initial operating losses, and marketing expenses.

Start-Up Costs

Start-up costs are one-time expenses for initiating business operations and must be expensed as incurred.
These include costs related to opening new plants, launching products, and legal fees for new organizations.
Conservative accounting practices necessitate expensing start-up costs due to the difficulty in predicting future benefits.

Financial Statement Disclosures

Financial statements should disclose total R&D expenses for each reporting period.
Practice problems may require journal entries related to intangible assets, testing for impairment, and reporting on financial positions.

Example Situations

Companies may acquire licenses and patents with varying life spans, implicating different amortization responsibilities.
Research and development projects may incur costs before achieving economic viability, warranting specific accounting treatments.

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Description

Explore the key factors influencing investment analysis, particularly in the context of asset renewal and maintenance expenditures. This quiz delves into legal considerations and the importance of evidence in decision-making processes. Perfect for finance students and professionals.