ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS Ervin L Black Mark L Zyla Copyright © 2018 by The Bureau of National Affairs, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or 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States at (317) 572–3993, or fax (317) 572–4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data Names: Black, Ervin L., author | Zyla, Mark L., author Title: Accounting for goodwill and other intangible assets / Ervin L Black, Mark L Zyla Description: Hoboken, New Jersey : John Wiley & Sons, Inc., [2018] | Includes index | Identifiers: LCCN 2018026831 (print) | LCCN 2018028714 (ebook) | ISBN 9781119157229 (Adobe PDF) | ISBN 9781119157212 (ePub) | ISBN 9781119157151 (hardcover) Subjects: LCSH: Goodwill (Commerce)—Accounting | Intangible property—Accounting Classification: LCC HF5681.G6 (ebook) | LCC HF5681.G6 B53 2018 (print) | DDC 657/.7—dc23 LC record available at https://lccn.loc.gov/2018026831 Cover Design: Wiley Cover Images: © duncan1890/iStockphoto; © from2015/iStockphoto Printed in the United States of America 10 Contents Introduction v CHAPTER Recognizing Intangible Assets CHAPTER Initial Measurement of Acquired Intangible Assets 47 CHAPTER Amortizing Intangible Assets 89 CHAPTER Impairment Testing for Goodwill and Other Intangible Assets 111 CHAPTER Financial Statement Presentation and Disclosures 191 CHAPTER Deferred Tax Consequences of Goodwill and Intangible Assets 215 Working Papers 237 About the Authors 265 Index 267 iii Introduction A Scope of Book The purpose of this book is to examine the application of the FASB Accounting Standards Codification provisions concerning goodwill and other intangible assets, as well as to explain common practices in valuing such assets Relevant International Financial Reporting Standards (IFRS) are also examined for goodwill and other intangible assets throughout the book In 2001, the Financial Accounting Standards Board (FASB) eliminated the amortization of goodwill and other indefinite-lived intangible assets when a new standard on business combinations (FAS 141) was approved In addition, this new standard resulted in the recognition of many more types of other intangible assets In the years since, the FASB and International Accounting Standards Board (IASB) have revised their business combinations guidance and have also amended the accounting for goodwill and other intangible assets several times The chapters in this book cover the rules under U.S GAAP and IFRS, as well as some of the exceptions for small and medium enterprises (SMEs) or private companies Chapter examines the recognition of goodwill and other intangible assets Chapter examines the initial measurement of acquired goodwill and other intangible assets, followed by Chapter 3, which examines the amortization of intangible assets with finite useful lives Chapter analyzes v vi Introduction impairments and impairment testing of goodwill and other indefinite-lived intangible assets Chapter discusses financial statement presentation and required disclosures, and Chapter discusses, in brief, the deferred tax consequences of goodwill and other intangible assets B Definitions and Origins U.S GAAP Synopsis Intangible Assets Other Than Goodwill For financial reporting purposes, “intangible assets” consist of assets (not including financial assets) that lack physical substance (The term intangible assets is used to refer to intangible assets other than goodwill.)1 Intangible assets that are acquired either individually or with a group of assets must be recognized in the financial statements In general, only acquired intangible assets are recognized, as most costs of internally developing intangible assets are expensed as incurred.2 This work is intended to provide authoritative information regarding the subject matter covered, but is not intended to provide legal or accounting advice or any other professional service The information is not relevant for any particular client or use and may not reflect all relevant laws applicable to any particular factual situation Although diligent effort has been made to ensure accuracy of the information, the authors and publisher assume no responsibility for any reader’s reliance on the information or opinions expressed herein, and encourage the reader to verify all items by reviewing the original sources To ensure compliance with IRS requirements, any discussion of U.S federal tax matters contained in the publication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (2) promoting, marketing, or recommending to another party any arrangement or other transaction addressed herein There are dozens of types of intangible assets, but most fall into one of four general categories: marketing/customer-related ASC Term “Intangible Assets.” See ASC 350-30-25-1 through ASC 350-30-25-4 Introduction vii intangibles, artistic-related intangibles, contract-based intangibles, and technology-based intangibles For a list of many different intangibles see Exhibit 1.1 in Chapter Intangible assets, besides goodwill, can be acquired in a business combination or in other transactions, including individually or with a group of other assets An intangible asset is considered distinct (separately identifiable) from goodwill if it meets one of the following two criteria: If it arises from contractual or other legal rights (regardless of whether those rights are tradable or separate from the acquired entity or from other rights and obligations), or If it is separable, that is, it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged (regardless of whether there is an intent to so).3 If intangible assets are acquired in a business combination, they are initially recognized under the guidance in ASC 805-10 and ASC 805-30, but are subsequently accounted for under the guidance in ASC 350 If they are acquired in a transaction that does not qualify as a business combination, they are initially recognized under ASC 805-50 and subsequently accounted for under ASC 350 Goodwill Goodwill is a specific category of intangible asset that arises only when an entity acquires one or more other entities in a business combination The definition of goodwill is “[a]n asset representing the future economic benefits arising from other assets acquired in a business combination … that are not individually identified and separately recognized.”4 Goodwill is measured as a residual (i.e., the excess of consideration transferred over the fair value of assets acquired and liabilities assumed) Therefore, goodwill is a single value that represents the sum of all the indistinguishable or inseparable intangible assets ASC 805-20-25-10; ASC Term “Identifiable.” ASC Term “Goodwill.” viii Introduction that comprise it The initial recognition of goodwill is governed by ASC 805-20 and subsequent accounting for goodwill is governed by ASC 350 What Constitutes a Business? When intangible assets are acquired, it is important to determine whether the acquisition transaction is a business combination and thus governed by ASC 805-10, ASC 805-20 (goodwill), and ASC 805-30 (other intangible assets) Whether an acquisition transaction is a business combination depends in part on whether the assets (or assets and liabilities) acquired constitute a business Prior to the revised standard on business combinations, EITF 98-3, Paragraph 6, defined a business as the following: A business is a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors A business consists of: (a) inputs, (b) processes applied to those inputs, and (c) resulting outputs that are used to generate revenues For a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred set is separated from the transferor, which includes the ability to sustain a revenue stream by providing its outputs to customers ASC 805 currently defines a business as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.”5 The key terms in the definition are that a business must be “capable of being conducted” and “managed to provide a return to investors.” Examples given by the FASB as a function of a business include managed for lower costs, a capital return, or other economic benefit ASC Term “Business.” Introduction ix Comment The net effect of the revised current definition of a business is that it removes the self-sustaining requirement from previous guidance Thus the current definition results in more acquisitions qualifying as businesses (such as those involving start-up companies), and thus more goodwill will be recognized The current definition also assumes a hypothetical acquirer, so the acquiring entity need not intend to operate the business, as long as the business is capable of being operated when acquired.6 This business definition contains a rebuttal presumption of a business as a going concern A consequence of this presumption is that if the acquisition is a going concern, then goodwill should be present One clarifying point is that intangible assets acquired in an acquisition not qualifying as a business combination must still be recognized in accordance with ASC 350 In these types of acquisitions, there would not be any residual goodwill.7 What Constitutes a Business Combination? The FASB Codification defines a “business combination” as “[a] transaction or other event in which an acquirer obtains control of one or more businesses Transactions sometimes referred to as true mergers or mergers of equals also are business combinations.”8 With the current definition, certain types of acquisitions that were classified as asset acquisitions under previous guidance may now be classified as business combinations Measuring and Subsequently Accounting for Goodwill and Other Intangible Assets Once intangible assets are identified, an entity must determine whether they have measurable (i.e., estimable) lives Some intangible assets have measurable lives while others have uncertain durations ASC 805-10-55-8 ASC 805-10-55-9 ASC Term “Business Combination.” x Introduction or indefinite lives Identifiable intangible assets with measurable useful lives are amortized over their estimated useful lives Intangible assets with indefinite useful lives (i.e., intangible assets whose lives cannot be reasonably estimated) and goodwill are not amortized However, these indefinite-lived intangibles, including goodwill, must be regularly tested for impairment Intangible assets with estimated useful lives also are subject to impairment testing, but only if circumstances indicate that they might be impaired rather than on a regular basis There is a different impairment test for each of these three categories of intangible assets: intangible assets with estimated useful lives, intangible assets with indefinite useful lives, and goodwill The impairment test for such assets is described in detail in Section 4.B An intangible asset with a useful life that is reasonably estimated is considered impaired if, after certain triggering events, the sum of its undiscounted expected cash flows is less than its carrying amount The amount of impairment is the difference between the asset’s fair value and carrying amount at the test date The impairment test for such assets is described in detail in Section 4.C The impairment test for goodwill requires a very involved two-step process, necessitating an entity to determine the fair value of the reporting unit to which goodwill is assigned as well as the fair values of all of the identifiable assets and liabilities in that reporting unit This impairment test is described in detail in Section 4.D IFRS Synopsis Under IFRS, an intangible asset is defined as an identifiable nonmonetary asset without physical substance.9 Current international accounting standard states that an asset meets the identifiability criterion in the definition of an intangible asset when it: a Is separable, that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, asset, or liability; or IAS 38, ¶ Working Papers 261 An entity should consider the following factors, which, if present, would indicate that two or more indefinite-lived intangible assets should be combined into one unit of accounting: • • • • The assets were purchased to be used together; Had the assets been acquired in the same acquisition, they would have been recorded as one asset; The assets as a group represent the highest and best use of the assets; or The marketing or branding strategy provides evidence that the intangible assets are complementary In contrast, the following factors, if present, would indicate that two or more indefinite-lived intangible assets should not be combined into one unit of accounting: • • • • • Each asset generates cash flows independent of any other intangible asset; If sold, each asset would likely be sold separately; The entity has adopted or is considering a plan to dispose of one or more of the assets separately; The assets are used exclusively by different asset groups under ASC 360-10; or The economic or other factors that might limit the useful economic life of one of the intangible assets would not similarly limit the useful economic lives or other intangible assets combined in the unit of accounting Conversely, the reverse of each of the factors above is also relevant in the analysis of whether to combine indefinite-lived intangible assets in a single unit of accounting For example, if assets were purchased for separate use, it may suggest that they should be in separate units of accounting Similarly, if it is likely the assets would be sold as a group if they were sold, it may suggest that they should be accounted for in a single unit of accounting Based on the FASB examples provided in ASC 350-30-55-29 through ASC 350-30-55-38, the most important factors appear to be how the assets are recorded, managed, and eventually would be sold If assets are managed together, that factor carries significant 262 Working Papers weight, and the FASB’s examples suggest that factor would outweigh the fact that each asset may produce a discrete cash flow or may be in a separate asset group under ASC 360-10 However, if assets are not managed together, other factors such as discrete cash flows and asset grouping under ASC 360-10 became more important [For each asset group identified, insert the following template:] The following factors suggest that [Entity Name]’s indefinitelived intangible assets in [Asset Group Name] should be accounted for in a single unit of account: [State the applicable factors supporting combination] The following factors suggested the assets in [Asset Group Name] should be accounted for in separate units of accounting: [State the applicable factors supporting separation] However, [state why you believe the factors supporting combination outweigh the factors supporting separation] [Once all identified asset groups are discussed, insert the following template to discuss ungrouped assets:] The following factors suggest that [Entity Name]’s remaining ungrouped indefinite-lived intangible assets should be accounted for in separate units of accounting: [State the applicable factors supporting separation] Working Papers 263 The following factors suggest the ungrouped indefinite-lived intangible assets should be combined into a single unit of accounting: [State the applicable factors supporting combination] However, [state why you believe the factors supporting separation outweigh the factors supporting combination] About the Authors Ervin L Black, PhD, currently holds the Rath Chair in Accounting and is a Professor of Accounting at the University of Oklahoma He completed his PhD at the University of Washington in 1995 and has held faculty positions at Brigham Young University, University of Arkansas, and University of Wyoming Professor Black’s research and teaching are primarily in the financial accounting and international accounting areas, with emphasis on examining the usefulness of firm financial characteristics in different settings Journals in which he has published include The Accounting Review, Journal of Accounting and Economics, Accounting Organizations and Society, Journal of International Financial Management and Accounting, Journal of Business Finance and Accounting, Accounting Horizons, and the Journal of the American Taxation Association Professor Black is active in the International Accounting and Financial Reporting Sections of the American Accounting Association, having served as president of the International Accounting Section He currently serves as editor of the Journal of International Accounting Research He is also a co-author of the BNA Tax and Accounting Portfolio 5170, Business Combinations (Accounting Policy and Practice Series) Mark L Zyla, CPA/ABV, CFA, ASA, is a managing director of Acuitas Inc., which is an Atlanta, Georgia-based valuation and litigation consultancy firm Mark received a BBA degree in Finance from the University of Texas at Austin and an MBA degree with 265 Accounting for Goodwill and Other Intangible Assets, First Edition Ervin L Black and Mark L Zyla © 2018 The Bureau of National Affairs, Inc Published 2018 by John Wiley & Sons, Inc 266 About the Authors a concentration in Finance from Georgia State University Mark also completed the Mergers and Acquisitions Program at the Aresty Institute of the Wharton School of the University of Pennsylvania and the Valuation Program at the Graduate School of Business at Harvard University He is a Certified Public Accountant, Accredited in Business Valuation (CPA/ABV), a Chartered Financial Analyst (CFA), and an Accredited Senior Appraiser with the American Society of Appraisers, certified in Business Valuation (ASA) Mark is the author of Fair Value Measurements: Practical Guidance and Implementation, published by John Wiley & Sons, and co-author of Bloomberg BNA’s Tax and Accounting Portfolio 5127, Fair Value Measurements: Valuation Principles and Auditing Techniques (Accounting Policy and Practice Series) Index Accounting alternatives application, 37–40 election, timing, 37 Accounting estimate, change, 212 Accounting for Goodwill, a Consensus of the Private Company Council (ASU 2014-02), 101–102, 186–187 Accounting for Mergers and Acquisitions of Not-for-Profit Entities (APPS 5203), 31 Accounting Standards Codification (ASC) 280-10, segment disclosures, 152 450-20, 40–41 730-10, 10, 19 740, 218 960, 103 Accounting Standards Codification (ASC) 250, 37 250-10, 39, 149 Accounting Standards Codification (ASC) 350, 218 350-20-35-3C, 187–188 350-20-35-8B, 188 350-20-35-28, 148 350-20-35-38, 116 350-20-50-1, 204–205 350-20-50-2, 206 350-20-55-23A-D, 163 350-30-25-1, 13 350-30-30-1, 13 350-30-35-3(d), 92–93 350-30-35-18/20, 98 350-30-35, impairment test, 99 350-30-50-2, 195 350-30-50-36, 126 350-30-55, 124–125 350-30-55-40, 196 350-30, indefinite-lived intangible assets (impairment tests), 113 350-30, purposes, 89 350-40, 10 impact, 12–13 350-40-25-27, addition, 13 350-40-65-2, 13 350-50, 17 Accounting Standards Codification (ASC) 360 360-10, 98 asset group, entry, 140 Impairment or Disposal of Long-Lived Assets subsection, 112 360-10-35, facts/circumstances, 119 Accounting Standards Codification (ASC) 805, 226 805 (business combination rules), 25, 155 805-20-55, intangible asset list, 4–5 805-50 guidance, 23 805-740, 19 805-740-55-9, 163, 188 Accounting Standards Codification (ASC) 820 820 (fair value measurement guidance), 24–25 820 (valuation identification), 47–48 820-10-50, 198, 206 Accounting Standards Codification (ASC) 985 985-20, impact, 10, 17 985-605, 13 revenue guidance, 11 Accounting units asset removal, 128 creation, guidelines, 122–124 selection, effect, 128 Account title, 253–255 267 Accounting for Goodwill and Other Intangible Assets, First Edition Ervin L Black and Mark L Zyla © 2018 The Bureau of National Affairs, Inc Published 2018 by John Wiley & Sons, Inc 268 Acquired company, overpayment/ underpayment, 253 Acquired defensive intangible assets, 29–30 IFRS, 30 U.S GAAP, 29–30 Acquired goodwill, valuation, 83, 87 Acquired intangible assets, measurement, 47 Acquired IPR&D assets, 201–204 Acquired net assets, fair values (excess), 242 Acquiree customer base contact, 36 noncontrolling interest, 31–43 fair value, 87 registered trademark, 36 Acquirer, identification, 31, 33 Acquisition date, determination, 31, 33 method, 58 application, 37 price (ASC 805), 32 Acquisition-date amounts, net, 87 Actions/plans, restructuring, 158 Actual future cost savings, 173e Actual net cash savings, 172e American Institute of Certified Public Accounts (AICPA) Assets Acquired to Be Used in Research and Development Activities, 202–204 disclosures, 201–203 Amortizable 197 intangible, taxpayer disposal, 223 Amortization expense, 192 method, 100–101, 211 Amortizing assets, 209 Annual goodwill testing, timing, 148–150 Application development stage, 15 Appraisal assumptions, 203–204 Assembled workforce, 77 asset identification, 43 valuation, cost approach, 78t Assets See Amortizing assets; Non-amortizing assets accounting unit grouping, 121–130 acquisitions, 225 accounting guidance (ASC 805-50), 24 capitalization, 256 cash flow generation, 123 cash inflows, generation (absence), 137–138 Index customer-related assets, 38 expected usage, 91, 105 fair value determination (ASC 820), 24–25 purchase price, excess, 27 function, testing costs, 28 groupings, 142 groups carrying amount, determination, 145 creation, 140–143 obsolescence/physical damage, evidence, 120 operation, stability, 106 product life cycle, 105 purchase, 122 removal, 128 uncertainty, 175 price, bearing, 177–178 undiscounted expected cash flow, association, 146 useful life, dependence, 106 working condition, professional fees, 28 Association of Chartered Certified Accountants (ACCA), “Impairment of Assets,” 207 ASU 2011-08 (Basis for Conclusions), 156 ASU 2012-02, 119 Basis for Conclusions, 133–134 ASU 2014-02, 101–102, 186 ASU 2014-18, 36–37 ASU 2017-04, 147–148, 151–154, 161–163, 188, 205–206 Bargain purchase, 44–45 Benetton, real-time information, Black-Scholes-Merton formula, 52 Bloomberg BNA annotations, 243–247 Branding strategy, 123 Brokered market, 49 Business acquisition, concept, 26 combination rules (ASC 805), 25 conducting, costs, 29 Business Enterprise Value (BEV), 60, 65 Capital Asset Pricing Model (CAPM), 65 Carrying amount, 212 determination, 145 equity, contrast, 37 level, analysis (change), 160–161 Index positive level, impact, 161–163 reductions, 186 Cash flow amount/timing, variations (expectations), 178–180 deterioration, 137 estimated future cash flows, variation, 179e estimated future net cash flows, determination, 165–175 forecast, 55 generation, 123 loss, 144 timing, variation, 175 Cash-generating units (CGUs), 213, 247 goodwill allocation, 182–183 IFRS, impact, 129–130 recoverable amount, 184 Cash inflows, generation (absence), 137–138 Churn rate, 92 Citibank, online banking system, Closed-form model, 52 Codification See Accounting Standards Codification; Financial Accounting Standards Board examples, analysis, 124–128 Competition, effects, 91 Competitors, expected actions, 106 Computer software amortization, absence, 232–233 internal use examples, 11 CON 5, 26 CON 7, 175 Conduit bond, usage, 104 Consideration, overvaluation, 252–253 Contingent assets/liabilities, 40–42 Contract assets, consideration, 38 Contract services, R&D costs, 20 Contractual-legal criterion, 25, 34 Contractual life, renewal/extension, 198 Contributory asset charge (CAC), 54, 69 Contributory assets, required return, 74t Contributory charge, basis, 69–70 Corporate debt, E&Y position, 154 Corporation, interests, 232 Cost approach, 57–59 International Glossary of Business Valuation Terms definition, 58 shortcomings, 66 usage, 68t, 78t, 84t Cost factors, 133, 150, 157 269 Cost model, revaluation model (contrast), 107–109 Costs accumulation, 144 Cost savings, intangible asset (comparison), 175 Covenant, competition (absence), 229 Current-period operating loss, 144 Customer relationships, 66–67 asset identification, 60 valuation, cost approach, 68t Customers churn rate, 92 customer-based intangibles, 227–228 customer-related assets, sale, 38 lists, 97 Dealer market, 49 Debt-free cash flows, prospective financial information, 60 Debt principal payments, E&Y perspective, 140 Defensive assets, useful lives (estimation), 97 Defensive intangibles assets, 29–30 Deferred tax asset, recognition, 217 Deferred tax consequences, 216–221 Dell, customer-designed computers, Demand, effects, 91 Deposit liabilities, market participant exchange, 36 Development costs, capitalization (IAS 38 requirements), 23 Development phase, activities examples, 22 Directly attributable costs, examples, 28 Disclosures IFRS, impact, 247–248 U.S GAAP, impact, 243–247 Discounted cash flow (DCF), 53–54, 248 analysis, 61t–62t International Glossary of Business Valuation Terms definition, 53 variation, 69 Discount rate determination, 175–181 risk-adjusted discount rate, 177 selection, 176 Discrete cash flows, 141 factor, 123 Disposal costs, deduction, 139 Dollar-for-dollar basis, 225 270 Index Earnings, interpretation, 257–258 Economic environment, deterioration, 150 Economic factors, 91, 123 Effects of Changes in Foreign Exchange Rates, The (IAS 21), 183 Employee benefits cost (IAS 19), 28 Enterprise market capitalization, decline, 158 Entity disclosure, 212–213 events/circumstances assessment, 157–158 Entity-specific events, impact, 133, 150, 158 Environment, deterioration, 157 Equity, carrying amount (contrast), 37 Ernst & Young (E&Y), 39, 100–102, 128 asset groupings, 142 corporate debt position, 154 debt principal payment perspective, 140 Estate, interests, 232 Estimated future cash flows, variation, 179e Estimated future cost savings, 173e Estimated future net cash flows, determination, 165–175 Estimated useful life, determination, 90–99, 104–107 Excel formula, equal sign (usage), 167 Excel worksheet, preparation, 166e Exchange market, 49 Excluded items, 231–233 Expenditures, examples, 28–29 Externally marketed software, 14 example, 10 Financial Accounting Standards (FAS) 5, guidance, 40 109, 219 141(R), 40, 202, 254–255 141, impact, 40 142, 2, 258 Financial Accounting Standards Board (FASB) Basis for Conclusions, 38 Codification events/circumstances, examples, 133 subtopics, Concepts Statement No 5, 25–26 Master Glossary, 83 Financial contracts, interests, 232 Financial performance, 158 Financial reporting goodwill, 219 tax-deductible goodwill, contrast, 220–221 Financial statement disclosures, 191, 194–210 presentations, 191–193, 192e Finite-lived intangible assets, impairment testing, 139–146 Finite lives, 109–110 Fixed assets, asset identification, 60 Form 10-Q, 150 Franchise, 229–230 acquisitions, 230–231 Fresh-start reporting (ASC 852), 37 Future cash flow, pricing, 138 Future economic benefits, application, Fair value cost approach, 57–59 decline, 131 determination, 32–33 estimation DCF method, 54 inputs, observation, 48–49 excess, 242 income approach, 52–55 market/income approach, 56–57 measurement, 47–48 consistency/comparability, increase, 50 guidance (ASC 820), 24–25 valuation techniques, 52–59 multiple valuation approaches, 59 Fair Value Measurement (IFRS 13), 47 impact, 139 Favorable interpretation, 257 Gain, recognition (approach), 45 Generally accepted accounting principles See U.S generally accepted accounting principles Going-concern value, 221, 224–226, 256 Goodwill amortization, 101–104, 221–235 annual goodwill testing, timing, 148–150 annual impairment test, change, 117 asset, 248–249 capitalization, 256 components, 248–259 analysis, 250–253, 251e deferred tax consequences, 215–221 definition, 253–255 disclosures, requirement, 197e, 204–210 rules, 204–205 disposal group inclusion, 205 Index entity recognition, 235 evaluation, 147 FASB Master Glossary definition, 83 financial statement presentation, 193, 193e gross amount, 205 impairment, 163–165 events/circumstances, 150–151 tests, 112e, 116, 159–160, 183 impairment testing, 111, 146 date, change, 148–149 example, 240–241 quantitative goodwill impairment test, 160–165 issues, recurrence, 253–259 measurement, 87, 234, 249–250 nature/components, 248–259 post-acquisition, value, 255–256 recognition/measurement, 31, 44–45 U.S GAAP/IFRS guidance, differences, 237–240 value, 224–226 Governmental license, 70 Government-granted licenses/permits/rights, 228–229 Government license, asset identification, 60 Greenfield method, 55, 75t–76t Historical costs, nonadjustment, 66–67 Historical experience, 91 Hosting contract, definition, 13 Hosting services, fees (ASC 350-40 impact), 12–13 IAS 8, 212 IAS 16, 164, 186, 233 IAS 19, 28 IAS 21, 183 IAS 36, 164, 183, 186, 211 approach, 142 events/changes, examples, 120–121 requirement, 118 IAS 38 analysis, 105 impact, 5–9 requirements, 23 U.S GAAP, comparison, IAS 40, 233 Identifiable assets acquisition-date amounts, net, 87 recognition/measurement, 31, 33–43 271 Identifiable intangible asset, definition, 25 Identification of Contributory Assets and Calculation of Economic Rents, 54 Illiquidity, 175, 180–181 Impairment calculations, application, 185 indicators, 158 losses, 185, 192, 196, 198, 205–210 calculation, IFRS (impact), 137–139 determination, 188 disclosure, U.S GAAP/IFRS requirement, 213 gross amount, 205 recognition, 198 measurement, 189 Impairment test, 99, 101–102 annual test, change, 117 conducting, U.S GAAP perspective, 144 Impairment testing, 111, 115–139 conducting process, 144–146 timing, 116–121, 143–144, 148–151 indefinite-lived intangible assets, memo template, 259–263 interim impairment testing, timing, 118–121 rules, 111–115 timing, 116–118 Income approach, 52–55 International Glossary of Business Valuation Terms definition, 52 methods, Practicing CPA description, 52–53 Indefinite-lived intangible assets, 93, 145 factors, combination, 122–123 fair value, decline, 134 impairment calculations, 114 testing, 113, 115–139 memo template, 259–263 Indefinite lives, 110 Indirect costs, R&D costs, 20 Industry-specific costs, capitalization, Information base, 227 In-process research and development (IPR&D), 42–43 acquisition, 26–27, 202 assets (See Acquired IPR&D assets) finite life, 99 usage, 131 Inputs, availability, 50–51 272 Intangible assets (intangibles), 224–231 See also Customers; Supplierbased intangibles acquired defensive intangible assets, 29–30 acquisition, 13, 212 business combination, 31–45 period, disclosures (requirement), 194 amortization, 89, 109–110, 194–195 methods, 100–101 ASC 805-20-55 list, asset acquisition, 23–30 carrying amounts, 212 completion, technical feasibility, 21 contractual-legal criterion, 34 considerations, 92–93 meeting, 34–35 control attribute, cost, expenditures (examples), 28–29 cost savings, comparison, 175 deferred tax consequences, 215–221 definitional criteria, 6–9 economic benefits, 21 examples, 8–9 excluded items, 231–233 existence, 212 expenditures, examples, 28–29 financial statement presentation, requirement, 191–193 finite life, 105 impairment testing, 139–146 future economic benefits, IAS 38, impact, identifiability attribute, IFRS list, IFRS definition, attributes, 6–9 impairment testing, 111 impairment tests, 112e indefinite lives, impairment testing, 115–139 internally generated intangible assets, IFRS rules, 21–23 I.R.C 197, impact, 221–235 purchase, R&D costs, 20 recognition, 1, 5–9 criteria, relevance, 2–3 renewal/extension terms, 194 sales, 210 self-created intangible assets, 9–23 separability criterion, considerations, 96–97 Index technology-based intangible assets, useful lives, 107 treatment, 32e types, 4e useful life change, 198–199 determination, 90 decisions, 94e–96e U.S GAAP/IFRS guidance, differences, 237–240 valuation, 66–83 inputs, 48–51 principles, application, 59–83 techniques, 48–59 Intangible assets, disclosures acquired IPR&D assets, 201–204 impairment losses, 196–197 internal research and development, 199–201 legal/contractual life, renewal/extension, 198 requirements, 194–201, 196e, 197e rules, 194–196 Intangible assets, fair value, 36–37 cost approach, 57–59 income approach, 52–55 market/income approach, 56–57 measurement, valuation techniques, 52–59 multiple valuation approaches, 59 Interest, risk-free rate, 175–178 Interim impairment testing IFRS, impact, 119–121 Interim impairment testing, timing, 118–121 Internally developed software capitalization, 9–17 marketing, ASC 985-20 (impact), 10 Internally generated intangible assets, IFRS rules, 21–23 Internal research and development, 199–201 Internal-use software, product qualification, 11 International Accounting Standards Board (IASB), IAS No 14, 182 International Financial Reporting Standard (IFRS), 233–235 (fair value excess), 44 3, intangible asset list, 3(R), requirement, 30 13, impact, 47, 139 Index disclosure requirements, 210–213 goodwill impairment testing, 181–186 impact, 137–139 intangibles, measurement, 104–110 interim impairment testing, 119–121 rules, 27–29 I.R.C 197 impact, 221–235 usage, 231 I.R.C 1253(d)(1), 230 Knowhow, 227 KPMG, 39 Land easements (ASC 350-30-55-29), 124–125 interests, 232 Lattice model, 52 Legal factors, adverse change, 144 Legal life, renewal/extension, 198 Liabilities assumption, 31–43 uncertainty, price (bearing), 177–178 U.S GAAP recognition, 41 License valuation, greenfield method, 75t–76t LINEST function, 173, 178 Long-lived asset cash flow dependence, 143 market value, 143 Long-lived intangible asset, depreciation, 145 Macroeconomic conditions, impact, 133, 150, 157 Maintenance expenditure level, requirement, 106 Management Discussion and Analysis (MD&A), 199 disclosures, 203–204 Manufacturing facility, acquiree lease, 34 Market approach International Glossary of Business Valuation definition, 56 straight market approach, 57 Market/income approach, 56–57 Marketing strategy, 123 Markets examples, 49 imperfections, 175, 180–181 interest rates, 120 273 Materials/equipment/facilities, R&D costs, 20 Memo, template, 259–263 Milk quotas, intangible asset example, 108 Money, time value, 175 Multi-period excess earnings method (MPEEM), 54–55, 69 Multi-period excess earnings model, 72t–73t National Association of Securities Dealers Automated Quotations (NASDAQ), 48 Net cash flow, estimation methods, 174–175 Net present value (NPV), 189–190 Net working capital, asset identification, 60 New York Stock Exchange, 49 Non-amortizing assets, 209 Non-compete agreement, 77, 79 Non-competition agreement analysis, scenario method, 80t–82t Non-competition agreement, asset identification, 60 Noncompetition agreements, 38–39 Noncontrolling interest, fair value, 87 Non-goodwill asset, 185 Nonlinear data, actual net cash savings, 172e Non-monetary asset, physical substance (absence), Non-taxable business, combination, 218 Not-for-profit entity, status, 103 Nuclear power plant, acquiree ownership/operation, 34–35 Obsolescence effects, 91 evidence, 120 types, 105 Operating cash flows, generation, Operating losses, 158 Operating segment (business component), 152–153 Over-the-counter markets, 49 Partnership, interests, 232 Personnel, R&D costs, 20 Physical damage, evidence, 120 Pink Sheets LLC, 49 Post-acquisition balance sheet, fair value nonrecognition, 77 Postimplementation-operations stage, 15 274 Preacquisition contingency, fair value, 40 Preliminary project stage, 14 Present rate discount rate, determination, 175–181 Present value actual cost, 171e calculation, 165–181 estimated cost, 171e estimated future cost savings, 173e estimation result, 170e usage, 174e straight line, determination, 168e PricewaterhouseCoopers, 39, 116 perspective, 117 Principal-to-principal market, 49 Private companies accounting alternative, 36–40, 189 goodwill, amortization, 101–104 Private Company Council (PCC), accounting (alternative), 186–187 Private enterprises goodwill impairment testing, 186–190 U.S GAAP perspective, 186–190 Product life cycles, 105 Proprietary software, 79, 83 asset identification, 60 valuation, cost approach, 84t Proprietary technology, 69–70 Prospective financial information (PFI), 60 Public business entity, status, 103 Public information, product life cycles, 105 Qualitative assessment, 156–160, 187–188 absence, 114, 184 conducting decision, 130–132, 156 process, 132–135, 157–160 introduction, 131 purpose, 130–135 Qualitative factors, assessment, 147 Quantitative goodwill impairment test, 160–165 Quantitative impairment test, 136–139 performing, 147 reduction, 131 Quantitative threshold, application, 23 Reacquired rights, 107 Reasonably possible, term (usage), 199 Index Recognition and Measurement in Financial Statements of Business Enterprises (FASB Concepts No 5), 25–26 Recognition criteria, Recoverability assessment, 143 test, 139–140 Recoverable amount, determination, 183–184 Regression analysis, 165–166 Relief-from-royalty method, 57, 67 tradename valuation, 71t Renewals IAS 38 language, 106 principal, 106–107 Reorganization transaction, fresh-start reporting (ASC 852), 37 Replacement costs, 58–59 Replacement costs, basis, 57 Reporting unit, 151–155 assets/liabilities, assignation, 153–154 definition, 152 events, impact, 151 fair value, 153, 161–162 determination, 162 goodwill, assignation, 154–155 identification, 151–153 level, 187 reorganization, 155 Reproduction cost, 58 Research and development (R&D) activities, 19–20 categories, 20 disclosure, SEC Comment Letter, 241–243 activities costs, 20 accounting, 19 assets, acquisition, 19 expenses, guidance (ASC 730-10), 19 in-process research and development (IPR&D), acquisition, 26–27 internal research and development, 199–201 process, acquisition/development/ improvement, 19 software creation/usage, 16–17 total R&D expense, composition, 242 Research phase, activities examples, 22 Residual cash flow, 70 Revaluation model, cost model (contrast), 107–109 275 Index Revenues guidance (ASC 985-605), 11 uncertain continuity, 92 Risk-adjusted discount rate, 177 Risk-free asset, 178 Risk-free interest rate, 176–177 Royalty rates, 48 analysis, 57 payment, 67 Scenario method, 80t–82t incremental income/deficit, 55 Securities and Exchange Commission (SEC) comment letters, 201, 208–210 requirements, 103 staff comment letters, 203–204 Securities Exchange Act of 1934, requirements, 103 Security, market price (nonrepresentation), 162 Segment Reporting (International Accounting Standards Board IAS No 14), 182 Self-created intangible assets, 9–23 Self-generated intangible assets, impact, Separability criterion, 25, 33–35 considerations, 96–97 Separately acquired intangible assets, cost (IAS 38 analysis), 28 Separate sales factor, 123 Service contract, 13 Share price, decrease, 158 Short-term Treasury bills, U.S government default, 177 Significant penalty, 11–12 Single asset factor, 122 Small-to-medium enterprises (SMEs), goodwill impairment testing, 186–190 IFRS perspective, 189–190 Software application development stage, 15 costs, 17 fair value recognition, 17 internal use, 14–16 postimplementation-operation stage, 15 preliminary project stage, 14 research and development usage, 16–17 tools, development costs, 18 upgrades/enhancements, 15–16 Software as a Service (SaaS), 11 development/maintenance costs, 12 Stock exchange seats, intangible asset example, 108 Straight line, determination, 168e Straight market approach, 57 Supplier-based intangibles, 228 Tangible assets, impact, Tax-deductible amortization expense, 217 Tax-deductible goodwill, 219 financial reporting goodwill, contrast, 220–221 Taxi medallions, intangible asset example, 108 Technology technology-based intangible assets, useful lives, 107 valuation, multi-period excess earnings model, 72t–73t Technology patent, acquiree ownership, 35 Time value of money, 175 Total assets, intangible asset classification, Total R&D expense, composition, 242 Trademark, 229–230 Trade name, 229–230 asset identification, 60 fair value, 67, 69 example, 51 usage, 125–126 Tradename, valuation, 71t Treasury Regulations 1.1060-1T(c)/ 1.338-6/7, 225 TREND function/formula, 169–172, 178 Trust, interests, 232 Unobservable inputs, 50 Unpatented technology, 97 Useful life determination, 92, 104–107 changes, 98–99 estimation, 97 timing, 210 U.S generally accepted accounting principles (U.S GAAP), 24–27, 108, 203 financial statements, preparation, 104 IAS 38, comparison, impact, 243–247 Valuation approaches, 51–59 data/inputs requirement, 48 276 Valuation (continued ) cost approach, 68t data, interpretation, 257 errors, 257–259 principles, application, 59–83 Value-in-use, 114, 184, 189 Wal-Mart supply chain, inventory management shift, Walt Disney Company goodwill/investments, 244–246 intangible assets/long-lived assets, 244–246 Walt Disney Company, 10-K annual report, 243–247 Warehouse contract, value (determination process), 169 Website application, infrastructure development stage, 17–18 Index costs, accounting guidance (ASC 350-50), 17 hosting, fees, 18 operation, software costs, 17 Website development, 17–19 content development stage, 18 graphics development stage, 18 operating stage, 18–19 planning stage, 17 Weighted average cost of capital (WACC), 60, 63t–64t, 65, 83 return, required rate (reconciliation), 85t–86t Weighted average return (WARA), 83 Without significant penalty, term (meaning), 13 Workforce, placement, 226–227 Working papers, 237 ... importance of their intangible assets, the need for relevant and ASC Term Intangible Assets. ” Accounting for Goodwill and Other Intangible Assets, First Edition Ervin L Black and Mark L Zyla ©... Recognizing Intangible Assets CHAPTER Initial Measurement of Acquired Intangible Assets 47 CHAPTER Amortizing Intangible Assets 89 CHAPTER Impairment Testing for Goodwill and Other Intangible Assets. .. Sons, Inc 2 Accounting for Goodwill and Other Intangible Assets reliable financial information for their existence and valuation is increasing The necessity of valuing intangible assets as accurately