Intangibles Examining U.S. GAAP vs.

IFRS
Brett Donner, Nick Ioriatti, Mike Nowaczyk, Mike OHara, and James Peters

U.S. GAAP Definition of Intangibles

SFAS 142- Identifiable non-financial assets that lack physical existence.
Examples
Goodwill Research and development Patents Copyrights Advertising

FASB Codification: Overall Treatment 350.10.15

Recognition 50.6

Recognition under U.S. GAAP

SFAS 142 To be recognized as an intangible asset:
Have costs that can be measured with sufficient reliability Have probable future economic benefits Have arisen from a previous event or transaction Be controlled by the entity FASB Codification: Presentation on Balance Sheet 210.4.05

Recognition under U.S. GAAP cont.

The Cost Model Calculation: historical cost less impairment losses and accumulated amortization Intangible assets brought outside a business are recognized at fair value.
FASB: 60.4 and 205 regarding presentation

Revaluation Model: never used for intangibles under U.S. GAAP

SFAS 142: Accounting for Intangible Assets

Acquired Goodwill Treated as an asset with an indefinite life, tested for impairment.
Fair value and carrying value are measured. If carrying value exceeds fair value, goodwill impairment loss is calculated. Goodwill loss impairment is excess of carrying value of goodwill over implied fair value.

FASB standard 205

Impairment of Goodwill
Exercise 12-15
prepare the journal to record impairment December 31, 2012 Loss on Impairment.................. 25,000,000 Goodwill............................................ 25,000,000 The fair value of the reporting unit ($335 million) is below its carrying value ($360 million). Therefore, an impairment has occurred.

Expenses after Initial Recognition

Research Activities finding new knowledge through critical investigation Development Activities developing of research into a new product R/D Costs
used in developments of patent or copy rights that prepare future value

Challenges with R/D Costs

Identifying costs for activities Determining magnitude of the future benefits and amount of time that benefits are realized

Recognition Criteria- IAS 38

In order to be recognized as an intangible asset, the asset must:
Fit within the definition of an intangible asset. Meet the recognition criteria from IAS 38 This requirement applies to: 1) Initial costs to acquire or internally generate an intangible asset. 2) Costs incurred to add, replace, or maintain the asset.

IAS 38-Intangible Measurement

Cost Method- same as U.S. GAAP Revaluation Model:
Carried at fair value less accumulated amortization and impairment loss Revaluations made annually at year end Increase/decrease recognized in Other Comprehensive Income (Revaluation Surplus)

IAS 38- Intangible Asset Transactions

Purchased assets for $300,000 from McEnroe Inc.
BV of assets: Liabilities: BV of Net assets Under valued assets Inventory Property, Plant, Equipment FMV of net assets Price paid for McEnroe Inc. Goodwill $70,000 revaluation $155,000 (25,000) 130,000

20,000 50,000 200,000

300,000 $100,000

IAS 38- Intangible Assets Useful Life

Assess whether life is finite or indefinite Finite Useful Life Depreciable amount: (cost-residual value) Amortization method reflects future economic benefits
Straight line pattern used if information cannot be determined reliably

IAS- Intangible Assets Useful Life

Indefinite Useful life no amortization IAS 36- Impairment of Assets
Tested for impairment annually

IAS 8- Changes in accounting estimates and errors

Indefinite asset can become finite based on assessment Change is considered an accounting estimate

Differences between IFRS and GAAP

Differences Cost and Revaluation Method Research and Development Costs IFRS (nonmonetary, entity controlled) Revaluation method (assets can be valued at fair value) Research Phase Costs and Development Costs -Research Phase cost are always expensed Development Costs -feasibility of finishing intangible -availability of resources to finish intangible -ability to measure expenses incurred though development of intangible -must generate future benefit -use or sale of asset GAAP (non-financial) Cost Method Costs are expensed when incurred, very few cases for exception

Start-Up Costs

-Start-up costs capitalized if included in property, plant, and equipment cost or if in acquisition includes goodwill as a part

always are expensed

Problems Adopting IFRS

Likely to be more expensive than the Sarbanes-Oxley Act Companies will need two to three years to update communications and software systems. Training of hundreds of employees Curriculum changes in Business schools Changes to testing standards for auditors

Potential Audit Problems

In most cases audits that involve intangible assets for both IFRS/GAAP requires the auditor to re-evaluate/recompute the value of the intangible, common problems arise from:

Failure to gather sufficient evidence for the valuation of the intangibles Failure to obtain evidence to support key assumptions Failure to obtain evidence related to the evaluation of managements estimates

Our Opinion
Adopting IFRS will save money in long run Flexibility on portrayal of financial performance
Finite vs. indefinite life span of assets

IFRS allows ease for international investments Makes use of revaluation of intangibles

Sources
Deloitte, (April, 2, 2008). IFRS In Your Pocket 2008. Retrieved October 28, 2012, from Deloitte's IAS Plus Site Web site: http://www.belkcollege.uncc.edu/jmcathey/6260/ifrs/Deloitte_IFRSpocke t2008.pdf Grant Thornton, (June, 30, 2008). Comparison Between U.S GAAP and International Financial Reporting Standards , from Grant Thorntons Web sitehttp://www.belkcollege.uncc.edu/jmcathey/6260/ifrs Grant_Thornton_GAAP_v_IFRS_Comparison.pdf IASC Foundation, (3/26/2008). Technical Summary - IAS 38 Intangible Assets. Retrieved October 28, 2012, from IFRS and IAS Summaries Web site: http://www.iasb.org/NR/rdonlyres/E52C2F1A-DA51-4CFC-A3639E84920D6EED/0/IAS38.pdf Iwata, Edward. "U.S. Considers Costly Switch to International Accounting Rules - USATODAY.com." USA Today, 6 Jan. 2009. Web. 28 Oct. 2012. <http://usatoday30.usatoday.com/money/companies/regulation/2009-0105-international-accounting-rule-switch_N.htm>.

Sources Continued
Johnson, Sarah. "Guessing the Costs of IFRS Conversion - CFO.com." CFO.com. N.p., 30 Mar. 2009. Web. 28 Oct. 2012. <http://www.cfo.com/article.cfm/13399306/c_13396520?origin=ar chive>. Keiso, Weygandt, Warfield, Chapter 12: Impairment of Intangible Assets, Intermediate Accounting Student Companion Website, 2007, slide 29 KPMG. "IFRS Compared to U.S. G.A.A.P: An Overview." KPMG. N.p., 1 Aug. 2009. Web. 28 Oct. 2012. <http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublicati ons/Documents/IFRS-compared-US-GAAP-0908.pdf>. "Major Differences Between US Gaap And IFRS." Major Differences Between US Gaap And IFRS. N.p., n.d. Web. 29 Oct. 2012. <http://www.slideshare.net/guestf0e05d/major-differencesbetween-us-gaap-and-ifrs>.