S. gaap I. General Principles



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APPENDIX A*


Accounting Rules and Regulations for Intangibles:

U.S. and International Standards
Accounting for Intangibles - U.S. GAAP

I. General Principles
The broad principles governing the accounting for Intangible assets are laid out in APB 17. According to APB 17, Paragraph 9, a company should record costs of intangible assets acquired from others, including goodwill, as an asset. All costs incurred to develop intangible assets that are not specifically identifiable should be record as expenses. Where an intangible asset has been recorded, its cost should be amortized by systematic charges to income over the estimated period of benefit of the asset. The amortization period should not exceed forty years in any case.
The provisions of APB 17 apply to intangible assets recorded on the acquisition of some or all of the stock held by minority stockholders of a subsidiary company. The provisions of APB 17 are also applicable to costs of developing goodwill and other unidentifiable intangible assets with indeterminate lives, provided that a company records such expenditure as assets. APB 17 itself does not mandate as to what type of expenditures should be deferred as assets.

1. Acquired Intangible Assets
Intangible assets acquired singly should be recorded at cost at date of acquisition. Cost is measured by the:


  1. amount of cash disbursed, or

  2. fair value of other assets distributed, or

  3. present value of amounts to be paid for liabilities incurred, or

  4. fair value of consideration received for stock issued as described in paragraph 67 of APB Opinion No. 161.

Intangible assets acquired as part of a group of assets or as part of an acquired company should also be recorded at cost at date of acquisition. Cost is measured differently for specifically identifiable intangible assets and those lacking specific identification. The cost of identifiable intangible assets is an assigned part of the total cost of the group of assets or enterprise acquired, normally based on the fair values of the individual assets. The cost of unidentifiable intangible assets is measured by the difference between the cost of the group of assets or enterprise acquired and the sum of the assigned costs of individual tangible and identifiable intangible assets acquired less liability assumed. Cost should be assigned to all specifically identifiable intangible assets; cost of identifiable assets should not be included in goodwill.


2. Acquired Intangible Assets for Banking or Thrift Institution
FAS 72 contains the rules for accounting for intangible assets arising during the acquisition of a commercial bank, a savings and loan association, a mutual savings bank, a credit union, or any other depository institution. For proper accounting it is important to recognize if the acquired intangible assets are identifiable or unidentifiable.

Identified Intangible Assets


Acquired intangible assets that can be separately identified should be assigned a portion of the total cost of the acquired enterprise if the fair values of those assets can be reliably determined. The fair values of assets that relate to depositor or borrower relationships should be based on the estimated benefits attributable to the relationships that exist at the date of acquisition. Hence new depositors or borrowers that may replace existing relationships should be ignored while allocating the fair value. Identified intangible assets have to be amortized over the estimated lives of the existing relationships.

Unidentifiable Intangible Assets


In a combination, if the fair value of liabilities assumed exceeds the fair value of tangible and identified intangible assets acquired, the excess constitutes an unidentifiable intangible asset. The intangible unidentified asset should be amortized to expense over a period that does not exceed the estimated remaining life of the long-term interest-bearing assets acquired. The amortization period should not exceed 40 years in any case. The amortization rate is applied to the carrying amount of the interest-bearing assets that, based on their terms, are expected to be outstanding at the beginning of each subsequent period.

3. Goodwill

Goodwill is defined as the excess of the cost of an acquired company over the sum of identifiable net assets. It is the most common unidentifiable intangible asset. While identifiable intangible assets may be acquired singly, as a part of a group of assets or as part of an entire enterprise, unidentifiable assets cannot be acquired singly.

Amortization of Goodwill


APB 17 requires that goodwill be amortized using the straight-line method unless a company can demonstrate that another systematic method is more appropriate. In order to use an accelerated method to amortize goodwill a company has to demonstrate that:

  1. the amount assigned to goodwill represents an amount paid for factors such as those listed in paragraph 272 but there is not a satisfactory basis for determining appraised values for the individual factors, and

  2. the benefits expected to be received from the factors decline over the expected life of those factors.

APB 17, paragraph 31, also specifies that a company has to continuously evaluate the period of amortization of intangibles to determine whether later events and circumstances warrant revised estimates of useful lives. However, the useful life of the unidentifiable intangible asset cannot be revised upward in any case.

4. Subsequent Costs
Costs of developing, maintaining, or restoring intangible assets should be deducted from income when incurred provided any of the following conditions are satisfied:

  1. the asset is not specifically identifiable

  2. the asset has an indeterminate life

  3. the asset is inherent in a continuing business and related to an enterprise as a whole



II. Specific Intangibles
1. Customer Acquisitions and Retention


Item

Industry

Current Treatment


Credit Information records

Banking,

Thrift


Collection of such information, its storage and repeated access are treated as operating expenditure. Valuation and disclosure is not required on the Income statement and Balance Sheet.
The following information is required as footnote disclosures by FAS105 ¶20 and could be useful in estimating the nature of the customer credit:

  1. All significant concentrations of credit risk arising from all financial instruments, whether from an individual counter party or groups of counter parties.

  2. Group concentrations of credit risk if a number of counter parties are engaged in (i) similar activities or (ii) activities in the same region or (iii) have similar economic characteristics, such that their ability to meet contractual obligations would be similarly affected by changes in economic or other conditions.

  3. For each significant concentration information required is: (i) information about the shared activity, region, or economic characteristic that identifies the concentration (ii) the amount of the accounting loss due to credit risk the entity would incur if parties to the financial instruments that make up the concentration failed completely to perform according to the terms of the contracts and the collateral or other security, if any, for the amount due proved to be of no value to the entity

  4. Policy of requiring collateral or other security to support financial instruments subject to credit risk, information about access to that collateral or other security, the nature and a brief description of the collateral or other security supporting those financial instruments.




Customer Relationships

Customer Oriented Industries


Self generated goodwill and customer relationships are not recognized in the Income Statement and Balance Sheet. Amounts spent on acquisition of customer relationships and goodwill are treated as selling, advertisement and sales promotion expenditure and expensed in the period incurred. EITF 88-20 deals with the issue when an enterprise purchases for cash the credit card portfolio, including the cardholder relationships, of a financial institution and the amount paid exceeds the sum of the amounts due under the credit card receivables. In such a case the difference between the amount paid and the sum of the balances of the credit card loans at the date of purchase, should be allocated between the intangible relationship assets and the loans acquired. The premium allocated to the loans should be amortized over the life of the loans in accordance with Statement 91.

Customer Support Costs

Consumer Services (including Computer Software)

The only mention of treatment of such costs is mentioned in FAS 86. According to FAS 86 ¶6, customer maintenance and support costs for computer software should be charged to expense when related revenue is recognized or when those costs are incurred, whichever occurs first. Maintenance is defined as activities undertaken after the product is available for general release to customers to correct errors or keep the product updated with current information. Such activities include routine changes and additions. When the sales price of a product includes customer support for several periods and the price of that support is not separately stated, the estimated related costs should be accrued in the same period that the sales price is recognized.

Subscribers acquisition and maintenance


Cable Television

Treatment of such costs in relation to cable television companies is specified under FAS 51. The standard deals with accounting for subscriber related costs. Subscriber related costs are defined as costs incurred to obtain and retain subscribers to the cable television system. It includes costs of billing and collection, bad debts, and mailings, repairs and maintenance of taps and connections, franchise fees related to revenues or number of subscribers, general and administrative system costs, programming costs for additional channels used in the marketing effort, and direct selling costs.
In the pre-maturity period, subscriber related costs are expensed as period costs. The pre-maturity is the period during which the cable television system is partially under construction and partially in service. The period begins with the first earned subscriber revenue and its end varies with circumstances of the system. The end is usually determined based on plans for completion of the first major construction period or achievement of a specified predetermined subscriber level at which no additional investment will be required for other than cable television plant. The length of the pre-maturity period also varies with the franchise development and construction plans. It is usually not mare than 2 years long.

For a continuing cable operation, initial hookup revenue is recognized as revenue only to the extent of direct selling costs incurred. The remainder of costs is deferred and amortized to income over the estimated average period that subscribers are expected to remain connected to the system. Direct selling costs include commissions, salesperson's compensation (other than commissions) for obtaining new subscribers, local advertising targeted for acquisition of new subscribers and costs of processing documents related to new subscribers acquired. Direct selling costs do not include supervisory and administrative expenses or indirect expenses, such as rent and costs of facilities.

Initial subscriber installation costs, including material, labor, and overhead costs of the drop3 is capitalized and depreciated over a period no longer than the depreciation period used for cable television plant. The cost of subsequently disconnecting and reconnecting is charged to expense.


Customer Lists/ Databases

HMOs, Hospitality Industry, Publications

Disclosure or valuation is not required either on the Income Statement or Balance Sheet. FAS 131, ¶39 requires footnote disclosures in certain cases. Information about major customers is required to provide information about the extent of reliance on major customers if revenues from transactions with a single external customer amounts to 10 percent or more of an enterprise’s revenues. Disclosures required are:

  1. Total amount of revenues from each such customer

  2. Identity of the segment or segments reporting the revenues (disclosure of the identity of a major customer or the amount of revenues that each segment reports from that customer is not required).

A group of entities under common control is considered to be a single customer, and the federal government, a state government, a local government (for example, a county or municipality), or a foreign government each is considered to be a single customer.


2. Innovations


Item

Industry

Current Treatment

Blueprints/ Drawings/ Designs/ Patterns/ Documentation/

Laboratory Notebooks/ Recipes



Engineering, Pharmaceutical Hospitality,

No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Chemical Formulations


Chemical, Pharmaceutical

No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Internally Developed Computer Software

Technology, Manufacturing, Retail, Transportation,

There are no specific accounting regulations requiring the capitalization of such costs. FAS 86, which deals with accounting for software, refers only to accounting for software that is developed for sale or lease. According to the discussion contained in FAS 86, the FASB was "not persuaded" that the predominant practice of expensing cost of internally developed software was improper.



3. Assets not specifically recognized


Item

Industry

Current Treatment

Book and Publication Libraries/ Music Master Recordings

Publishing, Record and Music Industry

According to FAS 50 ¶11, the cost incurred by the record company on a record master should be reported as an asset if the past performance and current popularity of the artist provides a sound basis for estimating that the cost will be recovered from future sales. Otherwise such costs should be expensed. Where an asset is recognized, it should be amortized over the estimated life of the recorded performance using a method that reasonably relates the amount to the net revenue expected to be realized.


Distribution Network

Consumer,

Industrial Products



No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Motion Picture Libraries

Motion Pictures, Television and Media companies

According to FAS 53, motion pictures produced by a company should be capitalized as “inventory of films produced” and valued at production cost. The cost of film is amortized using the individual-film-forecast-computation method. An alternative amortization method, the periodic-table- computation method, can be used if the result would approximate the result achieved by the earlier method. The amortization of film costs begins when a film is released and revenues on that film are recognized and the amortization procedure relates the film costs to the gross revenues reported too yield a constant rate of gross profit before period expenses.
Under the individual-film-forecast-computation method, film costs are amortized in the ratio that current gross revenues bear to anticipated total gross revenues. Hence the method requires the determination of total gross revenues during the entire useful life from exploitation in all markets.

The production costs for an individual film are accumulated in four chronological steps: acquisition of the story rights, pre-production (includes script development, costume design, and set design and construction), principal photography (includes shooting the film) and post-production (includes activities culminating in a completed master negative).

Motion picture companies are required to present either a classified or unclassified balance sheet. In a classified balance sheet film costs are segregated between current and non-current assets. Costs classified as current assets are:


  • unamortized costs of film inventory released and allocated to the primary market

  • completed films not released (reduced by the portion allocated to secondary markets), and

  • television films in production that are under contract of sale.

All other capitalized film costs are classified as non-current assets.
The allocated portion of film costs expected to be realized from secondary television or other exploitation should be reported as a non-current asset and amortized as revenues are recorded.
Since the anticipated total gross revenues vary from actual total gross revenues, estimates of anticipated total gross revenues should be reviewed periodically and revised when necessary to reflect more current information. When anticipated total gross revenues are revised, a new denominator is determined to include only the anticipated total gross revenues from the beginning of the current year and the numerator (actual gross revenues for the current period) is not affected. The revised fraction is applied to the unrecovered film costs (production and other capitalized film costs) as of the beginning of the current year.

The periodic-table-computation method uses tables prepared from the historic revenue patterns of a large group of films. That revenue pattern is assumed to provide a reasonable guide to the experience of succeeding groups of films produced and distributed under similar conditions. The periodic-table-computation method ordinarily is used only to amortize that portion of film costs relating to film rights licensed to movie theaters, and film costs are accordingly allocated between those markets for which the table is used and other markets. The periodic tables should be reviewed regularly and updated whenever revenue patterns change significantly. Such tables should not be used for a film whose distribution pattern differs significantly from those used in compiling the table, for example, a film released for reserved seat theater exhibition.




4. Assets arising from contractual arrangements


Item

Industry

Current Treatment

Cooperative Agreements






No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Patents and Trademarks




No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Franchise Agreements

Joint Ventures







FAS 45 only deals with accounting for franchise fees by the franchiser. The intangible asset represented by the contractual relationship on part of the franchisee is not accounted for at all.


Favorable Lease Agreements




No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Environmental Rights (including Exemptions)






No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.
In respect to general environmental contamination treatment costs according to EITF 90-8, they should be charged to expense. The costs may be capitalized only if any one of the following criteria is met:

  1. The costs extend the life, increase the capacity, or improve the safety or efficiency of property owned by the company. For purposes of this criterion, the condition of that property after the costs are incurred must be improved as compared with the condition of that property when originally constructed or acquired, if later.

  2. The costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations or activities. In addition, the costs improve the property compared with its condition when constructed or acquired, if later.

  3. The costs are incurred in preparing for sale that property currently held for sale.

Leasehold Interest





No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Distribution Rights/

Development Rights






No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.


Insurance Claims




Under FAS 5, claims payable are treated as contingencies but claims receivable are not recognized. Claims Insurance claims receivable are not recognized till realized under the currently prevailing revenue recognition principles

Project Financing Arrangements/ Take-or-pay Contracts/ Throughput Contracts/ Other Unconditional Purchase Commitments/ Open to Ship Purchase Orders






Definitions


According to FAS 47, a take-or-pay contract is defined as an agreement between a purchaser and a seller that provides for the purchaser to pay specified amounts periodically in return for products or services. The purchaser must make specified minimum payments even if it does not take delivery of the contracted products or services.
A throughput contract is an agreement between a shipper (processor) and the owner of a transportation facility (such as an oil or natural gas pipeline or a ship) or a manufacturing facility. The contract provides for the shipper (processor) to pay specified amounts periodically in return for the transportation (processing) of a product. The shipper (processor) is obligated to provide specified minimum quantities to be transported (processed) in each period and is required to make cash payments even if it does not provide the contracted quantities.
A project financing arrangement relates to the financing of a major capital project in which the lender looks upon the cash flows and earnings of the project as the source of funds for repayment. The assets of the project serve as collateral for the loan.

Accounting

The accounting standard does not require recognition of such contracts from the viewpoint of capitalizing the value of the intangible asset, if any. According to FAS 47, the purchaser (or the receiving party) should disclose the following information with respect to purchase obligations (provided they meet the specified criteria):


  1. The nature and term of the obligation(s)

  2. The amount of the fixed and determinable portion of the obligation(s) as of the date of the latest balance sheet presented and for each of the five succeeding fiscal years

  3. The nature of any variable components of the obligation(s)

  4. The amounts purchased under the obligation(s) for each period for which an income statement is presented

Disclosure of the amount of imputed interest necessary to reduce the unconditional purchase obligation(s) to present value is encouraged but not required.




5. Specific industry related intangibles



Item

Industry

Current Treatment

Airport Landing Rights

Airlines

No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

FCC Broadcast Licenses

Broadcasting

No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Network affiliation agreement

Broadcasting

FAS 63 deals with accounting for agreements under which broadcaster may be affiliated with a network of other television or radio broadcasters (network affiliation agreements). Usually under the agreement the station receives compensation for the network programming that it carries based on a formula designed to compensate the station for advertising sold on a network basis and included in network programming. A network affiliate would generally have a lower programming cost than an independent station because an affiliate does not incur such costs for network programs.

Network affiliation agreements are presented in the balance sheet of a broadcaster as intangible assets. If a network affiliation is terminated and not immediately replaced or under agreement to be replaced, the unamortized balance of the amount originally allocated to the network affiliation agreement is to be charged to expense.
If a network affiliation is terminated and immediately replaced or under agreement to be replaced, a loss is recognized to the extent that the unamortized cost of the terminated affiliation exceeds the fair value of the new affiliation. However, a gain is not recognized if the fair value of the new network affiliation exceeds the unamortized cost of the terminated affiliation.


License agreements for programs

Broadcasting

FAS 63 deals with the accounting for such license agreements. A typical license agreement for program material (for example, features, specials, series, or cartoons) covers several programs (a package). The agreement grants a broadcasting station, group of stations, network, pay television, or cable television system (licensee) the right to broadcast either a specified number or an unlimited number of showings over a maximum period of time (license period) for a specified fee. Ordinarily, the fee is paid in installments over a period generally shorter than the license period. The agreement usually contains a separate license for each program in the package. The license expires at the earlier of the last allowed broadcast or the end of the license period. The licensee pays the required fee whether or not the rights are exercised. If the licensee does not exercise the contractual rights, the rights revert to the licensor with no refund to the licensee. The license period is not intended to provide continued use of the program material throughout that period but rather to define a reasonable period of time within which the licensee can exercise the limited rights to use the program material.

The licensee reports an asset and a liability for the rights acquired and obligations incurred under a license agreement when the license period begins (and certain conditions are met). The asset is segregated on the balance sheet between current and noncurrent based on estimated time of usage. The liability is segregated between current and noncurrent based on the payment terms. The rights capitalized are amortized based on the estimated number of future showings, except that licenses providing for unlimited showings of cartoons and programs with similar characteristics may be amortized over the period of the agreement because the estimated number of future showings may not be determinable. If the first showing is more valuable to a station than reruns, an accelerated method of amortization is to be used. Else, the straight-line amortization method is used
The capitalized costs of rights to program materials are reported in the balance sheet at the lower of unamortized cost or estimated net realizable value on a program-by-program, series, package, or daypart4 basis, as appropriate. If management's expectations of the programming usefulness of a program, series, package, or daypart are revised downward, the unamortized cost is written down to estimated net realizable value. The management is not permitted to revise the value upwards if the program is more successful than originally aniticipated.


FCC Radio Band Licenses

Broadcasting/ Communications

No specific regulations could be identified. In the absence of any other specific standards, the costs of developing these intangible assets should be expensed as per APB 17.

Drilling and Mineral Rights

Extractive industries


FAS 19 deals with mineral interests in properties for oil and gas companies. Mineral rights cover a fee ownership or a lease, concession, or other interest representing the right to extract oil or gas subject to such terms as may be imposed by the conveyance of that interest. It includes:

  1. royalty interests

  2. production payments payable in oil or gas

  3. other non-operating interests in properties operated by others

  4. agreements with foreign governments or authorities under which the company participates in the operation or serves as producer of the underlying reserves

Mineral rights do not include any supply agreements or contracts that represent the right to purchase (as opposed to extract) oil and gas. Mineral rights are classified as proved or unproved as follows:

i. Unproved properties - properties with no proved reserves

ii. Proved properties - properties with proved reserves


Properties with unproved reserves are expensed whenever it is established that no recovery is possible.

Interstate Operating Rights

Transportation

FAS 44 deals with the accounting for intangible assets as represented by operating rights. An operating right (also known as an operating authority) is defined as a franchise or permit issued by the Interstate Commerce Commission (ICC) or a similar state agency to a motor carrier to transport specified commodities over specified routes with limited competition. These rights are either granted directly by the ICC or a state agency, purchased from other motor carriers, or acquired through business combinations.

The statement requires that the cost of acquiring operating rights should be charged to income and, if material, reported as an extraordinary item.

In case of a business combination of motor carrier companies, the costs of intangible assets should be assigned to:


  1. interstate operating rights

  2. other identifiable intangible assets (including intrastate operating rights4) and

  3. goodwill

The cost of identifiable intangible assets (including operating rights) should not be included in goodwill. Costs assigned to intangible assets should not reflect costs of developing, maintaining, or restoring those intangibles after they were acquired. Costs assigned to identifiable intangibles, including operating rights, should not be merged with or replaced by amounts relating to other identifiable intangibles or goodwill. If a company cannot separately identify its interstate operating rights, other identifiable intangible assets, and goodwill and cannot assign costs to them as specified by this statement or finds that it is impracticable to do so, it will presumed that all of those costs relate to interstate operating rights.

Mortgage Servicing Rights

Banking

According to FAS 125, the servicer of financial assets commonly receives the benefits of servicing (revenues from servicing fees, late charges, and other ancillary sources, including “float”) when it performs the servicing5 and incurs the costs of servicing the assets. If the benefits of servicing are not expected to adequately compensate the servicer for performing the servicing, the contract results in a servicing liability.

Under FAS 125, a company that undertakes the servicing obligation should recognize an asset or a liability. However, if the transferor securitizes the assets, retains all of the resulting securities, and classifies them as debt securities held-to-maturity in accordance with FAS 115, then the servicing asset or liability should be reported together with the asset being serviced.

A servicing asset or liability that was purchased or assumed rather than undertaken in a sale or securitization of the financial assets being serviced should be measured at the price paid (which will be considered the fair value).
The servicing asset or liability should be amortized in proportion to and over the period of estimated net servicing income (when servicing revenues exceed servicing costs) or net servicing loss (when servicing costs exceed servicing revenues). The servicing asset or liability should be assessed for impairment or increased obligation based on its fair value.


Motion Picture Exhibition Rights

Motion Pictures

According to FAS 53, motion picture exhibition rights are generally sold (licensed) to theaters on the basis of a percentage of the box office receipts or for a flat fee in some markets. In some markets guarantees may be received which are essentially outright sales because the licenser has no reasonable expectations of receiving additional revenues based on percentages of box office receipts, particularly where there is a lack of control over distribution.
The licenser recognizes revenues on the dates of exhibition for both percentage and flat fee engagements. Nonrefundable guarantees should be deferred and recognized as revenues on the dates of exhibition. Guarantees that are, in substance, outright sales, are recognized as revenue (provided certain conditions are met).
For films licensed to television, the license agreement for television program material is a sale of a right or a group of rights. Revenue from a license agreement is recognized when the license period begins and all of the following conditions have been met:

  1. license fee for each film is known

b. cost of each film is known or reasonably determinable

  1. the collectibility of the full license fee is reasonably assured.


  2. The film has been accepted by the licensee

  3. The film is available for its first showing or telecast.

The amount of the license fee for each film ordinarily is specified in the contract and the present value of that amount, should be used as the sales price for each film.


According to FAS 53 ¶20, a license agreement for sale of film rights for television exhibition should not be reported on the balance sheet until the time of revenue recognition. Amounts received on such agreements prior to revenue recognition are reported as advance payments and included in current liabilities, if those advance payments relate to film cost inventory classified as current assets.


Accounting for Intangibles - International Accounting Standards
IAS 38 deals with the accounting for Intangible Assets.

I. General Principles


According to IAS 38, an intangible asset is recognized on the balance sheet if the asset’s cost can be reliably measured and all future economic benefits specifically attributable to the asset will flow to the enterprise. All other costs incurred for non-monetary intangible items should be expensed. The intangible asset is reported in the bleach sheet at its cost less any accumulated amortization and any accumulated impairment costs.

1. Definitions




a. Intangible Assets


Intangible Assets are defined as non-monetary assets without physical substance held for use in production or supply of goods or services, for rental to others, or for administrative purposes:

  1. that are identifiable;
  2. that are controlled by an enterprise as a result of past events; and


  3. from which future economic benefits are expected to flow to the enterprise.

The definition of intangible assets requires that the asset be identifiable in order to distinguish it from goodwill.

b. Goodwill


Goodwill represents future economic benefits from synergy between identifiable assets or from intangible assets that do not meet the criteria for recognition as an intangible asset.

c. Cost


The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or production.


2. Recognition and Measurement of Intangible Assets


According to the standard an intangible asset should be recognized as an asset if and only if:

  1. it is probable that future economic benefits specifically attributable to the asset will flow to the enterprise

  2. the cost of the asset can be measured reliably

The asset that is recognized should be initially measured at cost. The future economic benefits flowing from an intangible asset may include revenue from sale of products or services, cost savings, or other benefits arising from use of the asset by the enterprise itself.


The standard lays down rules for an enterprise to demonstrate that future economic benefits specifically attributable to an intangible asset will flow back to an enterprise. The enterprise is required to show that:

  1. the intangible asset will enhance the enterprise’s net inflow of future economic benefits

  2. it has the intention and ability to use the intangible asset
  3. it has the adequate technical, financial and other resources available to obtain the expected future economic benefits.




3. Internally Generated Goodwill


Under no circumstances should internally generated goodwill be recognized as an asset. Internally generated goodwill is not recognized as an asset because no resource is created that is controlled by the enterprise, which will generate specific future economic benefits and that can be reliably measured at cost.


4. Subsequent Costs


Subsequent costs on an intangible asset should be recognized as an expense when they are incurred unless:

  1. it is probable that those costs will enable the asset to generate specifically attributable future economic benefits in excess of the originally assessed standards of performance

  2. those costs can be measured and attributed to the asset reliably.

In the absence of these conditions, the subsequent costs incurred on the intangible asset should be expensed.




5. Amortization

IAS 38 requires that cost of the intangible asset be amortized over the estimated useful life of the asset. In the absence of any other information to the contrary, the useful life of an intangible asset is presumed to be 20 years.


II. Specific Intangibles
1. Customer Acquisition and Retention


Item

Industry

Current Treatment

Credit Information records

Banking,

Thrift

In the absence of any other specific provisions IAS 38 treatment will apply.


Customer Relationships/

Goodwill


Customer Oriented Industries

In the absence of any other specific provisions IAS 38 treatment will apply.

Customer Support Costs

Consumer Services (including Computer Software)

In the absence of any other specific provisions IAS 38 treatment will apply.

Subscribers acquisition and maintenance

Cable Television

In the absence of any other specific provisions IAS 38 treatment will apply.

Customer Lists/ Databases

HMOs, Hospitality Industry, Publications

In the absence of any other specific provisions IAS 38 treatment will apply.



2. Assets


Item

Industry

Current Treatment

Blueprints/ Drawings/ Designs/ Patterns/ Documentation/Laboratory Notebooks/ Recipes

Engineering, Pharmaceutical Hospitality,

In the absence of any other specific provisions IAS 38 treatment will apply.

Chemical Formulations

Chemical, Pharmaceutical


In the absence of any other specific provisions IAS 38 treatment will apply.

Internally Developed Computer Software

Technology, Manufacturing, Retail, Transportation,

In the absence of any other specific provisions IAS 38 treatment will apply.



3. Assets


Item

Industry

Current Treatment

Book and Publication Libraries/ Music Master Recordings

Publishing, Record and Music Industry

In the absence of any other specific provisions IAS 38 treatment will apply.




Distribution Network

Consumer,

Industrial Products



In the absence of any other specific provisions IAS 38 treatment will apply.




Motion Picture Libraries

Motion Pictures, Television and Media companies

In the absence of any other specific provisions IAS 38 treatment will apply.






4. Contractual

Item


Industry

Current Treatment

Cooperative Agreements






In the absence of any other specific provisions IAS 38 treatment will apply.




Patents and Trademarks




In the absence of any other specific provisions IAS 38 treatment will apply.




Open to Ship Customer Orders





In the absence of any other specific provisions IAS 38 treatment will apply.




Franchise Agreements

Joint Ventures







In the absence of any other specific provisions IAS 38 treatment will apply.




Favorable Lease Agreements




In the absence of any other specific provisions IAS 38 treatment will apply.




Environmental Rights (including Exemptions)




In the absence of any other specific provisions IAS 38 treatment will apply.





Leasehold Interest





In the absence of any other specific provisions IAS 38 treatment will apply.




Distribution Rights/

Development Rights







In the absence of any other specific provisions IAS 38 treatment will apply.




Insurance Claims




In the absence of any other specific provisions IAS 38 treatment will apply.




Project Financing Arrangements/ Take-or-pay Contracts/ Throughput Contracts/ Other Unconditional Purchase Commitments/ Open to Ship Purchase Orders




In the absence of any other specific provisions IAS 38 treatment will apply.






5. Specific Industry related intangibles



Item

Industry

Current Treatment

Airport Landing Rights

Airlines

In the absence of any other specific provisions IAS 38 treatment will apply.





FCC Broadcast Licenses

Broadcasting

In the absence of any other specific provisions IAS 38 treatment will apply.




Network affiliation agreement

Broadcasting

In the absence of any other specific provisions IAS 38 treatment will apply.




License agreements for programs

Broadcasting

In the absence of any other specific provisions IAS 38 treatment will apply.




FCC Radio Band Licenses

Broadcasting/ Communications

In the absence of any other specific provisions IAS 38 treatment will apply.




Drilling and Mineral Rights

Extractive industries

In the absence of any other specific provisions IAS 38 treatment will apply.




Interstate operating rights

Transportation

In the absence of any other specific provisions IAS 38 treatment will apply.


Mortgage servicing rights


Banking

In the absence of any other specific provisions IAS 38 treatment will apply.




Motion Picture Exhibition Rights

Motion Pictures

In the absence of any other specific provisions IAS 38 treatment will apply.







1* This Appendix was written by Shyam Vallabhajosyula, a Ph.D. candidate at the Stern School of Business, NYU.

 According to APB 16, Paragraph 67, the general principles to apply the historical-cost basis of accounting to an acquisition of an asset depend on the nature of the transaction:

  1. An asset acquired by exchanging cash or other assets is recorded at cost, i.e. at the amount of cash disbursed or the fair value of other assets distributed.

  2. An asset acquired by incurring liabilities is recorded at cost, i.e. at the present value of the amounts to be paid.

  3. An asset acquired by issuing shares of stock of the acquiring corporation is recorded at the fair value of the asset, i.e. shares of stock issued are recorded at the fair value of the consideration received for the stock.

The general principles must be supplemented to apply them in certain transactions. For example, the fair value of an asset received for stock issued may not be reliably determinable, or the fair value of an asset acquired in an exchange may be more reliably determinable than the fair value of a non cash asset given up. Restraints on measurement have led to the practical rule that assets acquired for other than cash, including shares of stock issued, should be stated at "cost" when they are acquired. In this case, "cost" may be determined either by the fair value of the consideration given or by the fair value of the property acquired, whichever is the more clearly evident.


2 Factors which should be considered in estimating the useful lives of intangible assets include:

a. Legal, regulatory, or contractual provisions may limit the maximum useful life.

b. Provisions for renewal or extension may alter a specified limit on useful life.

c. Effects of obsolescence, demand, competition, and other economic factors may reduce a useful life.

d. A useful life may parallel the service life expectancies of individuals or groups of employees.

e. Expected actions of competitors and others may restrict present competitive advantages.

f. An apparently unlimited useful life may in fact be indefinite and benefits cannot be reasonably projected.

g. An intangible asset may be a composite of many individual factors with varying effective lives.



3 Definition of “Drops” – it is the hardware that provides access to the main cable. It comprises the short length of cable that brings the signal from the main cable to the subscriber's television set and other associated hardware, which may include a trap to block particular channels.

4 Definition of a “Daypart”: An aggregation of programs broadcast during a particular time of day (for example, daytime, evening, late night) or programs of a similar type (for example, sports, news, children's shows). Broadcasters generally sell access to viewing audiences to advertisers on a daypart basis.

5 Servicing of mortgage loans, credit card receivables, or other financial assets includes, but is not limited to, collecting principal, interest, and escrow payments from borrowers; paying taxes and insurance from escrowed funds; monitoring delinquencies; executing foreclosure if necessary; temporarily investing funds pending distribution; remitting fees to guarantors, trustees, and others providing services; and accounting for and remitting principal and interest payments to the holders of beneficial interests in the financial assets. While servicing is inherent in all financial assets, it becomes a distinct asset or liability only when contractually separated from the underlying assets by sale or securitization of the assets with servicing retained or separate purchase or assumption of the servicing.








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