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Intangible Assets CMA USA Part 1

Table of Contents

An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition, and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, inventory etc.

What are Intangible Assets?

Intangible assets are assets that are non-physical assets that have value and can contribute to a company’s overall worth or financial performance.

Examples of intangible assets include:

  1. Intellectual property, such as patents, trademarks, copyrights, and trade secrets.
  2. Brand recognition and goodwill, which is the value of a company’s reputation and customer loyalty.
  3. Customer lists and relationships.
  4. Software and technology.
  5. Human capital, such as the knowledge and skills of employees.
  6. Licenses and permits.
  7. Franchise agreements.
  8. Research and development.

Initial Recording of Intangible Assets

Intangible assets are recorded at the cost paid to acquire them including the costs required to make them ready for their intended use.
Research and Development costs are generally expensed as they are incurred and thus they are not capitalized or amortized.
Internally generated assets like customer goodwill are not recorded in the Balance Sheet because it doesn’t meet the definition of an asset (ie, they didn’t araised from a past transaction)

Subsequent Recording of Intangible Assets

Subsequently measured at:

Initial Cost:                          xxxx
less: Amortization              xxxx
less: Impairment                xxxx


Value of Intangible asset xxxxx

Amortization of Intangible Assets

Under US GAAP (Generally Accepted Accounting Principles), amortization refers to the systematic allocation of the cost of intangible assets over their useful life. Intangible assets are non-physical assets that lack a physical substance but possess value, such as patents, copyrights, trademarks, and software.

Amortization is necessary because intangible assets are typically long-term investments that provide benefits over multiple accounting periods. Instead of recording the entire cost of the asset as an expense in the period of acquisition, GAAP requires companies to allocate the cost over the asset’s estimated useful life.

Journal entry

Amortization Expense Dr
Accumulated Amortization Cr

Amortization of Definite Period Intangible Assets​

For a definite period intangible assets, it is amortized over their useful life. The amount amortized for a limited-life intangible asset is its cost minus any residual value.

If the estimated life of a limited-life intangible asset changes, the remaining carrying amount at the time of the change should be amortized prospectively over the revised remaining useful life

Amortization of Indefinite Period Intangible Assets​

Certain intangible assets, like trademarks or brand names, may have an indefinite useful life. This means that they don’t have a fixed period over which their benefits will be derived or their value will diminish. For such assets, companies don’t amortize them over a definite period.

Instead, companies perform an annual impairment test to assess if the value of the intangible asset has declined. If the asset’s value has indeed decreased, the company will recognize an impairment charge on their financial statements. This impairment charge reflects the reduction in the asset’s value and is recorded as an expense.

Impairment of definite period Intangible assets

Impairment of assets is an important topic in the Intangible assets CMA USA Part 1 syllabus. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell, and its value in use.

This situation arises when the future economic benefits from an asset are lower than its carrying amount. Companies are required to conduct impairment tests at regular intervals to ensure that the assets are not overstated on the balance sheet.

Impairment can occur due to various reasons, such as technological changes, shifts in market demand, regulatory changes, or physical damage to the asset. When an impairment is identified, the company must recognize the impairment loss by reducing the carrying amount of the asset and recognizing the loss in the income statement.

Impairment testing is important because it ensures that assets are valued accurately, which helps investors and other stakeholders make informed decisions about the company’s financial performance and health.

We have discussed Impairment in detail in Property, Plant, and Equipment (PP&E) refer to that page for more details

Recoverability Test

  • If the sum of the estimated undiscounted cash flows associated with the asset or asset group is greater than the carrying value then there is no impairment, even if the carrying value is greater than the fair value.
  • If the sum of the estimated undiscounted cash flows associated with the asset or asset group is less than the carrying value then there is impairment, hence the asset must be written down to its fair value and an impairment loss must be recognized.

Journal entry if there is an Impairment

Impairment LOSS Dr
Accumulated Depreciation Cr

Impairment of Indefinite life Intangible assets(other than Goodwill)

Step 1

Qualitative assesment (Optional):

Qualitative assesment should be performed atleast anually for each indefinite-life intangible asset that is not amortized, if the company detemined that the probability is 50% or greater than that then the asset is impaired if it is below that the asset is not impaire.

Examples of factors that could affect indefinite-period intangible assets includ:

  • Negative or declining cashflow
  • Economic factors
  • competition
  • Regulatory issues
  • Technological advancements


Step 2

Quntitative assesment/Fair value test:

Fair value of the intangible asset is calculated and compared with the carrying value, if the fair value is more than that of the carrying value of the intangible asset then there is no impairment.

Step 3

Write the asset down 

If the fair value is less than that of carrying value then the asset is impaired and nest step is to write the asset down to its fair value and recognize a loss. Any impairment loss is a part of income from continuing operations and is reported on a separate linefrom any goodwill impairment.

Goodwill and the impairment of Goodwill

Accounting Standards Codification (ASC) Topic 350, Intangibles–Goodwill and Other, defines goodwill as “an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.”

Key Points Intangible Assets CMA USA Part 1

KEY TAKEAWAYS

  • Don’t subtract salvage value from the cost of the asset for the depreciable base while computing depreciation expense using Double Declining Balance
  • Depreciable base for tax purposes is always 100% cost of the asset never subtract salvage value from the cost of the asset for tax purposes
  • If the question asks to find accumulated depreciation using the Sum of the year’s digits method for ‘n’ years, instead of calculating individual years add up the fractions.
    Eg: if the question asks to find the first 2-year accumulated depreciation of an asset having 4 years of life.
    Calculate accumulated depreciation simply by finding sum of the digits ie; n(n+1)/2 here 4(4+1)/2=10 and add the fraction for the first two years ie, 4/10+3/10 =7/10*depreciable base

If you have any queries or doubts regarding the above Property, Plant, and Equipment CMA USA Part 1 content, please feel free to contact us by visiting our contact us page. We will be happy to assist you in any way we can.

Practice Questions Intangible Assets CMA USA Part 1

14
Created on

PP&E

1 / 5

Blake Ltd. has determined that an impairment exists on one of its machines, but the company expects to continue using the asset for another three full years as no active market exists for the machine. Selected information on the impaired asset (on the date that impairment was determined to exist) is provided below.

 Original cost of machine £22,000
 Book (carrying) value of the machine 20,000
 Value in use (present value of future cash flows) 15,000
 Net selling price (fair value if sold less costs to sell) 12,000

According to IFRS, what is the amount of the impairment loss to be recorded by Blake?

2 / 5

Nella Corporation computes depreciation to the nearest whole month. A new piece of equipment was placed in operation on July 1, 20X1. It was expected to produce 400,000 units of product in its estimated useful life of eight years. Total cost was $300,000; salvage value was estimated to be $30,000. Nella employs a calendar year for financial reporting purposes. Actual production for the past 3 years was as follows.

Year 1 - 34,000 units
Year 2 - 62,500 units
Year 3 - 58,400 units

If Nella uses the sum-of-the-years'-digits method of depreciation, the amount of depreciation computed for this equipment for book purposes in 20X3 would be

3 / 5

Maple Industries purchased a lathe on June 1, Year 1, the beginning of the fiscal year. The lathe cost $43,200 and has an estimated salvage value of $3,600 and an estimated useful life of 8 years. The lathe has been used throughout the year.

Assuming that Maple Industries recognizes one-half year's depreciation on all assets purchased or sold during the year, the amount of straight-line depreciation that would be taken for financial reporting purposes in the fiscal year ending May 31, Year 2 would be

4 / 5

Maple Industries purchased a lathe on June 1, Year 1, the beginning of the fiscal year. The lathe cost $43,200 and has an estimated salvage value of $3,600 and an estimated useful life of 8 years. The lathe has been used throughout the year.

Assuming that Maple Industries calculates depreciation to the nearest whole month on all assets purchased or sold during the year, the amount of double-declining-balance (DDB) depreciation that would be taken for financial reporting purposes in the fiscal year ending May 31, Year 3 in the second year of the asset's life would be

5 / 5

Jason Company's fiscal year ended on November 30 of the current year. As of the fiscal year end, Jason had an irrevocable contract to replace its mainframe computer system on December 15 of the current year at a net cost of $750,000, reflecting the trade-in of the old hardware for $10,000, the trade-in value allowed by the vendor. The net book value of the old hardware on November 30 of the current year is $27,000. On its November 30 Statement of Financial Position for the current year, Jason should report the value of the old computer equipment as

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