...technology for interplanetary exploration. The company has many patents and has historically expensed all the costs associated with obtaining their patents. The owners of XYZ Research Company are unsure whether patent costs that have been expensed can be capitalized and whether or not periodic impairment testing is required. I have been hired as a consultant to research the proper accounting standards currently in place for the methods or recording patents, the useful life of patents amortization of patents, capitalization limits of patents and the impairment testing required. My immediate assumptions would be that no costs have been capitalized and no impairment testing has been done since I have been hired to research the proper accounting standards. A patent is the exclusive right granted by a government to the inventor to manufacture, use, or sell an invention for a certain number of years. A patent is considered an intangible asset, because a patent does not have physical substance and provides no long-term value to the owning entity. There are three different types of patents, a utility patent, a design patent and a plant patent. A U.S. patent lasts for 20 years. Patent expenses are any costs associated with obtaining the patent, which include application, registration, documentation and other legal fees as necessary. XYZ Research Company has historically expensed all the costs associated with patents by amortization. Amortization is spreading out expenses for intangible...
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...Accounting Regulation and Treatment of Patents XYZ Research Company Case Study You have been hired as a consultant for XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate accounting treatment for patents. 2014 Accounting Regulation and Treatment of Patents XYZ Research Company Case Study You have been hired as a consultant for XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate accounting treatment for patents. 2014 Research Memorandum To: XYZ Research Company From: Christine Quiñones Date: August...
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...existence and are not financial instruments. Intangible assets are usually classified as concurrent (long-term) assets because they produce benefits over several years. They are valuable because they provide rights and privileges to their owners. Examples of intangible assets are: trademarks, copyrights, patents, franchises, customer lists, and goodwill. Intangible assets have the following classifications: 1. Purchased vs. internally created intangibles 2. Limited-life vs. indefinite-life intangibles ← Purchased intangibles are recorded at the cost incurred to purchase an intangible asset from another entity, which includes the acquisition costs as well as expenditures made to get the asset ready for its intended use (e.g. legal fees). ← Internally created intangibles are often not recorded on the balance sheet: most costs incurred to internally develop an intangible asset have to be expensed (including Research and Development costs), and only certain costs (e.g. legal costs) might be capitalized (e.g. debit Patent for the cost of defending the patent). ← Limited-life intangibles are intangible assets with a limited useful life (e.g. copyrights, patents). Limited-life intangibles are systemically amortized throughout the useful life of the intangible asset using either units of activity method or straight-line method. The amortization amount equals the different between the intangible asset cost and the asset residual value. The owner of the intangible...
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...Explains how the impairment of the patent would be reflected on the financial statements in the event of losing a lawsuit - page 377 Response to Client Request II Week 4 Team A Names ACC/541 Date: MEMORANDUM TO: FROM: DATE: SUBJECT: Financial Implications of Pending Litigation ____________________________________________________________ __________________ Financial Implications The pending litigation has several implications for accurate financial reporting as established in the Generally Accepted Accounting Principles (GAAP). The immediate impact is the requirement for contingencies in the financial statements to report the potential that these statements will be restated to account for the outcome of the lawsuit. Pending the outcome of the lawsuit, the company may be required to reorganize their debts under a chapter 11 bankruptcy. The lawsuit also challenges the validity of a patent, which is a revenue generating asset of the client’s. Pending the outcome of the lawsuit, the patent will need to be tested for impairment. Reporting Requirements for Lawsuit Contingencies The implications for the lawsuit on the company financials depend upon the anticipated outcome of the lawsuit. If the anticipated outcome of the lawsuit is likely to result in a loss to the company, and that loss can be reasonably estimated, the loss should be accrued as estimated into the company financials, and noted as such, as detailed in the FASB Codification section...
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...Chapter 12 Intangible Assets Lack physical substance (patents, copyrights, franchises, licenses, trademarks, trade names, goodwill) They are NOT financial instruments (A/R, notes and bonds receivable,….ect.) Valuation: Record at cost (everything necessary to make asset ready for intended use). For internally-generated intangibles, only direct costs are capitalized (e.g., legal costs for patent). If insignificant cost, then usually expensed. Amortization:* Limited-life intangibles—over useful life. Amortizable base equals cost minus residual value. Indefinite-life intangibles—do NOT amortize. * Usually decrease the value of the asset directly, can use a contra-account: Accum. Amort. “Types” of Intangible Assets Legal Amortization life Period Market-related: Trademark Indefinate, Company name renewable Not amortized Customer-related: Customer lists None Lesser of useful or economic life. Artistic-related: Copyrights Life of creator Lesser of useful or plus 70 years economic life. Contract-related: Franchises Length of Length of Licences contract or contract or Permits indefinite not amortized Technology-related: Patents 20 years Less of useful or legal life. Goodwill: None Not amortized Recording Goodwill Duncun Corp. purchased the Fran Company for $300,000 on December 31, 2003. The balance sheet of Fran Company...
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...ACT/541 March17, 2014 Response to Client Request II To: Client From: Consulting Group Subject: Financial Implications of Pending Litigation Financial Repercussions The Generally Accepted Accounting Principles (GAAP) created financial reporting that will have some consequences from the client’s impending litigation. The first impact is with the obligation for contingencies in the financial statements to explain the probable account for the conclusion of the lawsuit that will cause a restatement. Pendantto the outcome of the litigation, the company is ordered to reorganize the debts of the organization via chapter 11 bankruptcy. The legitimacy of a patent is challenged in the lawsuit, which is a revenue creating asset for the client’s. The impending outcome of the asset will create testing the patent for impairment. Reporting Requirements for Lawsuit Contingencies The consequencesoflitigationfor the company financials hinge upon the expectedconclusion of the lawsuit. FASB Codification section 450-20-25-2 stipulates that in the event that theanticipated outcome of litigation results in a loss to the business, and can be rationallyprojected, then the cost should be accrued to the financials and footnoted as such.If the conclusion of the process is most likely to create a loss for the business, but thecost cannot judiciouslybe estimated, then FASB Codification 450-20-50-5 necessitates that a contingency disclosure be included to the financials describing the circumstances...
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...Intangible Assets A. Classification--intangible assets are assets that derive their value from the rights and privileges granted to their owner, are long-term in nature, and lack physical substance B. Valuation 1. Cost--cost is the cash or cash equivalent price of obtaining the intangible asset and making it ready for its intended use a. Purchased Intangibles--the cost of a purchased intangible asset is determined in essentially the same way as the cost of property, plant, and equipment b. Internally-created Intangibles--the cost of an internally-created intangible asset includes only the direct costs incurred in obtaining the intangible asset, such as legal fees, registration fees, etc. 1) Research and Development Costs--all research and development costs are expensed when incurred 2. Special Considerations a. Marketing-related Intangible Assets--marketing-related intangible assets are those intangible assets that are used in the marketing or promotion of products or services (such as trademarks or trade names, newspaper mastheads, internet domain names, and noncompetition agreements) 1) Purchased Intangibles--the capitalizable cost of a purchased marketing-related intangible asset is its purchase price plus any...
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...Amortizable asset i.e. Goodwill 2. Amortizable assets which include patents, acquired technology, trademarks & other intangible assets. As for goodwill, the impairment loss is NIL for both the accounting periods. We have shown the values in the tabular form and have done a comparison between the years at the last of the analysis. Amortization is done by the straight-line method by facebook, however the useful life of the assets has been provided in the range of the years and not in the specific years. Submitted By: Submitted To: Abhinav Sharma (14B102) Prof. Vishwanathan Iyer Visweswaran (14B123) As we can see that, Goodwill (NET) and intangible assets (NET) are increasing from 1388 million to 1722 million. The NET increase in the value is: 334 million. The split is as shown below: 1. Goodwill(NET Increase of 252 million) 2. Intangible Assets(NET increase of 82 million) Impairment (As of 31st December 2013, No Impairment has been identified) Amortization: Amortization as shown in the figure as (255-110) = 145 million. For Patents: Patents | 2013(Million) | 2012(Million) | Gross Carrying Amount | 773 | 684 | Accumulated Amortization | 142 | 53 | Net Carrying Amount | 631 | 631 | Patents acquired in the year 2013 are equal to $89 million. $92 million comprises $89 million towards patents and $3 million towards other intangible assets. For Acquired Technology: ...
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...Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment Questions for Review of Key Topics Question 11-1 The terms depreciation, depletion, and amortization all refer to the process of allocating the cost of property, plant, and equipment and finite-life intangible assets to periods of use. The only difference between the terms is that they refer to different types of these long-lived assets; depreciation for plant and equipment, depletion for natural resources, and amortization for intangibles. Question 11-2 The term depreciation often is confused with a decline in value or worth of an asset. Depreciation is not measured as decline in value from one period to the next. Instead, it involves the distribution of the cost of an asset, less any anticipated residual value, over the asset's estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset. Question 11-3 The process of cost allocation for plant and equipment and finite-life intangible assets requires that three factors be established at the time the asset is put into use. These factors are: 1. Service (useful) life — The estimated use that the company expects to receive from the asset. 2. Allocation base — The value of the usefulness that is expected to be consumed. 3. Allocation method — The pattern in which the usefulness is expected to be consumed. Question 11-4 ...
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...of these treatments. Impairment exists when the carrying amount of an asset exceeds its fair value and the impairment loss is the difference between the carrying value and fair value of that asset. The impairment test rules applied to impairment of property, plant, and equipment are different from those used in measuring goodwill. For tangible assets to be held and used, a recoverability test is performed when possible impairment exists, to determine whether an impairment has occurred. The first step of the test is to estimate the future net cash flow expected from the use of that asset and its eventual disposition. If the future cash flow is less than the carrying amount of the asset, the asset is impaired. Conversely, if the future net cash flow is equal to or greater than the carrying amount of the asset, no impairment has occurred. For example, if an asset has a carrying value of $600,000, and the future net cash flow from using and disposing this asset is to be $650,000, therefore, no impairment has occurred. However, if the future net cash flow is less than the carrying amount of the asset, it’s only $550,000, there is an impairment loss, which is the amount the carrying value of the asset exceeds the asset’s fair value. In the example, if the fair value of that asset is $500,000, the impairment loss would be $100,000 ($600,000-$500,000). What if the impaired asset is going to be disposed instead of being held for use? The measurement of impairment loss is same as it used...
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...Request to Client Request II Team A ACC/541 November 25, 2013 Michael Meyer MEMORANDUM TO: Client FROM: Consulting Firm DATE: November 25, 2013 SUBJECT: Pending Lawsuit Effects FASB stipulations affect financial statements, mortgages, and patents when a business entity loses a case. This memo describes Codification 450-10-05-4 of the Financial Accounting Standards Board (FASB) that details the proper reporting of gain and loss contingencies, as well as standards for financial statements. This memo will provide relevant information concerning pending lawsuit effects for the use of clients and affected stakeholders. Reporting Requirements For Contingencies: Paragraph 450-20-25-1 sets forth the general rule on loss contingencies. The rule applies in the event a loss contingency is present, and the probability that an incident or event would occur to validate the loss, incurrence of liability, or damage of an asset that can vary from probable to reasonably possible (FASB, 1975). The term loss or losses is used as a means to cover charges against income or expenses. An estimated loss from a loss contingency can be charged to income based on FASB paragraph 450-20-25-2 when the two conditions given below are satisfied: I. There is available information before issuance of the financial statements that indicates it is possible an asset had been damaged or a liability had been incurred at the date of the financial statements...
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...12 Click Link Below To Buy: http://hwcampus.com/shop/acc211-brief-exercise-12/ Brief Exercise 12-1 Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $78,790. The patent has a remaining legal life of 17 years. Celine Dion feels the patent will be useful for 10 years. Prepare Celine Dion’s journal entries to record the purchase of the patent and 2014 amortization. Account Titles and Explanation Debit Credit Patents 78,790 Cash 78,790 (To record purchase of patents) Amortization Expense 7,879 Patents 7,879 Brief Exercise 12-2 Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $50,300. The patent has a remaining legal life of 16 years. Celine Dion feels the patent will be useful for 10 years. Assume that at January 1, 2016, the carrying amount of the patent on Celine Dion’s books is $40,240. In January, Celine Dion spends $31,200 successfully defending a patent suit. Celine Dion still feels the patent will be useful until the end of 2023. Prepare the journal entries to record the $31,200 expenditure and 2016 amortization Account Titles and Explanation Debit Credit Patents 31,200 Cash 31,200 (To record expenditure of patents) Amortization Expense 8,930 Patents 8,930 (To record amortization expense) *Brief Exercise 12-3 Your answer is correct. Larry Byrd, Inc., spent $89,900 in attorney...
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...subsequent fixed asset acquisitions. True False 8. One of the advantages of group and composite methods is that gains and losses on the disposal of individual assets need not be computed. True False 9. Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP. True False 10. A change in the estimated recoverable units used to compute depletion requires retroactive adjustments to the financial statements. True False 11. Changes in the estimates involved in depreciation, depletion, and amortization require retroactive restatement of financial statements. True False 12. Property, plant, and equipment and finite-life intangible assets must be tested for impairment at least once a year. True False 13. International Financial Reporting...
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...Financial statements are in place to provide users with accurate information on performance and changes in financial position to be used in decision-making processes. Therefore, they need to be understandable, relevant, reliable, and comparable. These statements are used by users not only to look at the current situation, but also to predict the company’s ability to continue as a going concern or functioning as a business entity in the future. The balance sheet and the valuations for assets and liabilities are a reflection of the company’s financial position for the next 12 months. If there are uncertainties or contingencies that occur they must be disclosed in the footnotes section of the statement and in some circumstances reflected in the actual reporting (Schroeder, Clark, & Cathey, 2005). Pending Lawsuit A contingency is a possible event that will have some effect on the company. Pending lawsuits are considered a contingency because of possible outcomes that will impact the company’s financials. Litigation is a costly and length process that can work against a company’s good reputation regardless of the outcome. The future financial position may be affected by the information presented regarding the potential litigation outcome and therefore disclosure is required. Because of the high probability of losing the lawsuit it should be reported on the balance sheet as a liability instead of notification in the footnotes (Schroeder, Clark, & Cathey, 2005). This disclosure...
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...Notes on Intangible Fixed Assets Valuing and Amortizing Intangibles The characteristics of intangible assets are: (1) they lack physical existence, and (2) they are not a financial instrument. The most common types of intangibles reported are patents, copyrights, franchises, licenses, trademarks, trade names, and goodwill. Cost is the appropriate basis for recording purchased intangible assets. Like tangible assets, cost includes acquisition price and all other expenditures necessary in making the asset ready for its intended use—for example, purchase price, legal fees, and other incidental expenses. When intangibles are acquired for consideration other than cash, the cost of the intangible is the fair market value of the consideration given or the intangible asset received, whichever is more clearly evident. Costs incurred to create internally-created intangibles are generally expensed as incurred. Amortization of Intangibles Intangibles have either a limited (finite) useful life or an indefinite useful life. An intangible asset with a limited life is amortized; an intangible asset with an indefinite life is not amortized. Limited-Life Intangibles The expiration of intangible assets is called amortization. Limited-life intangibles should be amortized by systematic charges to expense over their useful life. The useful life should reflect the periods over which these assets will contribute to cash flows. The amount of amortization expense for a limited-life intangible asset...
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