How do firms account for intangibles other than goodwill?

Answer 1

INTANGIBLES OTHER THAN GOODWILL

U.S. GAAP and IFRS require firms to treat some or all expenditures made to internally
develop brand names, customer lists, new technologies, and other intangibles as expenses in
the period of the expenditure. U.S. GAAP treats all such expenditures as expenses of the
period (except for certain software development costs). IFRS treats research costs as immediate expenses but treats development costs incurred after a research project reaches the stage of technical feasibility as assets. In contrast to costs incurred internally to develop intangibles, U.S. GAAP and IFRS require firms to recognize as assets identifiable intangibles acquired in external market transactions. The exchange between an independent buyer and seller provides evidence of the existence of expected future benefits, and the exchange price provides evidence of the fair value of those benefits. Identifiable intangibles include patents, trademarks, customer lists, and other economic resources ready for use, as well as in-process technologies with uncertain future benefits.

Identifiable intangible assets have either finite lives or indefinite lives. Firms must amortize
intangible assets with finite lives, generally using the straight-line method. Firms do not amortize intangible assets with indefinite lives.

Firms must test intangible assets for impairment. U.S. GAAP applies the same provisions
to intangible assets with finite lives as it does to property, plant, and equipment, as previously
described. Firms cannot apply the undiscounted cash flow recoverability test to indefinite-
lived intangible assets because of the uncertain period of future benefits. Thus, the impairment
loss for intangibles with an indefinite life (other than goodwill) equals the excess of the
carrying value over the fair value of the intangible. The impairment provisions for intangibles
(other than goodwill) under IFRS, whether amortized or not, are the same as for property,
plant, and equipment. The impairment loss equals the excess of the carrying value of the
intangible assets over their recoverable amount (higher of fair value less cost to sell and value
in use to the firm). Firms must test nonamortized intangibles annually for possible impairment
under IFRS.