Types of Intangible Assets

Transcription

1 Depreciation and amortization Investment in intangibles Over assets useful life Methods Declining balance method Straight line Units of production Finite lifetime: patent example (useful life, not the lenght of legal protection against competition, i.e. not legal life ) Indefinite? Brand (need to follow up its value) Internally generated vs acquired intangibles treated differently: Comparability problem (competitor A and B)! The cost to be shown in the notes instead of the body of B/S (a possible solution) General rule: most internally generated intangibles are expensed (exception: dev. costs when criteria fulfilled. Acquired intangibles show up in the balance! Revaluation can be used under the IFRSs (recognized in other comprehensive income like PPE), no revaluation under the US GAAP International accounting International accounting Types of Intangible Assets Saunalahti Marketing-related, such as trademarks, trade names, service marks, internet domain names, non-competition agreements, newspaper mastheads and certification marks Customer-related, such as customer lists, order or production backlog, customer contracts and non-contractual customer relationships Artistic-related, such as plays, operas, ballets, books, magazines, newspapers, musical works, pictures, photographs and films Contract-based, such as licensing, royalty, advertising, construction contracts, lease agreements, construction permits, franchise agreements, operating rights, use rights and servicing contracts Technology-based, such as patented technology, computer software, unpatented technology, databases and trade secrets (secret formulas, processes or recipes)

2 Share Investments investment representing less than a 20 percent ownership in the investee investment representing a percent ownership in the investee investment representing more than a 50 percent ownership in the investee Share investments cont d < 20 % of the ownership in the investee will initially be recognized at acquisition cost. Measurement after recognition would be performed in accordance with IAS 39 (Financial instruments, revised 2004 and 2005), 2015 =>IFRS 9, i.e. as a financial asset and be recorded at fair value. However, there are investments in shares (equity instruments) that do not have a quoted price in an active market and whose fair values cannot be reliably determined. These investments are recorded at cost. cost may be, in some instances, approximation of the fair value Associated Companies Associated companies cont d = 20-50% ownership Have a significant influence on the other company (investee), i.e. as having the power to participate in the financial and operating policy decisions of the investee but does not mean control or joint control over those policies. In practice, significant influence can mean that the investor has representation on the board of directors Equity method of accounting (also joint ventures): the investment is initially recognized at cost. subsequently, the carrying amount is adjusted (increased/decreased) to reflect the investor s share of the profit or loss of the investee the increase or decrease is also recognized in the investor s income statement distributions (dividends) received from an investee reduce the carrying amount of the investment

3 Class activity: Sonera 84 International Accounting Spring Business combinations Some of the acquisitions of google Why acquisitios take place? If the growth is an objective ( greenfield or a jump start ) A subsidiary or not? Identify acquirer Determine the acquisition date Recognize and measure (assets, liabilities, noncontrolling interest) Test for impairment Trainers House ESMA report

4 Google buys Youtube Broader Range of Media. Our experiments with targeted ads in new media also open up new inventory options to AdWords advertisers. With the acquisition of dmarc in February 2006 and YouTube in October 2006, we have broadened the distribution options for our advertisers. In addition, we have been testing ad placements in mobile search. We are also currently testing ad placements in select magazines and newspapers and, among other things, experimenting with ways of streamlining the process of placing print ads. 88 The allocation of the purchase price for YouTube Goodwill is not deductible for tax purposes. The developed technology, customer contracts and other intangible assets have a weightedaverage useful life of 4.5 years from the date of acquisition. The amortization of these intangibles is not deductible for tax purposes. 89 Class activity: A subsidiary or not? A B After the acquisition Report as if was a single economic entity Note the difference in how internal margins are eliminated in Finnish group accounting compared to IFRS (sellers vs acquirers tax per cent) Consider the following example: C 90 International Accounting Spring

5 Identify the acquirer and the acquiree Business Combinations Pooling method Acquisition method Control (IFRS 10): if (all three criteria) has power over the investee has exposure, or rights, to the variable returns from its involvement with the investee has the ability to use its power over the investee to affect the amount of investor s returns. -many times straightforward, such as when obtained directly and solely from the voting rights from shareholdings -in other cases more complex, e.g., when power results from one or more contractual arrangements Recognize and measure NOKIA annual report 2006, p Assets Liabilities Non-controlling interest An example 94 95

6 Valuation of takeover targets and auditor quality (Niemi-Ojala-Seppälä, 2013 BAR) Possible component parts of goodwill Johnson-Petrone Pontus Troberg HSE 2001 Excess of fair Fair values of Fair value of Fair value of Overvaluation Overpayment values over other net assets the going- synergies from of the conside- by the acquirer the book not recognized concern ele- combining the ration paid by values of the by the acquiree ment of the the acquirer s the acquirer acquiree s acquiree s and acquiree s recognized existing business and net assets business net assets -trademarks -customer lists -licensing -technology TRUE GOODWILL Core goodwill In Picker, Leo, Loftus, Wise, Clark, Alfredson (2013) Acquisition Cost Allocation: IFRS 3 BV Adj FV Earlier goodwill Brands Customer lists Machinery & Equipm Land Buildings Inventory Total Assets Accrued exp., current liab Finance leases Total liabilities Net Assets Deferred taxes as a result of FV adj Net Assets after deferred taxes Acqusition cost (fair value) Goodwill

7 Non-controlling interest ( minority interest ) Is this a problem? Why? IFRS vs US GAAP Example (950 GW if there is 80% ownership) Pros and cons Valuation of Acquired Intangible Assets Subsequent to Acquisition 1. Intangible assets with finite useful life shall be amortized but are also subject to impairment tests. 2. Intangible asset with an indefinite useful life is not amortized but shall be tested for impairment, irrespective whether there is any indication of impairment. Estimate the recoverable amount (higher of the net selling price or value in use). In practice, value in use because of the uniqueness of the asset in question. 102 Goodwill Subject to Impairment Test at the Cash-Generating Unit Level 1. Identification of the cash-generating unit 2. Allocation of identifiable assets (tangible and intangible) including goodwill to the cash-generating unit 3. Determining the carrying amount, including goodwill, of the cash-generating unit 4. Determining the recoverable amount of the cash-generating unit 5. Determining whether impairment is prevalent, that is, comparing the carrying amount of the cash-generating unit to its recoverable amount 6. If impairment is prevalent, deduct the amount of the impairment loss, first from goodwill and then any remaining amount from the other assets on a pro rata basis 103

8 Goodwill Impairment Testing cont d If recoverable amount is determined as value in use, the business plan of the cash-generating unit should be examined as well as all relevant assumptions. Suitable methods (discounted cash flow) should be investigated and selected. Sensitivity analysis should be carried out and all business plans assumptions and analysis relevant to the impairment testing should be documented. Timing of goodwill testing 1. On an annual basis same time every year for a reporting unit. Not FASB (2011) if no signals. 2. Between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value. a) A significant adverse change in legal factors or business climate. b) An adverse action or assessment by a regulator. c) Unanticpated competition d) A loss of key personnel Impairment of intangible assets (IAS 36) Goodwill impairment test example Compare: Carrying amount (in B/S) and recoverable amount Recoverable amount ( how much can you recover ) Choose the higher of the following two: Fair value (less cost of disposal) net selling price and Value in use Under IFRSs: NPV (with a discount rate) Under US GAAP undiscounted cash flow! (more liberal) If in the US the impairment threshold is exceeded -> FV as a benchmark for impairment 106 CGU 1 BS of Subsidiary at Fair Values CGU 2 GOODWILL SH.EQUITY 600 INTANGIBLE GOODWILL 120 ASSETS DEFERRED TAX 120 GOODWILL 100 INTANGIBLE TANGIBLE INTANGIBLE ASSETS 50 FIXED ASSETS LIABILITIES 500 ASSETS 150 TANGIBLE CASH, RECEIV. TANGIBLE FIXED ASSETS 300 and INVENT FIXED ASSETS 150 CASH, RECEIV CASH, RECEIV. and INVENT. 250 and INVEN Book value of CGU Value in use of CGU 300 NO IMPAIRMENT IMPAIRMENT International accounting

9 International Accounting Spring

10 Class activity: Trainers house Impairment testing Try to get an understanding of how Trainers house performed its impairment tests (from their description in the case material). Do you get an impression that their reporting is constistent with true and fair view? Provide arguments supporting your view Trainer s house Trainers' House (TRH1V) Exchange OMX Helsinki Country FINLAND Industry Software & Computer Services CUSIP X Sedol ISIN FI Annual Ratios 12/31/2012 EUR 12/31/2011 EUR 12/31/2010 EUR 12/31/2009 EUR restated 12/31/2008 EUR Valuation Measures Market Cap Net Sales or Revenues Total Debt Net Assets Enterprise Value EBITDA 1.6 (14.7) (13.7) EBIT (0.1) (16.9) (16.2) (2.4) 4.2 Capital Expenditure Goodwill impairment in 2008 limited Finland (~130 co.) LSE 100 co. Impairment m. 50 b m. 0.3 b. As % of Sh.Eq. 1% 6% As % of Gwill 4% 15% Decline in MV 54% 23% # of co. recording 20/130 32/100 impairment 5 co. 90% 4 co. 95%

11 Goodwill Impairment 2011 according to ESMA European Enterprises Impairment losses ~5% of goodwill 36% of the enterprises recorded some impairment losses Industries mostly affected: financial services, retail, telecommunication, technology Less than half of the enterpises with P/B < 1 reported goodwill impairment losses Sensitivity analysis: 25% gave all information The future of goodwill accounting? Systematic amortization and impairment testing? Recent master thesis on changed auditing standards and goodwill accounting Auditors views of the value of impairment testing Kiira Waldmann (2014) Timeliness of goodwill impairments of US banks, Hilla Castren (2014)