PORTFOLIO

Business Combinations: Goodwill and Other Intangible Assets (Portfolio 5115)

Portfolio 5115-3rd, Business Combinations: Goodwill and Other Intangible Assets (Accounting Policy and Practice Series), examines in detail the creation of and accounting for goodwill and other intangible assets.

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DESCRIPTION

Portfolio 5115-3rd, Business Combinations: Goodwill and Other Intangible Assets (Accounting Policy and Practice Series), examines in detail the creation of and accounting for goodwill and other intangible assets. The Portfolio addresses this subject both in general and in the context of business combinations. The Portfolio also briefly analyzes the corresponding tax treatment of goodwill and other intangibles.
Intangible assets having finite useful lives must be amortized and must also be tested for impairment if circumstances suggest that their carrying values might have declined. In contrast, goodwill and some other intangible assets have indefinite useful lives. These assets are not amortized but must be tested annually to determine if their carrying values have declined (become impaired).
Specifically covered in the Portfolio is FASB Accounting Standards Codification (ASC) Topic 350, Intangibles—Goodwill and Other, which address the recognition, measurement, presentation, and disclosure of goodwill and other intangible assets. The Portfolio provides examples of financial statement presentation about goodwill and other intangible assets and examples of appropriate notes.
Although this Portfolio focuses primarily on financial accounting, Section VIII discusses the related tax treatment of goodwill and other intangible assets.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5115-3rd, Benke and Zyla, Business Combinations: Goodwill and Other Intangible Assets (Accounting Policy and Practice Series).


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AUTHORS

DR. RALPH L. BENKE, JR., PH.D., CMA
Ralph L. Benke, Jr., Ph.D., CMA, has served as Founder and Editor of the Journal of Accounting Education and the Founder and Director of the Center for Research of Accounting Education.
Dr. Benke has won numerous teaching awards. His teaching experiences include the University of Idaho (1972-1974); Florida State University (1974-1977); the University of Georgia (1977-1981); and James Madison University (1982-1997).
Dr. Benke's publications include: Transfer Pricing: Techniques and Uses (National Association of Accountants: New York, 1980); College Edition of DacEasy Payroll (1995); College Edition of DacEasy 4.3 (1994); The Financial Accounting Cycle (1992); College Edition of DacEasy 3.1 (1991); Faculty Performance Appraisals (1990); Dimensions of Faculty Research (1990); Research in Testing (1990); Research in Accounting Education (1986); Essays on Accounting Education (1986); and The Financial Accounting Cycle (1985).

MARK L. ZYLA, CPA/ABV, CFA, ASA
Mark L. Zyla, CPA/ABV, CFA, ASA is a Managing Director of Acuitas Inc., which is an Atlanta, Georgia-based valuation and litigation consultancy firm. Mark received a B.B.A. degree in Finance from the University of Texas at Austin and an M.B.A. degree with a concentration in Finance from Georgia State University. Mark also completed the Mergers and Acquisitions Program at the Aresty Institute of The Wharton School of the University of Pennsylvania and the Valuation Program at the Graduate School of Business at Harvard University. He is a Certified Public Accountant, Accredited in Business Valuation (“CPA/ABV”), a Chartered Financial Analyst (“CFA”), and an Accredited Senior Appraiser with the American Society of Appraisers certified in Business Valuation (“ASA”). Mark is the author of Fair Value Measurements: Practical Guidance and Implementation, published by John Wiley and Sons, and is also co-author of BNA's Tax and Accounting Portfolio 5127, Fair Value Measurements: Valuation Principles and Auditing Techniques (Accounting Policy and Practice Series).

TABLE OF CONTENTS

Detailed Analysis

I. Significance of Goodwill and Other Intangible Assets

A. Definitions and Origins

B. Scope of Portfolio

C. Evolution of Rules

D. Phases of the FASB's Guidance on Business Combinations

E. Examples of Goodwill and Intangible Assets

1. Acquirer Company and Target Company Example

2. Intangible Assets

3. Goodwill

4. Acquirer Company's Purchase of Target Company

F. Why the FASB Revised the Treatment of Goodwill and Other Intangible Assets

G. Impact of Pooling and Purchase Methods on Balance Sheets

1. Example 1-Pooling Versus Purchase (Acquisition Using All Equity)

2. Example 2-Pooling Versus Purchase (Acquisition for Cash + Debt + Equity)

H. Impact of Pooling and Purchase Methods on Income Statements

1. Example 1-Equity Purchase Versus Cash + Debt + Equity Purchase

2. Example 2-Pooling of Interests Method Versus Purchase Method

I. Conclusions

II. Goodwill

A. Introduction

B. Cross References

C. Nature and Components of Goodwill

1. Analysis of Avoidable Components of Goodwill

a. Component 1

b. Component 2

c. Component 5

d. Component 6

2. Fair Value(s)

D. Recurring Issues Concerning Goodwill

1. Definition of Goodwill and Goodwill as an Account Title

2. The Remaining Value of Goodwill

3. Goodwill Capitalizes Assets That Were Never Capital Assets (Components 3 - 4)

4. Valuation Errors

5. Interpretation of Earnings

III. Other Intangible Assets

Introductory Material

A. Criteria for Determining Intangible Assets

B. SFAS No. 141 List of Intangible Assets

C. Intangible Assets With Finite Lives

D. Acquired Renewable Intangible Assets

E. Challenges in Valuing Intangible Assets

IV. The Valuation of Other Intangible Assets

A. Introduction

B. Valuing Intangible Assets With an Observable Market

C. Valuing Intangible Assets Without an Observable Market

1. Determining the Estimated Useful Life

a. Are Benefits From the Contract or Legal Arrangement Expected to Last at Least the Contractual/Legal Term

b. Does the Company Have the Intention and Ability to Renew or Extend the Contract/Legal Life

c. Will Renewal or Extension Require Substantial Cost

d. Will Renewal or Extension Result in Material Modifications

(1) The Cost of the Material Modification

(2) Changes in Asset Caused by the Material Modification

e. Will the Benefits Provided by the Asset Continue Indefinitely?

2. Determining the Estimated Future Net Cash Flows

3. Determining the Discount Rate

a. The Risk-Free Interest Rate

b. The Price for Bearing the Uncertainty Inherent in the Asset (or Liability)

c. Expectations About Possible Variations in the Amount or Timing of Cash Flows

d. Other, Sometimes Unidentifiable, Factors Including Illiquidity and Market Imperfections

D. Summary

V. Calculating Net Present Values and Using Expected Values

A. Introduction

B. Calculating the Net Present Value of an Intangible Asset

C. Calculating the Net Present Value of an Intangible Asset With an Indefinite Life

D. Using Expected Values

1. Statement of Financial Accounting Concepts No. 7

2. Acquirer Company Example

3. Calculating Expected Values for the Acquirer Company

4. Determining the Weighted Average Cost of Capital

5. Determining the Net Present Value

E. Carrying the Results Forward

F. Summary

VI. Impairments and Impairment Testing

A. Introduction

B. The Acquirer Company

C. Impairment Testing for Intangible Assets With Finite Lives

1. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets

2. When the Carrying Value is the Net Present Value

3. When the Carrying Value is Not the Net Present Value

4. Presentation of Amortization and Impairment Losses

D. Impairment Testing for Intangible Assets With Indefinite Lives

E. Impairment Testing for Goodwill

1. What is a Reporting Unit?

2. Step One of Impairment Testing for Goodwill

3. Step Two of Impairment Testing for Goodwill

4. Using an Appraisal Company for Step Two

5. Presentation of Impairment Losses

F. Summary

VII. Financial Statement Presentation and Disclosures

A. Introduction and Background

B. Acquirer Company Required Presentations and Disclosures

1. Paragraph 42, SFAS No. 142 Required Financial Statement Presentation

2. Paragraph 43, SFAS No. 142 Required Financial Statement Presentation

3. Paragraphs 44 and 45, SFAS 142 Required Note Disclosures

C. Sample Disclosures: Manufacturing Company

1. Paragraph 42 and 43 SFAS No. 142 Required Financial Statement Presentation

2. Paragraph 45, SFAS 142 Required Note Disclosures

D. Sample Disclosures: Financial Services Company

1. Paragraphs 42 and 43 Required Financial Statement Presentation

2. Paragraph 44, SFAS No. 142 Required Note Disclosures

3. Paragraph 45, SFAS No. 142 Required Note Disclosures

4. Paragraph 47, SFAS No. 142 Required Note Disclosures

E. Sample Disclosures: Technology Company

F. Summary

VIII. The Tax Consequences of Goodwill and Intangible Assets

A. Introduction

B. Deferred Tax Consequences

C. Amortization of Goodwill and Certain Other Intangibles Under I.R.C. Section 197

1. Intangible Assets

a. Goodwill

b. Going-Concern Value

c. Workforce in Place

d. Business Books and Records

e. Patents, Copyrights

f. Customer-Based Intangibles

g. Supplier-Based Intangibles

h. Government-Granted License, Permit

i. Covenant Not to Compete

j. Franchise, Trademark, or Trade Name

k. Professional Sports Franchise

l. Contract for the Use of, or a Term Interest in, a Section 197 Intangible Arrangement Providing for the Use of any Section 197 Intangible

2. Items that are Not Intangibles

a. Interests in a Corporation, Partnership, Trust, or Estate

b. Interests Under Certain Financial Contracts

c. Interests in Land

d. Certain Computer Software

D. Anti-Churning Rules

E. Effective Dates

F. Summary

IX. International Accounting Standards for Goodwill and Other Intangible Assets

A. Introduction

B. Goodwill

C. Author's Comment

D. Goodwill

E. IAS 36, Goodwill Impairment Testing

F. IAS 38, Intangible Assets

1. Identifiability

2. Control

3. Future Economic Benefits

G. Amortization of Intangible Assets

1. Finite Lives

2. Indefinite Lives

H. Measurement of Intangible Assets

1. Research and Development

2. Revaluation Model

I. Summary

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Table of Abbreviations Used

Worksheet 2 Negative Goodwill

Worksheet 3 Descriptive and Diagnostic Statistics of Regression

Worksheet 4 Purchase Price Allocation Example

Worksheet 5 Disclosure Example: Samsonite Corporation and Subsidiaries

Worksheet 6 Disclosure Example: H& R Block Inc.

Worksheet 7 Disclosure Example: Intuit Inc.

Worksheet 8 Disclosure Example: Ford Motor Company

Worksheet 9 Differences Between Statement 141 and Exposure Draft for Statement 141-R

Worksheet 10 Proposed FASB Staff Position

Worksheet 11 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

Financial Accounting Standards and Accounting Principles Opinions

FASB Concepts

FASB Exposure Drafts

Proposed FASB Staff Position

FASB Interpretations

FASB Projects

IRS Cases

IRS Publications

International Accounting Standards

SEC Staff Accounting Bulletin

UNOFFICIAL