Financial Accounting Statement 142

Financial Accounting Statement 142

Intangible assets are an increasingly important economic resource for many businesses. Intangible assets have also become a greater portion of assets gained in an acquisition or business combination. Therefore, more useful information about intangible assets is needed for both those involved in the transaction and potential investors in the public community. Statement 142 replaces Accounting Principles Board (APB) Opinion No. 17, Intangible Assets in order to produce better information on which the public can rely.

APB Opinion No. 17 was issued in August of 1970 and involves intangible assets acquired from companies or individuals. The Opinion states that the cost of the acquisition of intangible assets should be classified as intangible assets. For intangible assets that are not easily identifiable, the Opinion states that the cost of developing these assets should be charged against income as they occur. However, intangible assets that are developed internally will not be added as an asset to the balance sheet according to Opinion 17. Finally, the Opinion’s policy on amortization is as follows: intangible assets should be amortized over the period of benefits; however amortization should not exceed forty years. Therefore, the theory behind this amortization rule is that the value of the intangible assets will disappear over the period of amortization.

“Statement 142 addresses the financial accounting and reporting acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets.” The Statement was issued in June 2001 in order to improve and change policies of Opinion 17 for intangible assets, and to specify how to treat goodwill. The Statement discusses how assets that are gained upon acquisition, either individually or with a group of assets should be accounted for in financial statements. Upon acquisition intangible assets should be recorded at fair value on the balance sheet. (Fair value is the amount at which the asset can be sold in a current transaction between willing parties, such as a quoted market price. ) However, internally developed intangible assets should not be recognized on the balance sheet, and should be recognized as an expense when incurred (just as stated in Opinion 17).

The Statement says that intangible assets with a limited life should be amortized over the useful life period. The useful life of an intangible asset is the period in which that asset is expected to contribute to future cash flows of the entity. In order to determine the useful life many factors are to be considered: how long the entity is expecting to use the asset, how long a comparable asset has lasted in the company, and legal and economic factors, to name a few. If economic benefits resulting from the asset can be measured then amortization should follow the same pattern. However, if the economic benefits are indeterminable then one must use straight-line amortization. The only reason an entity should write-off or write down an asset during the acquisition period is if the asset becomes impaired during that time.

The amount that should be amortized of the intangible asset should be the cost of the asset less any residual value. “The residual value of an intangible asset shall be assumed to be zero unless at the end of its useful life to the entity the asset is expected to continue to have a useful life to another entity and (a) the reporting entity has a commitment from a third party to purchase the asset at the end of its useful life or (b) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset’s useful life. (www.fasb.org/pdf/fas142.pdf)” Furthermore, the entity should annually test the intangible asset for the remaining useful life to determine if the period of amortization should be reevaluated or tested for impairment and no longer amortized if the asset is found to have an indefinite useful life. If an asset has an indefinite useful life it should be tested for impairment on an annual basis. Impairment loss exists if the fair value of the intangible asset is less than the carrying value. After the impairment loss is recognized, the new accounting basis of the asset becomes its adjusted carrying amount.

Statement 142 also reports on how to treat acquired goodwill. The Statement says that while goodwill should not be amortized, it should be annually tested for impairment. The asset is impaired if the fair value of the asset is deemed to be less than the carrying value. The next step is to evaluate the amount of the impairment loss. In order to measure the amount of the impairment, the implied fair value of the goodwill must be compared to the carrying amount of the goodwill. Implied fair value of goodwill