Advise Jonas on the acceptability of its suggested immediate write off of its identifiable intangibles
Intangible assets are non-monetary assets that can be identified yet they lack physical substance. Thus intangible assets should meet three critical attributes which are identifiability, control, and future economic benefits. Intangible assets should be recognized at cost if the future economic benefits from the assets will flow to the business and the cost of the assets can be reliably measured. If an intangible asset fails to meet the criteria and the definition of an intangible asset, the expenditures on the assets should be recognized as an expense at the time it is incurred. Therefore, if Jonas recognized the identifiable intangibles from the acquisition of Innovation plus and expresses the desire to have the assets written down to zero during its acquisition, it must prove that the assets cannot meet the criteria and the definition. However, if this is not the case, the assets should be recognized as finite and amortized over its useful time (EY, 2017).
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Relevant Factors to Consider in Allocating the Values to the Assets
The intangible assets can be classified as indefinite life and finite life. The measurement of the finite life intangible assets requires that the cost less residual value on a systematic basis over the life of the asset. The basis for amortization should be a reflection of the pattern of benefit or using the straight-line method if a pattern cannot be established. The amortized charge should be recognized in the income statement. Jonas approach to the intangible assets should be based on the useful life that the asset has to the company. Finite intangible assets should be amortized whereas those with indefinite useful life should not.
ASC provides that the useful life of an asset is the period in which such an asset will contribute directly or indirectly to the cash flows of an organization. Jonas should, therefore, estimate the useful life of the asset by analyzing the expected use of the asset, other relate assets in use, contractual obligations, previous experiences and the effects of other factors like economic, demand, competition among others. The estimated useful life of the intangible asset is the biggest determinant of the accounting treatment following the initial recognition of the asset (EY, 2017).
Jonas should review the useful life during the reporting period and establish whether the events, as well as circumstances, support the indefinite useful life of the asset. If changes are reported, the asset should then be treated as finite in the accounting estimates. Jonas should, therefore, disclose the useful life of an asset, the carrying amount, the amortization method, and any accumulated amortization losses.
Acceptability of the Way Jonas Treat Goodwill
Allocating the combined goodwill of the reporting units to enterprise goodwill account is not advisable. According to ASC 350-20 goodwill should be tested for impairment at the reporting unit. On the day of acquiring goodwill, Jonas should allocate it to cash generating units. Such units are the smallest identifiable assets generating cash flows and independent from the cash inflows other assets as well as group of assets. Goodwill should not be amortized but tested each year. The testing should only be performed at the reporting unit level. Jonas should assess qualitative factors to establish whether the fair value of the reporting unit is equal to or less than the carrying amount that includes the goodwill. Jonas can bypass the assessment and return to perform the assessment at a subsequent period (EY, 2017).
Impairment occurs when the carrying amount of the goodwill exceeded the implied fair value. Once the qualitative factors are assessed, the fair value is compared with the carrying amount. If it is larger, the fair value of the re[porting unit is then calculated. If the calculated fair value is more than the carrying amount, the implied fair value is then computed and compared with the carrying amount. If the implied fair value is more than the carrying amount, impairment should be recognized which the difference between the two. Otherwise, it should not be recognized. The implied fair value is computed by deducting the fair value. However, there are some exceptions to this as provided by ASC 805 (EY, 2017).
Relevant factors to consider while allocating goodwill
Once the purchase agreement is completed the companies allocate the purchase price, residual costs, and assets both tangible and intangible. The company must conduct an impairment test using established methodologies where the impairments will be presented as separate items in the period and as an item of income from ongoing operations. All other acquired assets that have been identified and properly valued through elimination, the remainder of the excess purchase price are assigned to goodwill (EY, 2017).
According to FASB, not all goodwill declines in its value and therefore a straight line method will not be appropriate. Periodic assessment can be facilitated by benchmark assessment which is performed in any acquisition irrespective of the value of the goodwill arising from the acquisition. In benchmark assessment, a valuation model is identified and the key assumptions are documented and then the fair value of the reporting unit is measured (EY, 2017).
In establishing whether the fair value for a reporting unit is less than the carrying amount, Jonas should assess some events and circumstances that include; macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, relevant business specific events and the events that affect the reporting unit and a sustained decrease in share prices (EY, 2017).
The goodwill is then presented as a separate item on the balance sheet. Goodwill impairments are presented as separate items in the income statement. However, if goodwill impairment is associated with discontinued operations, the impairment loss will be included in the results of discontinued operations net of tax basis (EY, 2017).
References
EY. (2017). Financial reporting developments A comprehensive guide Intangibles — Goodwill and other . Ernst & Young . Retrieved 26 April 2018, from http://file:///C:/Users/Dan/Downloads/financialreportingdevelopments_bb1499_intangibles_29june2017.pdf
