Research Report 2 (ACCT521) Consolidation & VIE Case I: Consolidation related with Goodwill and Intangible Assets P Co. recently acquired S Co. The combined firm consists of three related businesses...

Case I: Consolidation related with Goodwill and Intangible Assets.
1. As per ASC 805, An Intangible Assets is one which lacks physical substance (not including a physical
asset) and excludes Goodwill acquired in course of Business Combination. Some of the examples of
identifiable intangible assets are:
(a). Marketing Related: Trademarks, Trade names, Service marks, Collective marks, Certification marks,
Trade Dress, Newspaper mastheads, Internet Domain names, Noncompetition agreements.
(b). Customer Related: Customer Lists, Order or Production backlog, Customer contracts and related
customer relationships and Non-contractual customer relationship.
(c). Artistic Related: Plays, Operas, ballets, Books, Magazines, newspaper or other literary work, Musical
works, Pictures and photographs.
(d). Contract Based: Licensing, royalty, standstill agreements, Advertising, Construction, management,
service, supply contracts, Lease Agreements, Construction permits, Franchise Agreements, Operating
and Broadcast rights, Servicing contracts, and employment contracts.
An Intangible Asset is considered to be identifiable if any of the following two conditions are satisfied:
(a). It has a separate identity then that of the entity and thus can be sold or transferred to any other entity in an open market (This criterion is also known as Separability criteria). or
(b). It arises from contractual or other legal rights (This criterion is also known as contractual-legal criteria).
Statement 141 introduced the requirement to recognize certain intangible items separately from
goodwill. Separate recognition is required for items meeting either the contractual-legal criterion or the
separability criterion. The implementation guidance in Topic 805 provides an illustrative list of
intangibles items required to be recognized as individual intangible assets as a result of applying those
criteria. Noncompete agreements and certain customer-related intangible assets are among the items
listed. Intangible assets that are legally protected and capable of generating cash flows independent of a
business is more relevant to their analyses. For those users, subsuming certain recognized intangible
assets into goodwill may not reduce the usefulness of reported financial information.
In the given case, P Co. recently acquired S Co. The combined firm consists of three related businesses
that will serve as reporting units. P recognizes several identifiable intangibles from its acquisition of S. It
expresses the desire to have these intangible assets written down to zero in the acquisition method.
Advice: As per statement 142 Goodwill and Other Intangible Assets issued by the FASB:
(a). An Intangible Asset with finite life (Limited to certain defined number of years), should be
amortized equally over the useful life of that Intangible Asset. The estimated useful life of the asset shall
be determined using reliable factors based upon the nature of the assets.
(b). An Intangible Asset with Infinite life (Not limited to certain defined number of years), should not be
amortized over its life but should be tested at each year end for Impairment (Impairment means that
the fair market value of the asset is less than the current book value). Impairment can be performed
annually or more than once a year if the circumstances demand so.
Answer: Since in the acquisition of Company S by Company P, Company P has acquired some
Identifiable Intangibles. From the explanation of the Identifiable intangibles, it can be understood that
these assets are different from goodwill and should be amortized over the period of their useful life (if
they have infinite life, then no amortization only impairment should be measured at each year-end).
Hence company P cannot write-off these intangible assets to zero in first year itself.
2. The related factors to consider in allocating the value assigned to identifiable intangibles acquired in a
business combination to expense over time:
(a). The Estimated Life of identifiable Intangible Asset: The useful life of an asset is generally measured
by considering the laws and regulations of the country. If the company believes that the useful life of the
asset should be lower than what is mentioned in the law, then they can take lower life. If the company
believes that the life will be more than what is specified in the law, then the life will be restricted to life
specified in the law. Factors to consider to measure useful life are:
· Whether the life of the asset is dependent upon any other asset.
· Expected period of ownership by the company, example: term period of leases.
· Expected usage of the asset each year by the company.
· Technical factors which may give knowledge about the life of intangible asset.
(b). Expected Revenue Expected to be received over the Period: The expense can be allocated based on
the revenue expected to be earned each year. This principle helps to match revenue with cost to...