Intangibles and current liabilities

Lecture 6
Recoverable amount the value of the assent that you can recover form selling or using the asset
Book value (carrying amount) you find it on the balance sheet
Impairment loss  the book value > recoverable amount  we have to decrease the book value
After an impairment loss is recorded, the recoverable amount becomes the basis of the 9impaired asset and is
used to calculate depreciation in future
Today’s learning objective
FAR aims to train student as academic professionals in financial accounting and reporting. At the end of this
course, the students should be able to:
3. Describe and explain the accounting principles, including principles for valuation and income
measurement allowed under IFRS.
4. Prepare a set of financial statements including a balance sheet (a statement of financial position), a
statement of cash flows, an income statement and a statement of comprehensive income, and a
statement of changes in equity.
• As an example of non-current assets: Describe the characteristics of intangible assets, identify the
costs to include in the initial valuation of intangible assets, and explain the procedure for amortizing
intangible assets (Chapter 12).
• As an example of current or non-current liabilities: Explain the accounting for different types of
provisions (Chapter 13).
PREVIEW OF CHAPTER 12

INTANGIBLE ASSET ISSUES

Characteristics
1. Identifiable (it can be separated from the firm, ex the brand, so you can sell the brand name without
selling the company, ex IBM and Lenovo)
2. Lack physical existanc3e
3. Not monetary assets
Normally classified as non-current asset. Common types of intangibles:
• Marketing-related
• Customer-related
• Artistic-related
• Contract-related
• Technology-related
• Goodwill
Coca-Cola Company’s (USA) success comes from its secret formula for making Coca-Cola, not its plant
facilities.
Christian Dior’s (FRA) most important asset is its brand image, not its store
Valuation: Purchased Intangibles
• Recorded at cost.
• Includes all acquisition costs plus expenditures to make the intangible asset ready for its intended use.
• Typical costs include:
 Purchase price.
 Legal fees.
 Other incidental expenses.
Valuation: Internally Created Intangibles
• Might include patents, computer software, copyrights, and trademarks.
• Companies expense all research phase costs and some development phase
costs.
• Certain development costs are capitalized once economic viability criteria are met.
• IFRS identifies several specific criteria that must be met before development costs are capitalized.
 You do not have the clear amount that you have when you purchase
it is a process, the research phase. The costs are
expensed (income statement  they flow here, it
means that we do not capitalized them so we do not
have an assets) this happens during the research
phase).
The development phase, the project has become
more concrete and has come closed to the market, we have almost the final product. We can use it internally
and sell it on the market. Economic viability it becomes more probable that this product (project) that one
day it will generate positive financial cash flows with it. The costs are allowed to be capitalized ONLY when
there is this economic viability. Capitalized: we can report it on the balance sheet as an asset because we will
take these future financial benefits and wee will discount them at the present value (we create an asset).
The companies has to prove this economic viability audit has to sign off to
demonstrate it. (very difficult process).
Amortization of Intangibles: Limited-Life Intangibles
• Amortize by systematic charge to expense over useful life.
• Amortization expense should reflect the pattern in which the company
consumes or uses up the asset.
• Credit asset account or accumulated amortization.
• Amortization should be cost less residual value.
• Companies must evaluate the limited-life intangibles annually for impairment.
• No foreseeable limit on time the asset is expected to provide cash flows.
• No amortization.
• Must test indefinite-life intangibles for impairment at least annually (you compare the book value and
recoverable amount

PREVIEW OF CHAPTER 13
Current liabilities
Three essential characteristics:
1. Present obligation
2. Arises form pas events
3. Requires a transfer of economic resources (cash, goods, services)
A current liability is reported if one of two conditions exists:
1. Liability is expected to be settled within its normal operating cycle; or
2. Liability is expected to be settled within 12 months after the reporting date.
The operating cycle is the period of time elapsing between the acquisition of goods and services and the final
cash realization resulting from sales and subsequent collections.
Typical Current Liabilities:
1. Accounts payable.
2. Notes payable.
3. Current maturities of long-term debt.
4. Short-term obligations expected to be refinanced.
5. Dividends payable.
6. Customer advances and deposits.
7. Unearned revenues.
8. Sales and value-added taxes payable.
9. Income taxes payable.
10. Employee-related liabilities.
Accounts Payable (trade accounts payable)
Balances owed to others for goods, supplies, or services purchased on open account.
• Time lag between the receipt of services or acquisition of title to assets and the payment for them.
• Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state period of extended credit, commonly
30 to 60 days.
Dividends Payable
Amount owed by a corporation to its stockholders as a result of board of directors’ authorization.
• Generally paid within three months.
• Undeclared dividends on cumulative preference shares are not recognized as a liability.
• Dividends payable in the form of additional shares are not recognized as a liability.
 Reported in equity.

PROVISIONS
Provision is a liability of uncertain timing or amount.
Reported either as current or non-current liability.
Common types are
• Obligations related to litigation.
• Warrantees or product guarantees.
• Business restructurings.
• Environmental damage.
Uncertainty about the timing or amount of the future expenditure required to settle the obligation.
Recognition of a provision
Companies accrue an expense and related liability for a provision only if the following
three conditions are met at the same time:
1. Company has a present obligation (legal or constructive) as a result of a past event (like liabilities);
2. Probable (more likely than not >50%) that an outflow of resources will be required to settle the
obligation; and
3. A reliable estimate can be made.
Recognition of a provision: example
It is assumed that a reliable estimate of the amount of the obligation can be determined.

COMMON TYPES OF PROVISIONS

Common Types:
1. Lawsuits
2. Warranties
3. Consideration payable
4. Environmental
5. Onerous contracts
6. Restructuring
IFRS requires extensive disclosure related to provisions in the notes to the financial statements. Companies do
not record or report in the notes general risk contingencies inherent in business operations (e.g., the possibility
of war, strike, uninsurable catastrophes, or a business recession).
Warranty Provisions
Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a
product.
If it is probable that customers will make warranty claims and a company can reasonably estimate the costs
involved, the company must record an expense.
Companies often provide one of two types of warranties to customers:
Assurance-Type Warranty
A quality guarantee that the good or service is free from defects at the point of sale.
• Obligations should be expensed in the period the goods are provided or services performed (in other
words, at the point of sale).
• Company should record a warranty liability.
Service-Type Warranty
An extended warranty on the product at an additional cost.
Assurance-type warranty
Facts: Denson Machinery Company begins production of a new machine in July 2022 and sells 100 of these
machines for $5,000 cash by year-end for a total sales revenue of
$500,000 (100 X $5,000). Each machine is under warranty for one year. Denson estimates, based on past
experience with similar machines, that the warranty cost will average $200 per unit for a total expected
warranty expense of $20,000 (100 x $200).
Further, as a result of parts replacements and services performed in compliance with machinery warranties, it
incurs $4,000 in warranty costs in 2022 and $16,000 in 2023.
Question: What are the journal entries for the sale and the related warranty costs for 2022 and 2023?

At December 31, 2022, the statement of financial position reports a warranty liability (current) of $16,000
($20,000 − $4,000). The income statement for 2022 reports sales revenue of $500,000 and warranty expense
of $20,000.
To Record Payment for Warranty Expenditures Incurred in 2023 Related to 2022 Machinery Sales

At the end of 2023, no warranty liability is reported for the machinery sold in 2022.
RECOGNITION EXAMPLES
Constructive obligation is an obligation that derives from a company’s actions where:
1. By an established pattern of past practice, published policies, or a sufficiently specific current
statement, the company has indicated to other parties that it will accept certain responsibilities; and
2. As a result, the company has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.

Recognition example
It is assumed that a reliable estimate of the amount of the obligation can be determined.

 Not based on the contract but on an expectation

It is assumed that a reliable estimate of the amount of the obligation can be determined.

COMMON TYPES OF PROVISIONS

Litigation Provisions
Companies must consider the following in determining whether to record a liability with respect to pending or
threatened litigation and actual or possible claims and assessments.
1. The time period in which the underlying cause of action occurred.
2. The probability of an unfavorable outcome.
3. Ability to make a reasonable estimate of the amount of loss.

With respect to unfiled suits and unasserted claims and assessments, a company must determine
1. the degree of probability that a suit may be filed or a claim or assessment may be asserted, and
2. the probability of an unfavorable outcome.
If both are probable, if the loss is reasonably estimable, and if the cause for action is dated on or before the
date of the financial statements, then the company should accrue the liability.
Scorcese A.S. is involved in a lawsuit at December 31, 2022. (a) Prepare the December 31 entry assuming it is
probable that Scorcese will be liable for
₺900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that
Scorcese will be liable for any payment as a result of this suit.
(a) Lawsuit Loss 900,000
Lawsuit Liability 900,000
(b) No entry is necessary. The loss is not accrued because it is not probable that a liability has been
incurred at 12/31/22.
MEASUREMENT OF PROVISIONS
How does a company determine the amount to report for a provision?
IFRS:
Amount recognized should be the best estimate of the expenditure required to settle the present obligation.
Best estimate represents the amount that a company would pay to settle the obligation at the statement of
financial position date.
Measurement Examples
Management must use judgment, based on past or similar transactions, discussions with experts, and any
other pertinent information.

Toyota warranties. Toyota might determine that 80 percent of its cars will not have any warranty cost, 12
percent will have substantial costs, and 8 percent will have a much smaller cost. In this case, by weighting all
the possible outcomes by their associated probabilities, Toyota arrives at an expected value for its warranty
liability.
Novartis lawsuit. Large companies like Novartis are involved in numerous litigation issues related to their
products. Where a single
obligation such as a lawsuit is being measured, the most likely outcome of the lawsuit may be the best
estimate of the liability.
 Measurement of the liability should consider the time value of money, if material. Future events that
may have an impact on the measurement of the costs should be considered.

WITH WHAT YOU HAVE LEARNED TODAY, YOU ARE NOW ABLE TO…
• …describe the characteristics of intangible assets, identify the costs to include in the initial valuation
of intangible assets, and explain the procedure for amortizing intangible assets (Chapter 12).
• …explain the accounting for different types of provisions (Chapter 13).