This book explains the relatively few instances when a company must recognize intangible assets it creates (called self-generated intangible assets). It also analyzes the rules for identifying and recognizing intangible assets in business combinations and asset acquisitions (which are acquisitions of assets – and possibly liabilities – in a transaction that does not qualify as a business combination).
Once an intangible asset is recognized through a business combination or asset acquisition, the acquirer must determine the asset’s fair value to determine the asset’s initial carrying amount. In contrast, the initial carrying amount of a self-created intangible asset is the amount expended and capitalized during the asset’s creation. This book explains how valuation specialists typically approach calculating the fair value of intangible assets. These calculations can be challenging because most intangible assets are not readily traded, so there often are no past transactions or market quotes to guide the valuation specialists. In addition, once a company identifies and initially measures an intangible asset, it must analyze that asset to determine if the asset as a finite useful life, which would require that it be amortized over that life. This book analyzes the principles for determining the useful lives of intangible assets and the methodologies for amortizing those intangible assets that have finite useful lives. It further analyzes the principles for testing all intangible assets, as well as goodwill acquired in a business combination, for impairment. Impairment testing is particularly important for intangible asset with indefinite lives and goodwill because such assets are not amortized yet they can become impaired. Finally, the book explains how intangible assets and goodwill, and any amortization expenses and impairment losses, must be presented on financial statements and disclosed in the notes to the financial statements.
