Inter. Fin. Accoutning Notes

• Acquisition


  When one company buys another company, the acquiring company gains control over the acquired company, including its assets, employees, and operations
• Property, plant, and equipment (PPE)

  • Long lived assets classified as either tangible assets (physical assets that can be touched) or intangible assets (lack physical substance)
• Capitalization vs Expensing


  1. Expenditure leads to benefits in current period only - expense

  2. Expenditure leads to benefits in current and future periods - capitalize
• PPE is capitalized because it is expected to produce benefits for multiple periods
• Initial cost of PPE

  Purchase price + Acquisition costs (all expenditures necessary to bring the asset to its desired condition and location for use)
• Common tangible assets with typical acquisition costs

  • Land (clearing, filling, demolition, salvage proceeds)
  • Land improvements (parking lots, sprinkler systems)
  • Buildings (reconditioning, contractor payments, capitalized interest)
  • Natural resources (acquisition, exploration, development, restoration)
• Acquisition costs for land include broker's commission, title insurance, and miscellaneous closing costs
• Intangible assets


  Assets other than financial assets that lack physical substance but can be extremely valuable to a company
• How companies acquire intangible assets


  Purchased or developed internally
• Intangible assets generally refer to

  Ownership of exclusive rights providing benefits in the production of goods and services
• Why intangible assets are valuable

  • They can provide benefits in the production of goods and services
• Intangible assets are not acquired by inheriting them from previous owners
• Accounting for purchased patents, copyrights, and trademarks

  Recorded at purchase price plus other costs to get asset ready for use
• Trademarks


  Can be renewed for an indefinite number of 10-year periods
• Franchise


  Grants franchisee exclusive right to use franchisor's trademark/trade name, formula rights, operate in geographical area
• Accounting for franchise payments

  Initial franchise fee plus legal costs capitalized as intangible asset, ongoing payments expensed
• Goodwill


  Distinct intangible asset reflecting unique value of company, can only be acquired through purchase of entire company or portion
• Goodwill is only recorded as an asset on the balance sheet when acquired through acquisition of another company
• Interest capitalization


  When a company constructs an asset for its own use, the critical accounting issue is whether interest costs incurred during construction should be capitalized or expensed
• Franchisee


  The exclusive right to use the franchisor's trademark
• Franchise agreement


  • Fixed duration of 20 years
  • Protects the company's product formula rights
  • Allows the franchisor to operate a business within a certain geographical area
• The franchise agreement grants the franchisee the exclusive right to use the franchisor's trademark
• How are payments to the franchisor typically treated by the franchisee in accounting?


  Recorded as an intangible asset
• Goodwill


  Recorded on the balance sheet when it is acquired through the acquisition of another company
• Determining the cost of a self-constructed asset


  1. Identify the amount of the company's indirect manufacturing costs

  2. Decide on the proper treatment of interest incurred during construction
• Overhead allocation approaches


  • Incremental overhead cost approach
  • Full cost approach
• The cost of an asset includes all costs necessary to get the asset ready for its intended use
• Determining how much interest should be capitalized


  1. Determine the weighted-average accumulated expenditures

  2. Calculate the amount of interest to be capitalized

  3. Compare calculated interest with actual interest incurred
• Noncash acquisitions


  • Notes payable
  • Issuance of equity securities
  • Donated assets
  • Exchange of assets
• Valuation of assets acquired in noncash transactions

  Fair value of the assets given OR the fair value of the assets received (whichever is more clearly evident)
• Notes payable


  • If the note specifies a realistic interest rate, the asset is valued at the note's face value
  • If there's no clear interest rate or the payment is delayed, the asset is valued based on the present value of the note using a realistic interest rate, or based on the fair value of the asset received
• Issuance of equity securities

  • For small companies, the fair value of the assets received is used
  • For companies with actively traded stock, the market value of the shares is the best indicator of their fair value
• Donated assets


  Companies record assets donated by unrelated parties at their fair value based on either an available market price or an appraisal value
• Exchange of assets


  Valuation depends on whether the fair value of the asset given can be determined, whether the transaction has commercial substance, and whether cash was received or paid
• Lump sum acquisitions


  The price is allocated among the individual assets based on their relative fair values
• Research


  Planned search or critical investigation aimed at discovery of new knowledge, with the hope that such knowledge will be useful in developing a new product or service
• Development


  Translation of research finding or other knowledge into a plan or design for a new product or process for a significant improvement to an existing product or process
• R&D costs are expensed in the period they are incurred
• R&D costs


  Include salaries, wages, and other labor costs of personnel engaged in R&D activities, cost of materials consumed, equipment, facilities, and intangible assets used in R&D projects, cost of services performed by others, and a reasonable allocation of indirect cost
• If an asset is purchased specifically for a single R&D project, its cost is considered R&D and expensed immediately, even though the asset's useful life may extend beyond the current year