Financial Statement Analysis

Intangible Assets
and Marketable Securities

Intangible Assets and Marketable Securities

Intangible Assets
Identifiable intangible
 Can be acquired singularly, linked to rights and privileges
having finite benefit periods
Amortized over estimated useful life


Unidentifiable intangible
 Cannot be acquired singularly and may have indefinite
benefit period (e.g., goodwill)
 Not amortized; annual impairment review

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 Intangible Assets and Marketable Securities

Intangible Assets
 May only be recognized if they can be measured reliably
 Generally excludes internally generated intangibles—subjectivity
 Typical intangibles:
 Purchased patents and  Purchased franchise
copyrights and license costs
 Purchased brands and  Goodwill
trademarks  Computer software
 Direct response advertising development costs

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Intangible Assets and Marketable Securities

Expensed Items
 Internally generated brands,  Advertising and promotion
mastheads, publishing titles,  Relocation and
customer lists, etc. reorganization costs
 Start-up costs  Redundancy and
 Training costs termination costs
 Administrative and general  Research and development
overhead (development may be
capitalized under IFRS)

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 Intangible Assets and Marketable Securities

R&D
 Under IFRS, capitalize if:
 Project is technically feasible
 Resources exist to complete project
 Market exists for the product
 Company has intention to complete and sell product

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Intangible Assets and Marketable Securities

R&D: Example
Lowe S.A. worked on two projects during the year. What costs will be
capitalized, and what costs will be expensed under the IFRS?

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 Intangible Assets and Marketable Securities

R&D: Example
 Project 1:
 Aims to develop hydrogen fuel cells for motor vehicles
 Not yet developed a working prototype
 Believes in long run could revolutionize motor industry

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Intangible Assets and Marketable Securities

R&D: Solution
€m
Materials 150
Direct labor 80
Production overhead 40
Administrative overhead 30

 Capitalize: €0
 Expense: €300m

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 Intangible Assets and Marketable Securities

R&D: Example
 Project 2:
 Aims to develop new type of catalytic converter
 Has developed working protype, now working on
commercial version
 Believes demand would be high
 Has resources to develop and launch product

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Intangible Assets and Marketable Securities

R&D: Solution
€m
Materials 120
Direct labor 60
Production overhead 30
Administrative overhead 30

 Capitalize: €210m
 Expense: €30m

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 Intangible Assets and Marketable Securities

Goodwill
 Goodwill is the difference between the acquisition price and
the fair market value of the acquired firm’s net assets.
 The additional amount paid represents the amount paid for
assets not recorded on the balance sheet.
 Fair value involves management discretion.
 Goodwill is not amortized.

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Intangible Assets and Marketable Securities

Goodwill Analysis
 Impairment indicates that goodwill often results from
overpayment to acquire entity
 Remove the impact of goodwill from ratios:
 Remove goodwill from assets
 Remove any impairment from income statement
 Evaluate business acquisitions considering purchase
price, net assets, earnings prospects

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 Intangible Assets and Marketable Securities

Financial Instruments

 Stocks
 Bonds Measured at historical cost,
amortized cost, or fair value.
 Receivables
 Notes receivable
 Loans to others
 Derivatives

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Intangible Assets and Marketable Securities

Fair Value Assets

Financial assets
 Trading/held-for-trading securities
 Available-for-sale/fair value through OCI securities
 Derivatives (stand-alone or embedded in a
nonderivative instrument)
 Assets with fair value exposures hedged by derivatives

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 Intangible Assets and Marketable Securities

Cost or Amortized Cost

Financial assets
 Unlisted instruments
 Held-to-maturity investments
 Loans
 Receivables
Financial liabilities
 All other liabilities (e.g., bonds, notes payable)

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Intangible Assets and Marketable Securities

Fair Value Liabilities

Financial liabilities
 Derivatives
 Nonderivative investments with fair value exposures
hedged by derivatives

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 Intangible Assets and Marketable Securities

Cost or Amortized Cost

Financial liabilities
 All other liabilities (e.g., bonds, notes payable)

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Intangible Assets and Marketable Securities

Deferred Tax Liabilities

 A result of taxable temporary differences between income
tax expense (income statement) and taxes payable
(tax return)
 Accelerated depreciation for tax purposes; straight-line
for financial reporting
 Will reverse when taxes are paid

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