GASB 51: Accounting and Financial Reporting for Intangible Assets Presented by: Roger Martinez,...

GASB 51: Accounting and Financial Reporting for Intangible Assets

Presented by:

Roger Martinez, Kathy Lai, KPMG LLP, and Ben Cheng, COAUDIT

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Summary

Description of Intangible Assets

Characteristics of an Intangible Asset - Lack of Physical Substance

Characteristics of an Intangible Asset - Nonfinancial Nature

Common Types of Intangible Assets

Basic Guidance

Recognition Criteria

Internally Generated Intangible Assets

Internally Generated Computer Software

Amortization of Intangible Assets

Impairment Indicators

Effective Date and Transition

Year-End GAAP TrainingMay 2010

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Summary Cont.

Results of CSU Survey

CSU Guidance on Retroactive Reporting

Year-End GAAP TrainingMay 2010

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Description

An intangible asset is an asset that possesses all of the following characteristics:

– Lack of physical substance

– Nonfinancial nature

– Initial useful life extending beyond a single reporting period

4Year-End GAAP TrainingMay 2010

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Lack of Physical Substance

An asset may be contained IN or ON an item with physical substance

– Computer software on a compact disc

An asset may be closely associate with another item that has a physical substance

– A right-of-way easement on top of land

Note – these modes of containment and associated items should NOT be considered when determining whether or not an asset lacks physical substance


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Nonfinancial Nature

An asset that is not in a monetary form similar to cash and investment securities

An asset that represents neither a claim or right to assets in a monetary form similar to receivables nor a prepayment for goods or services


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Knowledge Check #1

An asset must possess all of the characteristics, except which one in order to be classified as an intangible asset under GASB 51

A. Nonfinancial in nature

B. Donated to the entity

C. Lack of physical substance

D. Initial useful life extending beyond a single reporting period


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Knowledge Check #1: Answer

B. Donated to the entity

An asset must lack physical substance, be nonfinancial in nature and have an initial useful life extending beyond a single reporting period in order to be classified as an

intangible asset under GASB 51.


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Knowledge Check #2

Computer software on a compact disc is NOT an intangible asset because it has physical substance.

A. True

B. False

May 2010 Year-End GAAP Training9

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B. False

An asset may be contained IN or ON an item with physical substance. These modes of containment should NOT be considered when determining whether or not an asset lacks physical substance. Computer software on a compact disc IS considered an intangible asset.


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Common Types of Intangible Assets

Right-of-way easements

Other types of easements

Patents, copyrights, trademarks

Land use rights

Licenses and permits

Computer software

– Purchased or licensed

– Internally generated


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Basic GuidanceAll intangible assets subject to Statement should be

classified as capital assets

– All existing authoritative guidance related to capital assets should be applied to these intangible assets

Paragraphs 18-22, 44, 45, 116, 117 and 120 of GASB Statement No. 34

Paragraphs 5-20 of GASB Statement No. 42

Scope exceptions:

– Intangible assets acquired or created primarily for directly obtaining income or profit

– Assets resulting from capital lease transactions reported by lessees

– Goodwill created through the combination of a government or other entity


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Recognition Criteria

An intangible asset should be recognized ONLY IF it is “identifiable”:

– The asset is separable, i.e. capable of being separated and sold, transferred, licensed, etc.

-OR-

– The asset arises from contractual or other legal rights, regardless of whether rights are transferable or separable


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Internally generated intangible assets (IGIA) are assets that are:

– Created or produced by the government or an entity contracted by the government;

-OR-

– Acquired from a third party but require more than minimal incremental effort to achieve expected level of service capacity

GASB Statement No. 51 provides a specified-conditions approach to recognizing outlays associated with IGIA


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Outlays incurred related to an IGIA that is considered identifiable should be capitalized ONLY upon the occurrence of ALL of the following:

– Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon completion of the project;

– Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity; and

– Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset.

Outlays incurred prior to meeting criteria should be expensed as incurred.


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Specific guidance on applying the specified-conditions approach for recognition of internally generated computer software is provided

Guidance generally based on development stages similar to AICPA SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use

New Accounting Rules for Software Costs - What Government IT Professionals Need to Know About GASB 51


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Computer software is a common type of intangible asset that is often internally generated.

Computer software should be considered internally generated if:

– It is developed in-house by the government’s personnel OR

– It is developed by a third-party contractor on behalf of the government

– It is commercially available software that is purchased or licensed by the government and modified using more than incremental effort before being put into operation (i.e., licensed financial accounting software that the government modifies to add special reporting capabilities)


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Activities involved in developing and installing internal generated computer software can be grouped into the following steps:

– Preliminary Project Stage

– Application Development Stage

– Post-Implementation/Operation Stage


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The criteria noted on slide #15 should be considered met only when both of the following occur:

– The activities noted in the preliminary project stage are completed

– Management implicitly or explicitly authorizes and commits to funding, at least currently in the case of a multiyear project, the software project.

Accordingly, outlays associated with activities in the PRELIMINARY PROJECT STAGE should be expensed as incurred.

For commercially available software that will be modified to the point that it is considered “internally generated”, (a) and (b) above generally would be considered to have occurred upon the government’s commitment to purchase or license the computer software.


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Once the criteria noted on slide #15 are met, outlays related to activities in the APPLICATION DEVELOPMENT STAGE should be capitalized.

Capitalization of such outlays should cease no later than the point at which the computer software is substantially complete and operational.

Outlays associated with activities in the POST-IMPLEMENTATION/OPERATION STAGE should be expensed as incurred.


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Outlays associated with an internally generated modification of computer software that is already in operation should be capitalized if the modification results in ANY of the following:

– An increase in the functionality of the computer software,

– An increase in the efficiency of the computer software, or

– An extension of the estimated useful life of the software.

Note - If the modification does not result in any of the above outcomes, the modification should be considered maintenance, and the associated outlays should be expensed as incurred.


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Amortization of Intangible Assets

Existing guidance for depreciation of capital assets generally applies to amortizing intangible assets

Exception for intangible assets with indefinite useful lives:

– No factors currently exist that limit the useful life of the asset

– Intangible assets with indefinite useful lives should not be amortized


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Knowledge Check #3

Outlays associated with activities in the post-implementation/operation stage of internally generated computer software should be expensed as incurred.

A. True

B. False


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A. True

Outlays associated with activities in the post-implementation/operation stage of internally generated computer software should be expensed as incurred.


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Knowledge Check #4

Intangible Assets with indefinite useful lives should not be amortized.

A. True

B. False


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A. True

Intangible assets with indefinite useful lives should not be amortized.


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Impairment Indicators

Impairment is indicated when events or changes in circumstances suggest that the service utility of the capital asset may have significantly and unexpectedly declined. Common indicators of impairment include (paragraph 9 of GASB Statement No. 42):

– Evidence of physical damage, such as for a building damaged by fire or flood, when the level of damage is such that restoration efforts are needed to restore service utility

– Enactment or approval of laws or regulations or other changes in environmental factors, such as new water quality standards that a water treatment plant does not meet (and cannot be modified to meet)

– Technological development or evidence of obsolescence, such as that related to a major piece of diagnostic or research equipment (for example, a magnetic resonance imaging machine or a scanning electron microscope) that is rarely used because newer equipment provides better service


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Impairment Indicators, continued

– Technological development or evidence of obsolescence, such as that related to a major piece of diagnostic or research equipment (for example, a magnetic resonance imaging machine or a scanning electron microscope) that is rarely used because newer equipment provides better service

– A change in the manner or expected duration of use of a capital asset, such as closure of a school prior to the end of its useful life

– Construction stoppage, such as stoppage of construction of a building due to lack of funding.

– Additionally, a common indicator of impairment for internally generated intangible assets is stoppage of development of computer software

– Internally generated intangible assets impaired from development stoppage should be reported at the lower of carrying value or fair value.


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Knowledge Check #5

In accordance with GASB 51, Intangible assets are not subject to the impairment provisions of GASB 42.

A. True

B. False


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B. False

Intangible assets require an impairment analysis in accordance with GASB Statement No. 42.


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Effective Date and Transition

Effective date is fiscal periods BEGINNING AFTER June 15, 2009 (Early application is encouraged)

Provisions generally should be retroactively applied

Exceptions for retroactively reporting intangible assets:

– Permitted but not required for IGIA and intangible assets with indefinite useful lives at transition

– Required for all other intangible assets acquired in fiscal years ending after June 30, 1980 by phase 1 or 2 governments

– Encouraged but not required for all other intangible assets of phase 3 governments


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Results of CSU Survey

32Year-End GAAP Training

Mark "X" Intangible Assets

Estimated number of total items

Number of items where cost is

unknown

Estimated total historical costs, net as of

6/30/2009

% of items where cost is

unknown

X

Computer software & websites

233 11 654,585.00 5%

Easements 0 0 - 0

X

Various rights, e.g. land use, water, timber, mineral.

4 4 - 100%

X

Licenses & permits

10 9 - 90%

X Patents 1 1 - 100%

X Copyrights 1 1 - 100%

X

Trademarks

5 2 15,604.95 40%

May 2010

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Systemwide Policy on Retroactive Reporting

Retroactive reporting is not required but permitted for intangible assets that are considered to have 1) indefinite useful lives and 2) those that would be considered internally generated as of June 30, 2009. (GASB 51 ¶ 21)

GASB Staff Implementation Guide Z.51.31 and Z.51.32

Systemwide retroactive reporting instructions for each type of these intangible assets:

– Computer Software: CSU has capitalized and reported internally generated software in the past and will continue to do so according to GASB Statement 51. (See GAAP Manual § 3.9.1 of Ch 13).


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Systemwide Policy on Retroactive Reporting

CSU does not plan to retroactively report:– Websites internally generated which were created and in use on or

before June 30, 2009.

– Rights (Including Water and Mineral) with indefinite lives, which were obtained on or before June 30, 2009. The adequate records to determine or estimate the historical cost are generally hard to obtain.

– Patents, Copyrights, & Trademarks, which have indefinite lives or were internally generated, and were obtained on or before June 30, 2009, except those were already reported as of June 30, 2009.

– Licenses & Permits which have indefinite lives or were internally generated, and were obtained on or before June 30, 2009, except those were already reported as of June 30, 2009.

– Federal Communications Commission (FCC) Licenses


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FCC Licenses

Federal Communications Commission (FCC) Licenses:

– The FCC has given licenses to the CSU at no cost in early 1980 primarily for the use of education purpose at that time.

– Licenses allow CSU to use spectrums for running radio channels and renewable every 10 years.

– Renewal of the FCC licenses is a perfunctory exercise.

– There is a remote likelihood that the licenses will not be renewed upon expiration.

– 14 campuses reported holding this license.

– Majority of the spectrums are leased to outside parties but not in use for operation by the campuses.


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Contact Information

Roger Martinez, KPMG Partner

(213) 955-8671

[email protected]

Kathy V. Lai, KPMG Senior Manager

(949) 885-5516

[email protected]

Ben Cheng, Sr. Financial Reporting Manager

(562) 951-4548

[email protected]


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Questions?


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GASB 51: Accounting and Financial Reporting for Intangible Assets Presented by: Roger Martinez,...

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