Mikkeli OY acquired a brand name with an indefinite life in 2015 for 41,000 mark
ID: 2572245 • Letter: M
Question
Mikkeli OY acquired a brand name with an indefinite life in 2015 for 41,000 markkas. At December 31, 2017, the brand name could be sold for 37,900 markkas, with zero costs to sell. Expected cash flows from the continued use of the brand are 43,210 markkas, and the present value of this amount is 36,900 markkas.
Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes. Required:
Prepare journal entries for this brand name for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP.
Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017 and December 31, 2018 conversion worksheet to convert IFRS balances to U.S. GAAP.
Explanation / Answer
1). IFRS - As per IAS 38, "Intangible assets", if an intangible asset is acquired by an entity with indefinite useful life, then no amortisation is required on such Intangible assets, rather these assets are tested for impairment losses at the end of each reporting period to value the asset at it's recoverable value. Recoverable value is the value of future economic benefits that could be derived from such asset. In the given case, Present value of future cash inflows to be received is the recoverable amount of Brand Name.
Journal Entry as per IFRS
Date
Particulars
Dr. Amount
Cr. Amount
Dec 31
Impairment Loss on Intangible Asset
TO Brand Name
(41,000 – 36,900)
4,100
4,100
2). Entry as per US GAAP.
Likewise in US GAAP also, an intangible asset with indefinite useful life is not amortised in the books but is required to be checked for impairment loss in the value at least annually. Impairment is recorded when an asset's carrying amount exceeds the higher of the asset's value in use (discounted present value of the asset's expected future cash flows) and fair value less costs to sell. However, method of calculating the recoverable value in US GAAP is diferrent from that in IFRS. Under US GAAP, recoverable value of an intangible asset is greater of Fair value less costs to sell or Value in use. In the given case, since both the vallue in use and fair value less cost is less than the carrying amount, impairment is required to be booked.
Recoverable Value = Higher of Fair Value or value in use
= HIgher of 37,900 markkas or 36,900 markkas = 37,900 markkas
Journal Entry under US GAAP
Date
Particulars
Dr. Amount
Cr. Amount
Dec 31
Impairment Loss on Intangible Asset
TO Brand Name
(41,000 – 37,900)
3,100
3,100
b. Conversion Entry from IFRS to US GAAP
Date
Particulars
Dr. Amount
Cr. Amount
Dec 31
Brand Name
TO Impairment Loss on Intangible Asset
(4,100-3,100)
1,000
1,000
Date
Particulars
Dr. Amount
Cr. Amount
Dec 31
Impairment Loss on Intangible Asset
TO Brand Name
(41,000 – 36,900)
4,100
4,100