12 Intangible Assets Financial Reporting Problem 12
Financial Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) Does P&G report any intangible assets, especially goodwill, in its 2014 financial statements and accompanying notes?
(b) How much research and development (R&D) cost was expensed by P&G in 2013 and 2014? What percentage of sales revenue and net income did P&G spend on R&D in 2013 and 2014?
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) (1) What amounts for intangible assets were reported in their respective balance sheets by Coca-Cola and PepsiCo at year-end 2014?
(2) What percentage of total assets is each of these reported amounts at year-end 2014?
(3) What was the change in the amount of intangibles from 2013 to 2014 for Coca-Cola and PepsiCo?
(b) (1) On what basis and over what periods of time did Coca-Cola and PepsiCo amortize their intangible assets?
(2) What were the amounts of accumulated amortization reported by Coca-Cola and PepsiCo at the end of 2013 and
2014?
(3) What was the composition of the identifiable and unidentifiable intangible assets reported by Coca-Cola and
PepsiCo at the end of 2014?
Financial Statement Analysis Cases
Case 1: Merck and Johnson & Johnson
Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and $200 million to develop its 1-DAY ACUVUE contact lenses. Below are some basic data compiled from the financial statements of these two companies.
…
Instructions
(a) What kinds of intangible assets might a healthcare products company have? Does the composition of these intangibles matter to investors—that is, would it be perceived differently if all of Merck’s intangibles were goodwill than if all of its intangibles were patents?
(b) Suppose the president of Merck has come to you for advice. He has noted that by eliminating research and development expenditures the company could have reported $4 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop. He says shareholders are eager for higher returns, so he is considering eliminating research and development expenditures for at least a couple of years. What would you advise?
(c) The notes to Merck’s financial statements note that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on a company’s books?
Case 2: Analysis of Goodwill
As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as “buys.” Each of the companies’ returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.)
Instructions
(a) The fair value for each of these companies is lower than the corresponding book value. What implications does this have for each company’s future prospects?
(b) To date, none of these companies has recorded goodwill impairments. Your supervisor suspects that they will need to record impairments in the near future, but he is unsure about the goodwill impairment rules. Is it likely that these companies will recognize impairments? Explain.
(c) Estimate the amount of goodwill impairment for each company and prepare the journal entry to record the impairment. For each company, you may assume that the book value less the carrying value of the goodwill approximates the fair value of the company’s net assets.
(d) Discuss the effects of your entries in part (c) on your evaluation of these companies based on the return on assets ratio.
Accounting, Analysis, and Principles
On January 2, 2017, Raconteur Corp. reported the following intangible assets: (1) copyright with a carrying value of $15,000, and
(2) a trade name with a carrying value of $8,500. The trade name has a remaining life of 5 years and can be renewed at nominal cost indefinitely. The copyright has a remaining life of 10 years.
At December 31, 2017, Raconteur assessed the intangible assets for possible impairment and developed the following information...
Accounting
Prepare any journal entries required for Raconteur’s intangible assets at December 31, 2017.
Analysis
Many stock analysts indicate a preference for less-volatile operating income measures. Such measures make it easier to predict future income and cash flows, using reported income measures. How does the accounting for impairments of intangible assets affect the volatility of operating income?
Principles
Many accounting issues involve a trade-off between the primary characteristics of relevant and representationally faithful information. How does the accounting for intangible asset impairments reflect this trade-off?
