Accounting Case Study Essay

1039 Words Mar 13th, 2012 5 Pages
Date: October 6, 2011
To: ABC Management
From: Shafiq Lalani, Advisor
Subject: ABC acquisition of patent, land, building and equipment
In response to your request to provide advice on how to account for the acquisition of a patent, land, building and equipment please find below an extensive report. Please note that this report is in accordance with Accounting Standards for Private Enterprises (ASPE) and as the advisor my recommendations will be based on my unbiased and independent understanding of these standards.
The primary users of this information will be ABC management who have the objective of understanding their balance sheet post acquisitions to determine whether a request to increase their line of credit is viable. The
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ABC Company already has early signs that the economic life may be shorter than the 10 year long patent life as the company only made healthy profits for the first 2 years. By amortizing over the economic life the company will more accurately reflect the value of the patent.
b. Impaired Intangible Assets
Another key factor to highlight for ABC Company is the fact that the value of its patent has decreased significantly after two years of purchase. It was purchased at a cost of $125 million in 2010 but in 2012 the fair value has dropped to $42 million. The issue here is that the patent has become an impaired asset since its carried value in 2012 is significantly greater than its net realizable value. As a result of becoming an impaired asset the asset account would be credited for $58 million and there would be a debit to the loss due to impairment account. This situation would decrease the asset value which in turn would decrease Shareholder’s Equity and ultimately decrease the chances of the company getting the loan they wanted.
c. Fair Market Value of an Asset
Although the company did get an offer from another party of $7M for the patent, it does not seem like this is a fair offer. Based on the assessment of future cash flows in 2012, the fair value

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