91Ó°ÊÓ

Amortization of Intangible Assets alludes to the strategy under which the cost of the distinctive intangible assetsof the company (assets that don't have any physical existence, cannot be felt and touched like trademark, goodwill, patents, etc.) are expensed over the particular period of time.

The copyright has a full year of amortization. The trade name, which is considered an intangible with endless life, has no amortization.

Calculating amortization expense:

$$\begin{gathered} \mathbf{\text{Amortization}}\mathbf{}\mathbf{\text{expense}}\mathbf{=}\frac{\mathbf{\text{Copyright}}\mathbf{}\mathbf{\text{value}}}{\mathbf{\text{Remaining}}\mathbf{}\mathbf{\text{life}}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}}{\mathbf{10}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500} \end{gathered}$$

The recoverability test for the copyright demonstrates that the copyright isn't impeded: The anticipated cash flows (undiscounted) of $20,000 are more prominent than the carrying value of $13,500 ($15,000 – $1,500).

A fair value test is used to determine if the trade name is impaired. Raconteur reduces it to $5,000 in fair value, resulting in an impairment penalty of $8,500 – $5,000 = $3,500.

Operating income is used to account for impairment losses. Because impairments are one-time events, their recognition might cause operating income to fluctuate year to year. Intangibles with an infinite life span, such as a trade name or goodwill, are particularly vulnerable to this volatility impact.

As there is no amortization, the larger carrying values, together with the yearly fair-value impairment test, can result in considerable impairment losses that have a major impact on operating income.

Accounting for intangible asset impairments gives useful information about intangible assets by revealing when their value has decreased. However, in order to provide this timely information, considerable subjective judgments are required when predicting

1. predicted cash flows for the cash flow recovery test and
2. Fair values for assessing the amount of impairment to be recorded.

These estimations may raise questions regarding the accuracy with which impairment losses are represented.