Question

3. Valuation of Intangible Assets The in-process research and development (IPR&D), which is proprietary food freezing technology submitted for Food and Drug Administration (FDA) approval, has a fair value of $15 million. The company considers its R&D to be in-process because it has not yet obtained FDA approval and additional R&D may be required. Allfoods management has determined that the fair value of the Baked Beans trademark is $3 million, using a market participants’ viewpoint. Management has also determined that it will not use the trademark because it intends to distribute the Baked Beans products under the Allfoods trademark. Management has also determined that it will not sell the trademark because it believes that this could potentially result in new participants entering the market, thus reducing its market share. No amounts were recorded in the balance sheet of Baked Beans for the research and development costs related to their proprietary freezing technology. The trademark has a carrying value of $2 million in Baked Beans financial statements related to costs that it incurred in purchasing the trademark.

What fair values should be recorded for the intangible assets as part of the acquisition accounting?

This question deals with two (possible) intangible assets. For each of these (i.e., the In-Process R&D and the Patent) you should provide two alternatives.

Answer 1

In process R&D :- As per US GAAP , internally developed intangible assets are recognized initially at the amount of the additional cost incurred other than those for research and Development expenditure. All the R&D expenses must be expenses as incurred and can not recognize as intangible assets. So as the FDA approval is still awaiting, it can not show any thing as intangible expenses. When the approval got from FDA, if any expenses incurred other than R&D such as legal, can be capitalized

The Patent :- Externally acquired intangible assets are initially recorded at the acquisition cost plus any additional cost such as legal fees . So they initially recorded at $2M which is the purchase cost. This initial cost will be amortized over the useful life of the patent.

The fair value of the patent is $3 M which is higher than the historical cost . But it is stated that the management has no intention to use the patent for marketing the baked beans as it intends to use its own developed brand and  It has also no plan to sell the patent .  So the use of the patent has changed significantly and adversely and as  per US GAAP, the impairment test is compulsory  . Both The future undiscounted cash flows expected from the patent and the fair value of the patent  are zero because of management's decision neither to use nor to sell the same. So the entire value of patent is to be recognized as impairment loss .  Patent will not be having any carrying amount.