GASB No. 51 Accounting and Financial Reporting for Intangible Assets

1. GASB No. 51Accounting and Financial Reporting for Intangible Assets Helen Y. Painter CPA, Partner Purvis Gray & Company LLP Ocala, Florida

2. Effective Date • For periods beginning after June 15, 2009 • Applicable for June 30, 2010 and September 30, 2010 fiscal year ends • Plan NOW during interim field work dates and/or discuss with clients

3. Year of Implementation Requirements • Phase I and II (GASB 34) governments-retroactive reporting required for assets acquired after June 30, 1980 • Phase III governments-Encouraged but not required • Retroactive reporting NOT required but permitted-intangible assets with indefinite useful lives and those internally generated

4. Statement 51 Amends … • Statement 34, para 19-21 • Statement 42, paras. 9e, 16, and 18

5. Intangible Assets EXAMPLES • Easements, Right-of-ways • Water Rights • Timber Rights • Patents, Trademarks • Computer Software

6. Big Question?? • Are they and when are they Capital Assets for financial reporting purposes • GASB found since implementation of 34-Inconsistencies in accounting and financial reporting

7. Objective of StandardConsistency • Recognition • Initial measurement • Amortization

8. How can the intangible Asset be Obtained? • Purchased • Licensed • Non-exchange transactions (donations) • Internally –generated (computer software)

9. CLASSIFICATION • Unless specifically excluded …. ALL INTANGIBLE ASSETS ARE CLASSIFIED AS CAPITAL ASSETS • All authoritative guidance for accounting and reporting for capital assets should be applied to intangible assets • Recognition • Measurement • Depreciation (termed amortization for intangible assets) • Impairment • Presentation • Disclosures

10. Recognition • Must be included in the statement of net assets only if it is identifiable- • Identifiable when either of the following conditions are met: • Asset is separable-capable of being separated or divided from the government and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract • Asset arises from contractual or legal right, regardless of whether these rights are transferable or separable from the entity or from other rights and obligations

11. Definition of Intangible Asset An Asset that possesses all of the following: • Lack of physical substance-An asset may be contained in or an item with physical substance, for example, a compact disc in the case of computer software. An asset also may be closely associated with another item that has physical substance i.e. underlying land of a right-of-way easement.

12. Definition of Intangible Asset (cont) • Nonfinancial nature-not in a monetary form similar to cash and investment securities and it represents neither a claim or right to assets in a monetary form similar to receivables, nor a prepayment for goods or services • Initial useful life-extending beyond a single reporting period

13. Exceptions to intangible assets • Assets acquired or created primarily for the purpose of directly obtaining income or profit • Assets resulting from capital lease transactions reported by lessees, • Goodwill created through the combination of government and another entity

14. Internally Generated Intangible Assets (IGIA) • Created or produced by the government OR an entity contracted by the government • If acquired from a third party but require incremental effort to begin to achieve their expected level of service capacity

15. When to Capitalize IGIA • Outlays incurred related to the development of IGIA that is identifiable should be capitalized only upon the occurrence of all of the following: • Determination of the specific objective and the project and nature of the service capacity • Demonstration of the technical feasibility for completing the project so that the IA will provide its expected service capacity • Demonstration of the current intention, ability, and presence of effort to complete or continue development of the intangible asset

16. When to expense (IGIA) • Outlays incurred prior to meeting the prior 3 occurrences should be expensed as incurred

17. Internally Generated Computer Software (IGCS) • When considered internally generated- • Developed in-house government’s personnel • Developed by a third-party contractor on behalf of government • Purchased from a vendor and substantially modified

18. Stages of developing and installing IGCS • Preliminary Project Stage-includes the conceptual formulation and evaluation of alternatives, determination of the existence of technology, and final selection of alternatives • Application Development Stage-includes the design of chosen path, software configuration and software interfaces, coding, installation to hardware, testing including the parallel processing phase • Post-Implementation /Operation Stage-includes application training and software maintenance

19. Stages of developing and installing IGCS (cont.) • Data conversion –application development stage if necessary to make the computer software operational-otherwise, should be considered post-implementation/operation stage

20. When to Capitalize • Same criteria as IGIA • Thus preliminary project stage activities should be expensed • Assumes that management implicitly or explicitly authorizes and commits to funding

21. When to Capitalize(cont.) • Outlays in the application development stage-capitalize until substantially complete or operational • Outlays in the post-implementation/operation stage –expensed

22. IGCS-Capitalization • If software is already in operation, capitalization occurs at any time during the following: • Increase in the functionality • Increase in the efficiency and or level of service • Extension of the estimated useful life of the software

23. Specific Amortization Issues • Items to consider- • Useful live arising from contractual or other legal rights should not exceed the period to which the service capacity • IA may have an indefinite useful life if no legal contractual, regulatory, factors that limit the useful life • EX. Permanent right-of-way easement • Do NOT amortize

24. Impairment Considers • Consider indicators in para 9, Statement 42 • Stoppage of development of computer software • Report at the lower of carrying value or fair value

25. Reporting Considerations • Report outlays as expenditures in financial statements using the current financial resources measurement focus (governmental) • Apply statement retroactively by restating financial statements • If restatement not practical, the cumulative effect should be reported as a restatement of beginning net assets or fund balance • Disclose nature of restatement and its effect

26. Reporting Considerations • 1st Year of implementation • Nature of restatement and its effect • Reason for not restating prior periods presented should be explained

27. Disclosures • Include any necessary information in Summary of Accounting Policies • i.e. Capitalization policy, estimation of useful life, amortization periods

28. Examples and Q & A • Great examples in Appendix C of Standard • Q & A located in 2009-2010 GASB Implementation Guide-Chapter Z, Look for Q & A related to Statement No. 51