Lesson: Capitalization of Costs

Instructor: Nick Palazzolo

In this lesson, delve into the intricacies of capitalizing costs with Nick Palazzolo, CPA, as he unravels the procedures for recording intangible assets obtained through arm's length transactions. By exploring scenarios like purchasing a company or incurring liabilities, he clearly delineates what counts as capitalizable costs, emphasizing the importance of the fair value of consideration given against the property acquired. Nick explains that understanding equity versus cost outlay is crucial, highlighting that while goodwill can emerge from acquisitions, it shouldn't be included in the cost of identifiable intangible assets. Get ready to engage with practical examples that shine a light on the key components of capitalization and how they feature prominently in problem-solving within accounting practices.

Updated: Oct. 20, 2021 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Capitalization of costs. So a company should record the cost of intangible assets acquired from other enterprises or individuals in an arm's length transaction as assets. Meaning you can't just create goodwill with your own subsidiary. That's not an arm's length transaction. Arm's length refers to a non-related party.

Because again, if we could just constantly pump out these assets with ourselves that's a little suspicious, right? Not too ethical there. Maybe not ethical, but just not true. Not fair. So cost is measured by the amount of cash dispersed or the fair value of other assets distributed.

So if we're buying a $900,000 company and we spend a million dollars or we give them a million dollars in stock, that's the fair value of the assets given, that is going to give us $100,000 of goodwill. So the amount of cash dispersed or fair value of other assets distributed, maybe we give them a million dollars in land. So what about the present value of amounts to be paid for liabilities incurred? So that is taking into account the liabilities, right? Because when you're buying a company you're not only buying its assets but you're also buying its liabilities.

So that's the net assets or the equity and also the fair value consideration received for stock issued. So taking into account basically what are you giving up versus what are you getting? So all these factors go into account. This will be the most important, right? Just determining the equity, how much you paid for it, decently important as well.

And I'd say less important. But take these all factors into account. So the cost may be determined by the fair value of the consideration given or by the fair value of the property acquired. Whichever is more clearly evident, again, depends on

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Intangibles, R&D and Software Costs, & Business Combinations

Module: 4 Concepts, 42 Lessons

Intangibles Overview and Objectives

2:55

Tangible Versus Intangible Assets

1:38

Classification of Intangible Assets

3:30

Valuation of Intangible Assets