Stephen J. Cosgrove is the Former Vice President. Corporate Controller, and Chief Accounting Officer of Johnson & Johnson, a leading manufacturer of pharmaceuticals, medical devices, and consumer products. He has served on the Financial Accounting Standards Advisory Council and is currently a member of the Financial Executives International Committee on Corporate Reporting.
1 Why are intangible assets one of the most important economic resources on Johnson & Johnson’s balance sheet, and why should students understand how to report these assets? Intangible assets comprise approximately 30% of total assets on the Johnson & Johnson balance sheet. These assets are important economic resources, capable of generating future value for shareholders They include the
Students who understand how to measure, value, and report intangible assets will be positioned to assist their future employers to communicate the value of these assets to the investor community and customers as well as comply with accounting and tax regulations.
2 How do you measure the economic benefits of an intangible asset?
Johnson & Johnson uses the direct or indirect contribution to cash flows to measure the economic benefits of our intangible assets. We make risk-adjusted estimates of the present value of the
3 In-Process Research and Development (R&D) is recorded as an asset upon acquisition of another company. How does a company like Johnson & Johnson measure the potential success of a research and development project?
In-Process R&D assets have a wide range of risk of success associated with individual projects or potential products. In particular, the probability of success of an early-stage pharmaceutical compound can be extremely low. This risk is taken into account when determining the value of each potential opportunity. Factors used to determine risk include success of similar compounds or products, results of clinical studies, and how far a project has progressed through the regulatory process. Ultimate product approval and introduction to the marketplace determine whether the associated intangible asset is amortized over the remaining useful life or expensed if unapproved or abandoned.
4 What factors do you consider when looking for a possible impairment of a capitalized indefinite-life intangible asset?
Johnson & Johnson performs intangible asset reviews on an ongoing basis, especially if any significant factor changes. Some of the factors we consider are management intentions as to the use and funding of the assets, whether there have been any significant changes in the assumptions used in the initial valuation, and any delays in clinical trials or product launches. Other common triggers include a significant decrease in the market price of the asset or losses associated with the use of the asset.
5 Under current U.S. GAAP, firms capitalize a portion of software development costs as an intangible asset while expensing all internally generated research and development costs. Can you justify this divergence in practice?
Johnson & Johnson capitalizes certain internal costs associated with software development, such as coding and testing costs incurred during the projects’ application development phase. These software development costs meet the essential characteristics of an asset, because they have probable future economic benefit. For Johnson & Johnson these costs are typically not significant and generally incurred quickly, and the time between capitalization and potential write-off tends to be short.
The opposite is true for internally developed R&D such as the costs of discovery, testing, and developing new products. All internal research and development costs are expensed as incurred. R&D costs can span several years, the costs can be significant, and the probability of successful approval of any one project is low based on industry history. These costs do not meet the definition of an asset, primarily due to the uncertainty of receiving future benefits.
Discussion Questions
1. What are some of the judgments used in estimating the future economic benefit (specifically, measuring the value) of intangible assets?
2 Compare and contrast the accounting for research and development expenditures under U.S. GAAP and IFRS, including the rationale used to justify each accounting treatment. (Do not address in-process R&D.)
Answer to Problem 11.1Q
Tangible assets and definite life intangible assets are required to have finite life to be classified as long term operating assets but not infinite life intangible assets.
Explanation of Solution
Tangible Assets:
The assets which exist in physical form and include both fixed and current assets are known as tangible assets.
Intangible Assets:
The assets which do not exist in physical form and includes patents, copy rights and goodwill are known as intangible assets.
- Intangible assets need not to have finite life to be classified as long term operating assets but, to be classified as long term operating assets.
- Definite life intangible assets and tangible fixed assets must have finite lives.
- Various factors, like IRS guidelines, industry standards, manufacturer’s specification, can be used to determine useful life of all the tangible assets except land.
- Various legal, contractual, legal and competitive factors help to determine the useful life of definite life intangible assets.
- No identifiable legal, contractual, or economic factors limit revenue generating term of indefinite life intangible assets.
- Tangible assets and definite life intangible assets required to have finite life because tangible assets tend to depreciate and definite life intangible assets tend to amortize.
Tangible assets and definite life intangible assets are required to have finite life to be classified as long term operating assets.
Want to see more full solutions like this?
Chapter 11 Solutions
Intermediate Accounting
- Suresh is the sole professional accountant for a small business, LCU Ltd Suresh's key task is to prepare management miormation on the results of the company's operation. An external consultant hav analysed Suresh's job and identified four different roles that he undertakes. Suresh is unsure about how his key task fits into these rolesIn preparing this management information Suresh is undertaking the role ofOA Monitoring financial control processes OB Measuring performanceOC. Processing transactionsOD. Managing riskarrow_forwardAssume that you have finished your MBA program and have applied for a position in the FinancialAccounting Department of a large multinational company. The company is struggling with itsaccounting reporting matters and several accounting reports are under regulatory scrutiny. In theinterview board, the recruitment committee members have asked you the following questions. i. What have you learnt in the BUS 505 course relating to financial accounting?arrow_forwardJames Henderson is the president of York Athletics, a producer of hats and jerseys and other accessories for fans of several professional sports teams. Imagine you are the accountant in charge of all accounting functions at Sportswear. She reviewed the most recent financial statements, and noticed that the company did not do as well as they had planned. She wanted to look more closely at the profitability of each of our products to determine exactly what happened, but realized that she did not have this information in the financial statements. According to the accountant, financial statements are prepared according to the Generally Accepted Accounting Principles (GAAP) and do not require their company to disclose profitability by product, and therefore did not prefer not to make this information public. Accordingly, product profitability information stays in-house and is prepared by the company’s managerial accountant. It is common among companies like York Athletics to prefer not to…arrow_forward
- Why does financial accounting have a positive impact on our society? a. It entails a detailed transaction record necessary for filing taxes with the Internal Revenue Service (IRS).b. It allows investors and creditors to redirect their resources to successful companies and away from unsuccessful companies.c. It prevents competitors from being able to steal the company’s customers.d. It provides a system of useful internal reports for management decision making.arrow_forwardUse the internet to research one manufacturing, one retail (or merchandising), and one service business. For each business, describe the following: A. the primary purpose of the entity B. the types of activities that accountants would record (hint: what is the source of the business funding, and what costs might the business have?) C. the types of decisions that might be made in this organization and how financial and nonfinancial information might help the decision-making processarrow_forwardWhy Does It Matter? ECOTOUR EXPEDITIONS, INC., Jamestown, Rhode Island You probably have never imagined the possibility of being an accountant who could have a direct impact on improving global ecosystems. Accountants who work for Ecotour Expeditions, Inc., an ecotourism company, might manage accounting details for guest air travel and accommodations, tour guide compensation, expedition revenue, and a variety of expenses. What type of accounting transactions would Ecotour Expeditions have? List 3 to 4 transactions and then record the journal entry for each transaction. Example: Purchase safari jeep with cash, 42,500. Safari Jeep42,500 Cash42,500arrow_forward
- Role of controller, role of chief financial officer. George Jimenez is the controller at Balkin Electronics, a manufacturer of devices for the computer industry. The company may promote him to chief financial officer. In this table, indicate which executive is primarily responsible for each activity. Activity Controller CFO Managing the company’s long-term investments Presenting the financial statements to the board of directors Strategic review of different lines of businesses Budgeting funds for a plant upgrade Managing accounts receivable Negotiating fees with auditors Assessing profitability of various products Evaluating the costs and benefits of a new product design Based on this table and your understanding of the two roles, what types of training or experience will George find most useful for the CFO position?arrow_forwardMegaCorp is a multinational company operating in various countries, engaging in diverse business activities, including manufacturing, retail, and services. Due to its complex structure and geographical reach, MegaCorp faces numerous challenges in financial reporting and accounting. Discuss five significant accounting challenges that MegaCorp might encounter and explain how it can address these challenges to ensure accurate and transparent financial reporting.arrow_forwardAssume that you have finished your MBA program and have applied for a position in the FinancialAccounting Department of a large multinational company. The company is struggling with itsaccounting reporting matters and several accounting reports are under regulatory scrutiny. In theinterview board, the recruitment committee members have asked you the following questions. How can you contribute the Financial Accounting Department of this company if youare recruited?arrow_forward
- James Madison was brought in as assistant to Computron’s chairman, who had the task of getting the company back into a sound financial position. Madison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions to take. Your assignment is to help her answer the following questions, using the recent and projected financial information shown next. Provide clear explanations, not yes or no answers. Use the extended DuPont equation to provide a summary and overview of Computron's projected financial condition. What are the firm's major strengths and weaknesses?arrow_forwardWhich of the following is a mechanical aspect of accounting? Select one: a. Analyzing the transactions preparatory to the recording process b. Designing the accounting system c. Reviewing the effectiveness of the internal control procedures d. Preparation of the financial budget Which of the following statement is not true? Select one: a. A non-accounting graduate may work as a bookkeeper or accountant of a business enterprise. b. A non-CPA may be engaged in public accounting. c. To be a good accountant, one must have mastery of mathematics. d. A non-CPA may be the chief accountant of a business enterprise. The area of accounting that relates to providing audit, tax, and consulting services to clients. Select one: a. General managers b. Public accounting c. Incorporators d. Private accountingarrow_forwardABC Corporation is a global conglomerate operating in various industries. As the financial controller of the company, you are responsible for ensuring accurate accounting for current liabilities, provisions, and contingencies. Discuss the challenges and complexities you may encounter in properly accounting for these items and the strategies you would implement to address them effectively.arrow_forward
- Century 21 Accounting Multicolumn JournalAccountingISBN:9781337679503Author:GilbertsonPublisher:CengageCollege Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College Pub
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College