 and welcome to the session in which we would look at intangibles and how are they treated during an acquisition. In other words, when we buy another company or when we combine with another company, what do we do with the intangibles? Now simply put, what we do with them is transfer the intangibles, transfer the intangible from the subsidiary to the parent company during the consolidation or if we're combining, we transfer the intangibles. That's the general rule. Now, what define an intangible? That's important. Well, the intangible arises from either contractual or other legal rights. For example, you have the right to conduct business in a specific geographical area. That's a right. That's an intangible right. And is the intangible asset capable of being sold or otherwise separated from the acquire enterprise? Simply put, can you account for it separately? Can you sell it separately? Simply put, if you can do so, that's an intangible. And this is an example of many intangibles that we deal with. Now, intangibles are growing on a daily basis because of the technology. For example, databases are considered intangibles and patent and technology. There are many intangibles out there. Some are marketing related. Some are customer related. Some are artistic, contract based, technology based. So especially the technology based, it's constantly growing. For example, how you swipe the phone to open your app or to open your phone. That's considered an intangible asset and there was a lot of fight between Apple and Google about who created this using your finger to swipe the phone. So all of these are considered in a sense intangible. Specifically, we're going to be dealing with two intangibles that we have to be aware of that gives us special circumstances that we have to deal with because we talked about intangibles before in the prior session when we combined the two companies. We said we just allocate any access of the fair value to assets not identifiable assets. The question becomes, what do we do if we have a pre-existing goodwill on the subsidiaries balance sheet? Or if we have what's called in-process RND or IPR-ND. This is basically the rules have changed recently. So that's why we have to treat those two concepts separately so you are aware of the rules. Now this topic is covered in advanced accounting as well as the CPA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website farhatlectures.com. No, I don't replace your CPA review course. I am a useful addition. I can help you along your CPA review course. My courses are designed to parallel, to mirror image your course. I will be able to help you. Your risk is one month of subscription. If you want to try it out, your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have resources for other courses as well. Please take a look. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So we talked about intangibles, what constituted intangibles. Now we're going to dig deep into pre-existing goodwill. Now I hope you know what a goodwill is. Goodwill is when you buy another company and you pay above their book value. Well, let's assume you bought a company for $10,000. Their book value was $6,000. Therefore, you paid $4,000 in access of the book value. And just to keep it simple, you could not identify any assets to allocate this, any undervalued asset to allocate this $4,000 too because you paid $4,000 more than the book value. When I say the book value, fair value, the fair value of the book value, then you would allocate this to goodwill. And if you don't know what goodwill is, please see the prior recording. So what happened when you buy a company and the prior company has a goodwill? In other words, the prior company has goodwill. Well, in terms of combination, if you're doing a combination, the new owner simply ignores the carrying amount. And if any pre-existing goodwill, just ignore it. You just ignore it. The acquiring firm simply record any new goodwill along with the identifiable assets and ignores the acquired prior goodwill. So you simply ignore it. When you do the computation, you don't take into account the existing goodwill. And the logic is what you are paying for should include their goodwill in that sense. Now, what happened if you maintain separate legal existence? In other words, you're going to be consolidating every year. Pre-existing goodwill must be eliminated. So if you have any pre-existing goodwill, you cannot bring that pre-existing goodwill to the consolidated financial statement. The parent company effectively reallocate the pre-existing goodwill via a credit in the consolidated worksheet. And let's take a look at an example. Just know we have to eliminate the old goodwill when we consolidate because we're keeping two separate records. Let's assume the subsidiary have an existing goodwill of $5,000 on its books. And also, the sub has a trademark that's undervalued by 4,000. So in the parent company, based on our computation, recognize the new goodwill of 3,000. So the old goodwill has to be gone. The only thing that's left is the new goodwill. Therefore, we're going to debit the new goodwill, 3,000. We're going to debit the trademark because it's undervalued. We're going to credit the old goodwill, the sub, 5,000 to get rid of this. And the difference will be investment in stone will reduce our investment for the difference between those two. Now, bear in mind that the parent company first, when they do the allocation, they allocate their assets to identifiable assets and liabilities. Then if there's any access, this is any access remaining after recognizing fair value of the net identifiable asset, will go to the goodwill. In-process research and development. What is this in-process research and development? In what industry does it get involved? Usually in pharmaceutical and high-tech. Well, you're buying a company and they have a product and process, like a cure for COVID, right? You bought them, but it's not done. They are manufacturing a pill. They are researching a pill to cure COVID. Let's assume that's the case. Now, we have the vaccine. So now we need a pill to cure COVID in case you get sick. So what you have is IP in-process research and development. Well, the current accounting standard require that you have to value this IPRND as an asset. Now, bear in mind, you used to expense this, but again, be careful. It's now, it's an asset. Initially, you would recognize this asset on the books and you will assume it has an indefinite asset, indefinite life. What does that mean? It means it's not subject to amortization. It gets tested for impairment every year because it has an indefinite life, indefinite life get tested for impairment until the project, whether it's complete. Now, we turn it into an asset. You know, once we register this asset, whatever the rules are for that asset, or if it's abandoned, it's gone. It's zeroed out. It's no longer exist. And remember that any additional in-i-n-p in-process research and development cost incurred, it will get expensed. Any additional one is because we expense RND. But when you buy the company, you have to find out what's the IPRND as of that date. Make it an asset, but any additional cost, it's going to be expensed. Now, this is basically an overview of these rules. These rules are a little bit more advanced or specific. Nevertheless, you might have to know them for the CPA exam and definitely for an advanced accounting course. Once again, I don't replace your CPA review course. What I can be is a useful addition to your CPA review course. I can help you understand the material better. And by doing so, by doing so, I can give you the knowledge needed to pass the exam. Okay? And that's how I can help you. Your risk is one month of subscription. Your potential gain is passing the exam. Study hard. Stay motivated. It's worth it to pass the CPA exam. Good luck.