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W31821
INTANGIBLE ASSET VALUATION AT LIBERTY MEDIA AND
FORMULA ONE
Andre Sanchez wrote this case under the supervision of Professor Kun Huo. The authors wrote this case solely to provide material
for class discussion and do not intend to illustrate either the effective or ineffective handling of a managerial and financial reporting
situation. All information presented in this case comes from public sources.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Our goal is to publish
materials of the highest quality; submit any errata to [email protected]. i1v2e5y5pubs
Copyright © 2023, Ivey Business School Foundation
Version: 2023-04-19
In mid-April 2022, Leo Castillo was looking for stock pitch ideas to prepare for an upcoming stock pitch
competition organized by the university’s Value Investors Club. Castillo began looking at recent trades made
by Berkshire Hathaway Inc., a company led by the famous value investor Warren Buffett. As a passionate
Formula One (F1) fan, Castillo knew that Berkshire Hathaway Inc. had recently increased its minority stake
in Liberty Media Corp.’s (Liberty Media) Series C Liberty Formula One common stock shares—known by
the acronym FWONK on the Nasdaq Stock Market—bringing the firm’s aggregate holdings up to 7.7 million
shares.1 Could FWONK stock provide the winning formula for Castillo’s stock pitch competition?
The stock had only become public in 2016 when Liberty Media acquired F1; as a result, it was important
to understand how the F1 business was reflected on Liberty Media’s financial statements. While analyzing
the balance sheet, Castillo noticed a significant balance in Liberty Media’s reported intangible assets in
2017, which had ballooned from US$1.1 billion2 to $6.1 billion year-on-year. The company’s footnotes
showed that a primary driver of this increase was the addition of the so-called “FIA Agreement” with the
sport’s governing body, the Fédération Internationale de l’Automobile (FIA), reported at $3.5 billion (net
of amortization) (see Exhibit 1).3 At the time, this amount represented 35 per cent of F1’s purchase price.
Castillo decided to find out what made this agreement so valuable, and what it might say about F1’s value
if one were to invest in its stock.
F1 BACKGROUND
F1 was owned by the Formula One Group (the Group), which held the exclusive commercial rights to the
F1 World Championship (the Championship). The Group consisted of multiple related companies
responsible for the promotion and monetization of the sport. Primary revenue streams included fees from
race promotion (hosting races), broadcasting, and advertising and sponsorship. In each case, revenue was
earned in exchange for granting or licensing rights to third parties.
The Group started in the 1970s when Bernie Ecclestone formed the Formula One Constructors’ Association
(FOCA) to protect the financial interests of racing teams. The commercial aspect of the sport led to disputes
between FOCA and the FIA. In 1997, a contract between FOCA and FIA resulted in Ecclestone and his
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companies gaining commercial rights to the sport for fourteen years in exchange for annual payments. Until
the acquisition by Liberty Media, the Group underwent a complex series of corporate restructurings
involving numerous companies, investment firms, and Ecclestone himself.
To fans, F1 was a premier class of international motor racing for open-cockpit, single-seater cars. The sport
started in 1950 and consisted of fourteen teams (known as constructors) and six races in Europe. As of
2021, the Championship had expanded to twenty-two races, known as Grand Prix, hosted in twenty
countries across multiple continents. Among the sport’s most successful drivers were Michael Schumacher,
Sebastian Vettel, and Lewis Hamilton (see Exhibit 2).
Among other motorsport championships, F1 was known for its modern technology due to the highly
advanced and complex nature of its cars. The engineering efforts accumulated over decades of
championships resulted in machines that could reach over 350 kilometres per hour and accelerate from 0–
60 miles per hour (0–97 kilometres per hour) in 2.6 seconds.4 Beyond advances in vehicle technology, F1
had also developed a deep heritage including iconic racetracks (e.g., Monaco), teams (e.g., Scuderia Ferrari
S.p.A., known as Ferrari), and the race experience (e.g., loud engine noise). Therefore, as a business, F1
faced the difficult challenge of balancing growth while maintaining its heritage.
F1’s business model was centred around its Grand Prix races. The owners of each racetrack (also known as
a circuit) were granted the right to host and promote the race for that track, which could be either private or
government owned. In 2015, the average annual fee for race for organizers hosting a Grand Prix on their
circuit and selling tickets was $31.5 million. These were typically ten-year contracts with annual fee
escalators of up to 5 per cent, making the average total cost nearly $400 million over ten years. Race
organizers were also responsible for the operational costs of running the race, such as staffing and building
grandstands; the average annual cost in 2015 was $58 million for an aggregate ten-year cost of nearly $1
billion. In addition to economic viability, the Group had to consider the quality of the racetrack, given the
track layout had a material impact on how easily cars could overtake during a race. For instance, the Abu
Dhabi Grand Prix, hosted at a $500 million complex, was consistently criticized by fans and pundits alike
for its unspectacular races.5 In addition to races, F1 also generated revenue by granting exclusive
broadcasting rights to certain networks under multi-year contracts. These included Sky Sports, ESPN, and
Channel 4 (see Exhibit 3).
LIBERTY MEDIA’S ACQUISITION OF F1
Liberty Media was a mass-media company based in Douglas County, Colorado. The company was founded
in 1991 when it was spun out of Tele-Communications, Inc.—a now-defunct US cable television provider.
Liberty Media had a long history of mergers, spin-offs, and corporate restructures, which had resulted in
numerous ownership interests in businesses within the media, communications, and entertainment
industries. Two reporting segments represented the company’s most significant investments: F1 and Sirius
XM Holdings Inc., a subsidiary broadcasting company that provided a diverse range of media content (e.g.,
music, sports, news) for a subscription fee. Liberty Media also reported a third “corporate and other”
segment that included additional investments such as Braves Holdings, LLC, which owned the Atlanta
Braves baseball team, and Live Nation Entertainment, an entertainment company that produced and
managed live entertainment events and associated ticket sales.
Liberty Media’s strategy was to invest in media and entertainment companies with sustainable business
models to generate superior returns over the long term.6 The company’s shares were organized into three
separate tracking stocks: Liberty SiriusXM Group, Formula One Group (FWONK), and Braves Group.
While each stock did not represent a distinct entity, it served to reflect the performance of the underlying
businesses owned by Liberty Media (see Exhibit 4).
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In early 2017, Liberty Media acquired the Group’s private parent company, Delta Topco Limited (Delta),
which was owned by various investment companies, F1 directors, and Ecclestone.7 The transaction price
represented an enterprise value and equity value of $8 billion and $4.4 billion, respectively.8 At closing, the
total consideration paid was $3.05 billion in cash and $1.6 billion in newly issued shares of Liberty Media
stock for a total of $4.65 billion (see Exhibit 5).9 At the time, Liberty Media’s management team identified
numerous growth opportunities within the F1 business.10
In addition to maximizing its traditional revenue streams, Liberty Media’s management team’s long-term
strategy for enhancing the business included building new revenue and promotion opportunities
(particularly in the digital sector), expanding geographically into new markets, and evolving the business
model with a partnership focus involving teams, the FIA, and F1’s commercial partners such as broadcasters
and advertisers. One of the company’s most high-profile efforts within this strategy was Netflix Inc.’s
Formula 1: Drive to Survive series, which provided viewers with an in-depth, behind-the-scenes look into
the sport and its teams. The series was a part of the management team’s focus on growing its US audience;
over 70 per cent of US viewers reported that the show had increased their interest in the sport.11
The company had also pursued other promotional strategies that deviated from its typical business model.
Most notably, Liberty Media announced that it would act as the promoter of the new Las Vegas Grand Prix,
slated to begin in 2023. Rather than receiving race promotion revenue from a third party in exchange for
granting the right to host the Grand Prix, Liberty Media would act as the promoter and operator of the race
with the intention of creating a spectacle truly worthy of a global audience.12
THE FÉDÉRATION INTERNATIONALE DE L’AUTOMOBILE
The FIA was the world’s largest governing body for motorsport. In addition to sanctioning the
Championship, the FIA also governed and organized many other global car racing events and
championships, including the FIA World Endurance Championship. The Group had an essential and
intricate relationship with the FIA. First, in 2001, the Group signed a 100-year agreement with the FIA to
obtain the commercial rights to the sport for 100 years beginning in 2011, the end of Ecclestone’s fourteenyear contract. In exchange for these rights, the Group paid a one-time fee of $313.6 million in addition to
future annual regulatory payments ($26.8 million paid in 2016) (see Exhibit 6).13 Second, the FIA was the
governing authority for F1 races, including managing and enforcing sporting rules, establishing budgets
and finances, providing technical regulations (e.g., car design), and upholding the integrity of the sport.
Aside from the commercial rights, Castillo wondered how necessary the FIA was to F1’s business model.
While many of the world’s largest car racing championships were governed by the FIA, many others were
independent or self-regulated; among these was the IndyCar Series, a popular USS single-seater, opencockpit championship series.14
Financial Regulations
One key role of the FIA related to the Concorde Agreement—a contract established in 1981 between the
Group, the FIA, and each participating team. The agreement was put into place to protect the interests of
the sport’s various stakeholders by dictating how broadcasting revenues were to be shared and how prize
money was to be distributed between teams.15 The agreement outlined various other terms, including a $200
million fee that new teams would be required to pay in their first year of racing.16 This fee protected
incumbent teams and their return on investment in developing their cars over the years since additional
entrants would result in prize money being spread more thinly. The eighth and most recent Concorde
Agreement signed in 2021 also introduced a controversial budget cap that would limit annual spending for
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Page 4
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each team to $145 million.17 The budget cap intended to close the gap between teams and their different
levels of financial backing. As expected, some larger teams opposed the idea; Ferrari even threatened to
exit the sport unless certain amendments were made to the proposed contract. Finally, the agreement
emphasized the preservation of F1’s most iconic brands. For instance, due to its historic legacy within the
sport, Ferrari benefited from the right to veto technical regulations as well as from a heritage bonus—an
additional share of prize revenue.18
Technical Regulations
F1 technical regulations were extensive and applied to nearly every aspect of the car from the engine to
aerodynamic components. For example, as of 2022, each car had to have a minimum weight of 775
kilograms and use tires supplied exclusively by Pirelli & C. S.p.A. Other rules could be extremely granular,
such as the composition of alloys used in the manufacture of certain car components.19 Prior to that, the
latest major technical revamp had taken place in 2014, introducing V6 hybrid turbo engines (replacing the
previous 2.4-litre V8 engines). The engine alone produced approximately 850 horsepower (hp) since fuel
flow was capped and engine revolutions were limited to 15,000 revolutions per minute. However, the power
unit included two hybrid systems that produced an additional 150 hp by converting the kinetic energy from
braking (MGU-K) and the car’s excess exhaust gases (MGU-H) into additional power. As a result, hybrid
cars used approximately 33 per cent less fuel over the course of a race compared to their V8 predecessors.20
The FIA’s decision to switch to hybrid engines was made to align with growing social trends toward ecofriendly vehicles. Companies like Mercedes-Benz AG invested aggressively in car design because, in
addition to improving speed and reliability on the F1 racetrack, the innovations produced by teams often
trickled down to technology seen in road vehicles. Considering that F1’s largest teams were typically
backed by original equipment manufacturers such as Mercedes and Ferrari,21 the FIA was incentivized to
ensure that technical regulations remained relevant to manufacturers’ road vehicles.
Enforcement
The FIA was also responsible for enforcing regulations through routine checks at each race. Most cars were
tested against fundamental parameters such as car weight, power unit usage, and oil consumption. One or
two vehicles would be randomly selected for more extensive testing. Penalties for infringements varied
widely depending on severity. For minor infractions, teams might have been given a grid penalty, where
the driver would start the race behind their qualified position.22 However, more costly punishments such as
the disqualification of drivers and teams also occurred. The most high-profile case in recent years was in
2019. Rivals accused Ferrari of cheating by not following rules regarding fuel flow and oil burn based on
the significant improvement in Ferrari’s power unit performance compared to the previous year. While the
FIA did not find any evidence throughout the year, a “thorough” post-season investigation resulted in an
undisclosed agreement between Ferrari and the FIA.23
Despite the FIA’s efforts to increase parity among teams with different financial backing, resources had
proven to be a deciding factor in who won the Championship. In 2020, Mercedes—which had won seven
of the last eight championships—was reported to have spent £324 million during the season and made a
profit.24 Meanwhile, the much smaller Williams Racing team was sold following weak Championship
performances.25 Although the competition of technological ingenuity was a part of F1’s ethos, the widening
gap between teams in terms of car performance in recent years had reduced on-track competition between
drivers; some pundits have cited the trend as a major issue for the sport while the Company’s strategy to
enhancing the value of F1 partly entails improving the competitiveness within the sport.26
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RECOGNITION OF COMMERCIAL RIGHTS
Given the limited insight provided by Liberty Media’s annual reports, Castillo found it difficult to reconcile
the initial payment for the rights with the much higher value reported on the balance sheet. He began looking
into Delta’s financials reported in public filings related to the initial issuance of FWONK stock.
While comparing statements, Castillo noticed that Delta’s financial statements were prepared in accordance
with the International Financial Reporting Standards and were subsequently adjusted to the US Generally
Accepted Accounting Principles to conform with Liberty Media’s financial statements (see Exhibit 7).
Castillo also noticed that prior to being acquired by Liberty Media, Delta recognized the payment of the
100-year agreement as a non-current prepaid expense with an annual amortization of approximately $3
million.27 However, as of December 31, 2016, the carrying value of the asset was $301.8 million but by the
end of the first quarter of 2017, Liberty Media was already valuing the 100-year agreement at $3.6 billion.28
Liberty Media’s acquisition had been completed in January of 2017. But how could the acquisition have
affected the supposed value of the 100-year agreement if the latter had been signed before Liberty Media
became involved?
In addition to the 100-year agreement, the company’s total prepaid expenses also included an additional
$144 million related to other contracts with the FIA and certain teams. These partly consisted of a $163
million payment made to the teams in 2013 in exchange for their guaranteed participation in the
Championship until 2020; the related annual amortization was approximately $20 million. Further, Delta
reported $150 million of non-goodwill intangible assets comprised almost entirely of “customer and
supplier relationships” acquired in 2006 with a 20-year useful life. These assets were reportedly related to
agreements pertaining to racetrack rights and the use of trademarks (see Exhibit 8 and Exhibit 9).29
Switching over to Liberty Media’s financial statements, Castillo noted that by the end of 2017, Liberty
Media reported $5.1 billion of gross intangible assets attributed to the F1 business and consisted of the FIA
Agreement ($3.6 billion) and customer relationships ($1.9 billion). The remaining weighted-average useful
lives of these assets were around thirty-five years and around twelve years, respectively. The company’s
consolidated amortization expenses also increased significantly from $168 million to $594 million from
2016 to 2017.30
DECISION
Liberty Media provided little to no insight into how it justified recognizing the 100-year agreement at such
a high dollar value. Castillo considered all that he knew about the sport and what it said about the reliability
of such a number. What factors would—and should—Liberty Media have considered when attributing a
value to an asset that was ten times higher than its original cost?
Castillo was faced with a number of questions. How should investors view these inflated values for
intangible assets such as the 100-year agreement and F1’s customer relationships? What would be their
impact on Liberty Media’s earnings and FWONK’s future stock value?
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EXHIBIT 1: FORMULA ONE DEFINITE LIFE INTANGIBLE ASSETS (IN US$ THOUSAND)
FIA Agreement
Customer relationships
Acquisition price allocated to intangible assets subject to
amortization
December 31, 2017
3,630,000
1,854,000
5,484,000
Note: FIA = Fédération Internationale de l’Automobile
Source:
Liberty
Media
Corporation,
2017
Annual
Report,
March
1,
2018,
https://d1io3yog0oux5.cloudfront.net/_d936fd1c59f00e52f8ba5d63bbb20610/libertymedia/db/2054/18904/annual_report/09d
13fa9-1674-43e3-8534-f7365557828e.pdf.
EXHIBIT 2: FORMULA ONE WORLD CHAMPIONS (2011–2021)
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Driver
Sebastian Vettel
Sebastian Vettel
Sebastian Vettel
Lewis Hamilton
Lewis Hamilton
Nico Rosberg
Lewis Hamilton
Lewis Hamilton
Lewis Hamilton
Lewis Hamilton
Max Verstappen
Nationality
German
German
German
British
British
German–Finnish
British
British
British
British
Belgian–Dutch
Constructor
Red Bull Racing
Red Bull Racing
Red Bull Racing
Mercedes
Mercedes
Mercedes
Mercedes
Mercedes
Mercedes
Mercedes
Red Bull Racing
MONACO GRAND PRIX WINNERS (2011–2021)
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2021
2022
Driver
Sebastian Vettel
Mark Webber
Nico Rosberg
Nico Rosberg
Nico Rosberg
Lewis Hamilton
Sebastian Vettel
Daniel Ricciardo
Lewis Hamilton
Max Verstappen
Sergio Pérez
Nationality
German
Australian
German–Finnish
German–Finnish
German–Finnish
British
German
Australian
British
Belgian–Dutch
Mexican
Constructor
Red Bull Racing
Red Bull Racing
Mercedes
Mercedes
Mercedes
Mercedes
Ferrari
Red Bull Racing
Mercedes
Red Bull Racing
Red Bull Racing
Source: Compiled by the case authors from “Formula One Archive 1950–2022,” Formula1.com, accessed July 22, 2022.
This document is authorized for use only by Danai Nyaungwa in TGM 517 Global Accounting (MGM SP24) taught by Aneel Iqbal, Arizona State University from Jan 2024 to Feb 2024.
For the exclusive use of D. Nyaungwa, 2024.
Page 7
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EXHIBIT 3: FORMULA ONE BUSINESS MODEL MAP
Note: FIA = Fédération Internationale de l’Automobile
Source: Created by the case authors with information from Liberty Media Corporation, 2021 Annual Report, February 25,
2022, 5, https://d1io3yog0oux5.cloudfront.net/_d936fd1c59f00e52f8ba5d63bbb20610/libertymedia/db/2054/19673/annual_
report/Liberty+Media+-+Annual+Report-Proxy+Statement+-+Bookmarked.pdf.
This document is authorized for use only by Danai Nyaungwa in TGM 517 Global Accounting (MGM SP24) taught by Aneel Iqbal, Arizona State University from Jan 2024 to Feb 2024.
For the exclusive use of D. Nyaungwa, 2024.
Page 8
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EXHIBIT 4: FORMULA ONE FINANCIAL STATEMENTS (IN US$ MILLION)
Income Statement Summary (in US$ Million)
Primary F1 revenue
Other F1 revenue
Total F1 revenue
2019
1,750
272
2,022
2020
1,029
116
1,145
2021
Cost of F1 revenue
Gross profit
Margin (%)
−1,394
628
31
–974
171
15
–1,489
647
30
Selling, general, and administrative expenses
Adjusted EBITDA
Margin (%)
–210
418
21
–174
-3
N/A
–210
437
20
Depreciation and amortization
EBIT
Margin (%)
–453
–35
N/A
–441
–444
N/A
–397
40
2
1,850
286
2,136
Balance Sheet Summary (in US$ Million)
2019
587
161
748
2020
1,684
580
2,264
Net property, plant, and equipment
Definite life intangible assets
Other non-current assets
Total non-current assets
112
4,303
6,342
10,757
124
3,883
4,920
8,927
119
3,507
5,669
9,295
Total assets
11,505
11,191
11,664
Total debt
Other liabilities
Total liabilities
5,677
587
6,264
3,759
877
4,636
3,631
1,093
4,724
Total equity
Debt/equity
Price to book value
Debt/assets
5,241
1.08
1.86
0.49
6,555
0.57
1.42
0.34
6,940
0.52
2.06
0.31
Cash and equivalents
Other current assets
Total current assets
2021
2,074
295
2,369
This document is authorized for use only by Danai Nyaungwa in TGM 517 Global Accounting (MGM SP24) taught by Aneel Iqbal, Arizona State University from Jan 2024 to Feb 2024.
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Page 9
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EXHIBIT 4 (CONTINUED)
Cash Flow Summary (in US$ Million)
2019
Cash from operations
Capex
Free cash flow
Free cash flow/EBITDA (%)
2020
294
–44
250
60
2021
–139
–21
–160
N/A
481
–17
464
106
Note: F1 = Formula One; EBIT = earnings before interest and taxes; EBITDA = earnings before interest, taxes, depreciation,
and amortization.
Source:
Liberty
Media
Corporation,
2021
Annual
Report,
February
25,
2022,
5,
https://d1io3yog0oux5.cloudfront.net/_d936fd1c59f00e52f8ba5d63bbb20610/libertymedia/db/2054/19673/annual_r
eport/Liberty+Media+-+Annual+Report-Proxy+Statement+-+Bookmarked.pdf.
EXHIBIT 5: ACQUISITION PURCHASE PRICE ALLOCATION (IN US$ MILLION)
Cash and cash equivalents
Receivables
Goodwill
Intangible assets subject to amortization
Other assets
Deferred revenue
Debt
Other liabilities assumed
Deferred tax liabilities
Total acquisition price
Price Allocation
644
136
3,956
5,484
153
–141
–4,528
–516
–490
4,698
Source:
Source:
Liberty
Media
Corporation,
2017
Annual
Report,
March
1,
2018,
https://d1io3yog0oux5.cloudfront.net/_d936fd1c59f00e52f8ba5d63bbb20610/libertymedia/db/2054/18904/annual_report/09d
13fa9-1674-43e3-8534-f7365557828e.pdf.
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Page 10
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EXHIBIT 6: DESCRIPTION OF THE 100-YEAR AGREEMENT
Under the 100-year agreement entered into by Formula 1 (F1) and the Fédération Internationale de
l’Automobile (FIA) in 2001, F1 was granted an exclusive licence with respect to all commercial rights to the
World Championship, including its trademarks, in exchange for a significant one-time fee of $313.6 million
in 2001 and annual escalating regulatory fees to the FIA. This licence, which took effect on January 1, 2011,
and expires on December 31, 2110, maintains F1’s exclusive commercial rights to the World Championship
held under previous agreements with the FIA. For 2016, F1 paid the FIA an approximate $26.8 million cash
regulatory fee.
The 100-year agreement also provides that F1 may appoint a representative to the FIA, subject to the FIA’s
approval, and that person will be a member of the FIA’s F1 Commission and World Motor Sport Council.
The FIA may terminate the 100-year agreement and F1’s exclusive licence upon a change of control of
Delta Topco Limited (Delta), unless either the FIA previously approved the transaction or the transaction
falls within one of a number of specified exceptions. F1 obtained the FIA’s approval for its acquisition by
Liberty Media under the 100-year agreement.
In addition, the FIA may terminate F1’s licence if (i) certain Delta subsidiaries party to the 100-year
agreement become insolvent; (ii) F1 fails to pay an amount due to the FIA and such non-payment is not
cured within 30 days of the FIA’s demand for payment; (iii) arbitrators declare that F1 materially breached
the 100-year agreement and F1 has not paid to the FIA certain penalties to cure such breach; or (iv) F1
changes or removes certain of the FIA’s rights without its prior consent.
Source:
Liberty
Media
Corporation,
Prospectus
Supplement,
May
18,
2017,
https://www.sec.gov/Archives/edgar/data/1560385/000104746917003510/a2232217z424b2.htm#bg44601a_main_toc.
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Page 11
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EXHIBIT 7: ACCOUNTING FOR INTANGIBLE ASSETS
US GAAP
IFRS-16
Definition
An identifiable asset that is non-monetary and without physical substance. To be
considered identifiable, the asset must (i) be separable (i.e., it can be isolated
from the business and transferred to a separate entity); or (ii) stem from a legal or
contractual right. In addition, the asset must be under the control of the company
and provide an economic benefit.
Initial
recognition
Can be the result of one of three primary events: (i) Individually purchased
(customer relationships, distribution rights, etc.); (ii) indirectly purchased through
an acquisition; or (iii) internally generated.
Initial
measurement
Varies depending on the context.
Useful life
May have a definite or indefinite useful life. This is determined by evaluating the
period in which cash flow can expected to be generated. If there is no foreseeable
limit to this period, then the intangible asset will have an indefinite useful life. For
definite intangible assets, the underlying elements that impact their useful life can
be numerous including legal, competitive, economic, and contractual factors.
Therefore, judgment must be used when determining the useful life of an
intangible asset.
Revaluation
Not allowed.
Must always be initially measured at
cost.
Cost model or revaluation model.
Under the cost model, the total cost is
amortized over the useful life of the
asset. The amortization method used
(i.e., straight-line, declining balance, or
units of production method) should
align with the timing of the expected
economic benefit generated by the
asset. Under the revaluation model,
intangible assets are adjusted to their
fair value at the end of each reporting
period. An increase in value results in
a gain recorded in other
comprehensive income (OCI), an
equity account on the balance sheet.
A decrease in value results in an
expense on the income statement,
thereby reducing equity through
retained earnings. If a previous gain
was recorded in OCI, a decrease in
fair value—up to the amount of the
initial gain—is first applied to OCI
before being expensed. This rule also
applies vice versa.
This document is authorized for use only by Danai Nyaungwa in TGM 517 Global Accounting (MGM SP24) taught by Aneel Iqbal, Arizona State University from Jan 2024 to Feb 2024.
For the exclusive use of D. Nyaungwa, 2024.
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EXHIBIT 7: (CONTINUED)
US GAAP
IFRS-16
Impairment
(indefinite life)
Annually tested.
Impairment
(definite life)
Must be impaired if its carrying value
Similar to US GAAP with certain
exceeds its fair value. This test is
differences. First, testing is done at the
performed at the asset group level—“the individual asset level unless it does
lowest level for which identifiable cash
not generate cash flows independently
flows are largely independent of the cash of other assets or asset groups. In the
flows of other groups of assets and
latter case, testing is done at the cashliabilities.” Once the asset group is
generating unit level. For an
identified, the carrying value of the asset impairment to be recorded, the
group must be determined to be noncarrying value must be greater than
recoverable and greater than its fair
the recoverable amount. This is
value. “Non-recoverable” means that the defined as the greater of (i) the fair
aggregate undiscounted future cash flows value of the asset (less selling costs)
generated by the asset are less than its
and (ii) the present value of future
carrying value. Finally, if the fair value is cash flows expected to be generated
calculated to be less than the carrying
(value in use). The impairment amount
amount, then the difference is expensed is equal to the difference between the
and reduced from the asset on the
carrying value and the recoverable
balance sheet.
amount. Unlike for US GAAP,
impairments may be reversed under
certain conditions.
Notes: GAAP = Generally accepted accounting principles; IFRS = international financial reporting standards
Source: Richard Stuart, “U.S. GAAP vs. IFRS: Impairment of Long-Lived Assets,” RSM, February 2020,
https://rsmus.com/content/dam/rsm/insights/financial-reporting/us-gaap-vs-ifrscomparisons/ifrs_impairment_of_long_lived_assets.pdf.coredownload.inline.png; “Impairment of Goodwill, Tangible and
Intangible Assets,” BDO, June 2020, https://www.bdo.com/getmedia/a1612d99-efa1-4103-9039-4a56e979f26c/ASSR_IFRSImpairment-of-Goodwill_Alert.pdf?ext=.pdf; “IFRS Compared to US GAAP: An Overview,” KPMG, December 2015,
https://assets.kpmg/content/dam/kpmg/pdf/2015/12/US-GAAP-comparison-2015-overview.pdf; David Fraser, Note on
Accounting for Intangible Assets (London, ON: Ivey Publishing, 2013). Available from Ivey Publishing, product no. 9B13B019.
This document is authorized for use only by Danai Nyaungwa in TGM 517 Global Accounting (MGM SP24) taught by Aneel Iqbal, Arizona State University from Jan 2024 to Feb 2024.
For the exclusive use of D. Nyaungwa, 2024.
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EXHIBIT 8: DELTA—PREPAYMENTS (IN US$ MILLION)
December 31, 2016
Non-current
Current
100-ye
