12 Intangible Assets

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Intermediate

Financial Accounting I

Intangible Assets


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Intangible Assets 2

Chapter Outline

Definition and common types ofintangible assets

Valuation and costs of intangibles

Accounting for finite-life intangibles andintangibles with indefinite lives. Accounting for patents, copyrights,

franchise and licenses, trade names and

trademarks, and start-up costs. Accounting for !D and computer

software costs.

Accounting for goodwill


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Intangible Assets "

Definition Of Intangible Assets

Assets --

a. with future economic benefits,

b. no physical substance,

c. with high degree of uncertaintyconcerning the future benefit.


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Intangible Assets #

Common Types of Intangibles

$atents, copyrights, franchises,start-up costs, trade names,

trademarks, goodwill etc..


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Intangible Assets %

Valuation of Intangibles

Intangibles are recorded at cost andare also reported at cost at the end ofan accounting period.

Intangibles with limited life are sub&ectto amorti'ation and possibleimpairment test.

Intangibles with indefinite life are onlysub&ect to impairment test at least

annually.


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Intangible Assets (

Costs of Intangibles

)osts of Intangibles include ac*uisitioncosts plus any other e+pendituresnecessary to make the intangibles ready

for the intended uses i.e., purchase price,legal fees, filing fees etc. not includinginternal !D.

/ssentially, the accounting treatment ofvaluation for intangibles closely parallels

that followed by tangible assets.


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Examples

1. Issuance of stock to ac*uire intangibles.

2. ump-sum purchase of intangibles. )osts will be allocated in accordance

with the fair market value of each

individual intangible.



Intangibles Assets with Finite lives

Patents24 years, copyrightsthe lifeof the creator plus 04 years, franchiseand license the contractual life.

5he costs are sub&ected to amorti'ationa process of cost allocation over the

shorter of the legal or useful life, not toe+ceed #4 years.



Amortization of Intangibles

5he impairment test needed only whenevents indicate that the book value maynot be recoverable.

Amorti'ation 7ethod8 9traight-linemethod.

:ther method can be applied if it is moreappropriate than the 9- method.

esidual value8 ;sually 'ero.



Amortization of Intangibles !ont"#$



Intangibles Assets with In"efinite%ives 5rade names, trademarks, goodwill, in-

process !D.

5he costs are notsub&ect toamorti'ation.

Impairment test is re*uired at least

annually.



'atents

=ranted by the ;.9. $atent and5rademark :ffice for a period of 24

years. A patent gives the holder the e+clusive

right to produce, use and sell a product

or process without interference orinfringement from others.


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'atents !ont"#$

)ost of patent8 If purchased from aninventor, the cost will include thepurchase price plus any legal fees to

successfully protect the patent.

In addition, any legal fees occur after the

ac*uisition of a patent whichsuccessfully defend the right of thepatent should also be capitali'ed.


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'atents !ont"#$

5he cost of a patent should beamorti'ed over the legal life or the usefullife, whichever is shorter.


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'atents !ont"#$


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'atents !ont"#$

If events indicate the book value of a patentmay not be recoverable, an impairment testis re*uired see )hapter 11 for details

If a patent becomes worthless, the net valueof the patent should be written off as loss.

If a patent is internally developed, no cost

can be capitali'ed. 7ost of the research and development

!D costs are e+pensed.



(#Copyrights

A federally granted right to authors,sculptors, painters, and other artists for

their creations. A copyright is granted for the life of the

creator plus 04 years.

It gives the creator and heirs ane+clusive right to reproduce and sellthe artistic work or published work.



Copyrights !ont"#$

If purchased, the cost includes thepurchase price plus any legal fees.

If developed by the owner the creator,no cost can be capitali'ed.

Amorti'ation8 9traight-line method or aunit-of-production method.

Impairment test needed only if eventsindicate that book value may not berecoverable.



)# Fran!hise * %i!ense

A franchise is a contractual agreementunder which the franchiser grants thefranchisee the right to sell certain products

or service or to use certain trade names ortrademarks.

A license is a contractual agreementbetween a governmental body i.e., city,state, etc. and a private enterprise to usepublic property to provide services.



Fran!hise * %i!ense !ont"#$

)osts8 >ranchise fees plus any legalfees should be capitali'ed.

Amorti'ation8 over the shorter of thecontractual life or the useful life, not toe+ceed #4 years.

Impairment test is needed only if eventsindicate that the book value may not be

recoverable.



+# Tra"emar,s * Tra"e -ames

A word, a phrase, or a symbol thatdistinguishes a product or an enterprisefrom another i.e., company names,?/:?,@

)ost8 9imilar to that of copyrights.



Tra"emar,s * Tra"e -ames ife8 register at the ;9 $atent :ffice for

14 years life. 5he registration can berenewed every 14 years for unlimited

times. Amorti'ation8 no amorti'ation necessary.

Impairment test is re*uired at leastannually.


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Intangible Assets 2"

.# /tart01p Costs in!lu"ing OrganizationCosts$ 9tart-up costs8 Any costs incurred for the

preparation of introducing a new product ornew service or start business in a new

territory. :rg. )osts8 )osts associated with the

formation of a corporation including fees to

underwriters for stock issuance, legal fees,promotional e+penditures, etc. 5hese costs should be expensed as

incurred.


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Intangible Assets 2#

2# 3esear!h an" Development 3*D$

$rior to 9>A9 2 effective in 160#, thepractice was to either e+pense or

capitali'e !D related e+penditures. 9>A9 2 re*uires to e+pense and

disclose all !D costs if the results of

!D are for internal use.


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Intangible Assets 2%

2# 3esear!h an" Development

3*D$ !D costs include salaries of personnelinvolved in !D, costs of materials used,e*uipments, facilities and intangibles used

in !D activities. If e*uipment has an alternative usage,

the e*uip. should be capitali'edand onlythe depreciation e+pense will be includedin the !D e+pense.


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3*D4 An Example

)ash e+penditures related to the !D are asfollows8

!D salaries and wages 144,444

!D material !supplies used %4,444 !D e*uip. purchasedB 124,444

$ayments to others for service

performed related to !D "4,444 $atent filing and legal fees

for completed pro&ect 2%,444

Intangible Assets 2(


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3*D4 An Example !ont"#$

B5he e*uipment purchased will be used inother pro&ects and the depreciation on thee*uipment in 2443 was 14,444.

!D e+penses include the followings8 !D salary8 144,444 !D material8

%4,444 depre. /+pense8 14,444

payments to others8 "4,444 . 5he following e+penditures are capitali'ed8 /*uipment8 124,444 $atent8 2%,444.

Intangible Assets 20


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3 * D Contra!ts )osts of !D performed under

contracts for others are capitali'ed asinventory or receivable.

Income from these contracts can berecogni'ed based on percentage-of

completion or complete contractmethod as discussed for the long-termconstruction contracts.


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'ur!hase" 3*D

Chen ac*uiring another company, thepurchase price is allocated to tangible

assets, intangibles developedtechnology and in-process R&D.

5he remaining will be the goodwill.

5he in-process !D is e+pensed priorto 2446.


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Intangible Assets "4

'ur!hase" 3*D Cont"#$

5he fair value of in-process !D iscapitali'ed as indefinite-life intangible

assetfor business ac*uisition made infiscal years beginning on or after121%2443 9>A9 1#1 revised.

5he capitali'ed in-process !D shouldnotbe amorti'ed but is sub&ect toimpairment test.


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International Finan!ial 3eporting/tan"ar"s 5 3*D IA/ )6$ Researche+penditures are e+penses

as incurred.

Development e+penditures meetcertain criteria i.e., development costscan be measured , the product istechnically and commercially feasible

and the economic benefits areprobable are capitali'ed as anintangible asset.



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7# Computer /oftware Costs

)omputer software costs including planning,designing, coding, testing, documentationand preparation of training materials.

/+pense most of the costs if the software isto be sold.

9>A9 3( re*uires these costs be e+pensedas ! D e+penses prior to theestablishment of technological feasibility ofthe software.


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Intangible Assets ""

Costs Asso!iate" 8ith a /oftware

)osts occurred after the establishmentof technological feasibility but before

the software is ready for general releaseare capitali'ed as an intangible asset.

)osts occurred after the software is

ready for general release andproduction are recogni'ed as producecosts will be e+pensed as )=9 later.


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Intangible Assets "#

6# 9oo"will

)annot be separated from the business.

)an only be recogni'ed if the wholebusiness was purchased and thepurchase price is greater than the

market value of the net assets i.e.,market value of assets market valueof liabilities.


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Intangible Assets "%

Fa!tors Contribute to 9oo"will

9uperior management team.

:utstanding sales organi'ation.

>avorable ta+ condition.

/ffective advertising.

=ood labor relations.

:utstanding credit rating.


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Intangible Assets "(

:etho"s of :easuring 9oo"will

5heoretically, estimate the value of eachfactor which contributes to the goodwill notpractical.

5here are two alternatives used inmeasuring goodwill8

a. 7aster valuation approach.b. )apitali'ation of e+cess earnings power.


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a# :aster Valuation Approa!h

=oodwill1E $urchase price of a business -market value of net assets of the business.

7arket value of net assetsE 7.V. of assets - 7.V. of liabilities.

1. Goodwill is measured as the excess of cost overthe fair value of the identifiable net assets acquired.


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b# Capitalization of Ex!ess Earnings'ower

/+cess earnings power E the differencebetween what a firm earns and what is

normally earned for a similar firm in thesame industry.

=oodwill E Discounting the e+cessearnings over the estimated life of thee+cess earnings.


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b# Capitalization of Ex!ess Earnings'ower !ont"#$

/+ample

/+cess earning E 14,444

Discount ate E 14F/stimated life E 14 years

=oodwill E 14,444 + (.1#% E (1,#%4

annuity, 14 -period, 14F


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Intangible Assets #4

b# Capitalization of Ex!ess Earnings'ower !ont"#$

/+cess /arnings E annual averageearnings of a firm e+cludinge+traordinary items normal annualearnings of a similar firm in the industry.

Gormal earnings E industry rate of return

on assets the market value of theac*uiredfirmHs net assets.


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9oo"will !ont"#$

ecording of Ac*uisition8

Assets at market value +++

=oodwill +++

iability at market value +++

)ash +++


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9oo"will !ont"#$

Amorti'ation of goodwill is abolished by9>A9 Go. 1#2, effective


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Intangible Assets #"

-egative 9oo"will

Gegative =oodwill8 )annot be recogni'ed.

(in the case when price paid is less than

the maret value of the net assets)

5he negative goodwill is used to reduce thecosts assigned to the noncurrent assetsac*uired. 5he reduction is proportionatelyto the relative market value of thenoncurrent assets.


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Intangible Assets ##

Impairment of Intangible Assetssee Impairment -otes in Ch# && for Details$

All principles 9>A9 1## apply toimpairments of long-lived assets also applyto intangible assets.

5hus, when changes in circumstancesindicate that the book value of theintangibles may not be reconcilable i.e., fair

value of intangible carrying amount, awrite-down should be performed torecogni'e the loss.


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Intangible Assets #%

Impairment of Intangible Assets!ont"#$ /+ample8

)arrying amount of a copyright 1,244,444

>air value %44,444oss on Impairment 044,444

!he "ournal entry to record the loss#

oss on Impairment 044,444

)opyright 044,444


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/ummary of the Chapter

Intangible egal ife Amorti!ation

$atent 24 5he shorter of useful orlegal life

)opyrights ife of creator J 04

years

5he shorter of useful or

legal life not to e+ceed#4 years

>ranchises oricenses

)ontractualagreements

5he shorter ofcontractual ife oruseful life

5rade Games !5rademarks

;nlimited renewedevery 14 years

Impairment test onlyat least annually

In-$rocess !D ;nlimited Impairment test only

=oodwill ;nlimited Impairment test only

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