8/4/2019 Financial Accounting - Intangible Assets

1/22

Intangible asset have three maincharacteristics

They are identifiable musteither be separable from thecompany (can be sold or

transferred), or it arises from acontractual or legal right fromwhich economic benefits willflow to the company.

8/4/2019 Financial Accounting - Intangible Assets

2/22

Intangible asset have three maincharacteristics

They lack physicalexistence derive their valuefrom rights and privileges

granted to the company usingthem.They are not monetary

assets Monetary assetsderive their value from theright (claim) to receive cash orcash equivalents in the future.

8/4/2019 Financial Accounting - Intangible Assets

3/22

Intangible asset - Valuation

Companies record at costintangibles purchased fromanother party. Cost includes all

acquisition plus expendituresto make the intangible assetready for its intended use.Typical costs include purchaseprice, legal fees, and otherincidental expenses.

8/4/2019 Financial Accounting - Intangible Assets

4/22

Intangible asset - Amortization

The allocation of the cost ofintangible assets in asystematic way is called

amortization. Intangible haveeither a limited (finite) usefullife or an indefinite useful life.

8/4/2019 Financial Accounting - Intangible Assets

5/22

Intangible asset - Types

Marketing-related intangibleassetsCustomer-related intangible

assetsArtistic-related intangibleassets

Technology-related intangibleassetsGoodwill

8/4/2019 Financial Accounting - Intangible Assets

6/22

Intangible asset - Types

Marketing-related intangibleassetsCompanies primarily use

marketing-related intangibleassets in the marketing orpromotion of products or

services. Examples aretrademarks or trade names,newspaper mastheads,Internet domain names, and

non-competition agreements.

8/4/2019 Financial Accounting - Intangible Assets

7/22

Intangible asset - Types

Trademark or trade name is aword, phrase, or symbol thatdistinguishes or identifies a

particular company or product.Trade names like Mercedes-Benz, Pepsi-Cola, Honda,Cadbury Eggs, Wheaties, andIkea create immediate productidentification in our minds,thereby enchancing

marketability.

8/4/2019 Financial Accounting - Intangible Assets

8/22

Intangible asset - Types

Under common law, the right touse a trademark or tradename, whether registered or

not, rests exclusively with theoriginal user as long as theoriginal user continues to useit.

8/4/2019 Financial Accounting - Intangible Assets

9/22

Intangible asset - Types

Customer-related intangibleassetsResult from interactions with

outside parties. Examplesinclude customer lists, order orproduction backlogs, and bothcontractual and non-contractual customerrelationships.

8/4/2019 Financial Accounting - Intangible Assets

10/22

Intangible asset - Types

To illustrate, assume thatGreen Market Inc. Acquires thecustomer list of a large

newspaper for 6,000,000 onJanuary 1, 2011. Thiscustomer database includesname, contact information,order history, anddemographic information.

8/4/2019 Financial Accounting - Intangible Assets

11/22

Intangible asset - Types

Artistic-related intangibleassetsInvolve ownership rights to

plays, literary works, musicalworks, pictures, photographs,and video and audiovisualmaterial. Copyrights protectthese ownership rights.

8/4/2019 Financial Accounting - Intangible Assets

12/22

Intangible asset - Types

A copyright is a government-

granted right that all authors,painters, musicians, sculptors,and other artists have in their

creations and expressions. Acopyright is granted for the lifeof the creator plus 70 years. Itgives the owner or heirs theexclusive right to reproduceand sell an artistic or publishedwork. Copyrights are not

renewable

8/4/2019 Financial Accounting - Intangible Assets

13/22

Intangible asset - Types

Copyrights can be valuable. Inthe late 1990s, Walt Disney(USA) faced the loss of itscopyright on Mickey Mouse,which could have affectedsales of billions of dollars ofMickey-related goods and

services (including themeparks). This copyright was soimportant that Disney and

many other big entertainment

8/4/2019 Financial Accounting - Intangible Assets

14/22

Intangible asset - Types

Companies fought all the way tothe U.S. Supreme Court- andwon an extension of copyrightslives from 50 to 70 years.

8/4/2019 Financial Accounting - Intangible Assets

15/22

Intangible asset - Types

Contract-related intangibleassetsRepresent the value of rights

that arise from contractualarrangements. Examples arefranchise and licensingagreements, constructionpermits, broadcast rights, andservice or supply contracts.

8/4/2019 Financial Accounting - Intangible Assets

16/22

Intangible asset - Types

Franchise is a contractualarrangement under which thefranchisor grants the

franchisee the right to sellcertain products or services, touse certain trademarks ortrade names, or to performcertain functions, usuallywithin designated geographicalarea.

8/4/2019 Financial Accounting - Intangible Assets

17/22

Intangible asset - Types

We deal with franchiseseveryday: A Toyota (JPN)dealer, a McDonalds (USA)

restaurant, a Gucci (ITA) retailstore, and an ABInBev (BEL)Budweiser distributorship areall examples of franchises.

8/4/2019 Financial Accounting - Intangible Assets

18/22

Intangible asset - Types

A municipality (or othergovernmental body) allows aprivately owned company to

use public property inperforming its services.Examples are the use of publicwaterways for a ferry service,

use of public land fortelephone or electric lines, useof phone lines for cable TV,

use of city streets for a bus

8/4/2019 Financial Accounting - Intangible Assets

19/22

Intangible asset - Types

Line, or use of the airwaves forradio or TV broadcasting. Suchoperating rights, obtained

through agreements withgovernmental units oragencies, are frequentlyreferred to as licenses or

permits.

8/4/2019 Financial Accounting - Intangible Assets

20/22

Intangible asset - Types

Technology-related intangibleassetsRelated to innovations or

technological advances.Examples are patentedtechnology and trade secretsgranted by a governmentalbody.

8/4/2019 Financial Accounting - Intangible Assets

21/22

Intangible asset - Types

In many countries, a patentgives the holder exclusive rightto use, manufacture, and sell a

product or process for a periodof 20 years withoutinterference or infringement byothers. Companies such as

Merck (USA) and Canon (JPN)were founded on patents andbuilt on the exclusive rights

thus granted.

8/4/2019 Financial Accounting - Intangible Assets

22/22

Intangible asset - Types

GoodwillInternally Created Goodwill.Should not be capitalized

Purchased Goodwill.Recorded only when an entirebusiness is purchased