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Intangible Assets

IAS 38

2015

Two Main Characteristics:

Characteristics

(1) Lack of physical existence.

(2) They are not financial instruments.

Normally classified as long-term asset.

Common types of intangibles:Patents

Copyrights

Franchises or licenses

Trademarks or trade names

Goodwill

Intangible Assets Issues

22015

Purchased Intangibles:

Recorded at cost.

If purchased in exchange of stock, the fair value of the consideration given or received which is evident, should be recognized.

Includes all costs necessary to make the intangible asset ready for its intended use.

Intangible Assets Issues

32015

Internally Created Intangibles:

Expense as incurred

Only capitalize direct costs incurred in developing the intangible, such as legal costs.

Intangible Assets Issues

Determine The Useful Life• Expected Use

• Useful Life of relative assets

• Legal Regulatory Conceptual Framework

• Limiting useful life

• Law supporting renewal or extension

• Effect of obsolesce, demand, competition.Level of Maintenance cost

42015

Amortization of IntangiblesLimited-Life Intangibles:• Amortize to (Cost Less Residual Value)• Assume zero Residual value unless it has value to another company

after its useful life• Reflect the pattern in which the company consumes the asset (if

Determined)• Credit asset account or accumulated amortization.

Intangible Assets Issues

Indefinite-Life Intangibles:• No foreseeable limit on time the asset is expected to provide cash

flows. • No amortization.

52015

Accounting Treatment for Intangibles

Intangible Assets Issues

62015

Six Major Categories:

1) Marketing-related.

2) Customer-related.

3) Artistic-related.

4) Contract-related.

5) Technology-related.

6) Goodwill.

Types of Intangibles

72015

Marketing-Related Intangible Assets

• Examples are:

Trademarks or trade names, newspaper mastheads, Internet domain names, and noncompetition agreements.

• Trademark or trade name has legal protection for indefinite number of 10 year renewal periods.

• Capitalize acquisition costs.

• No amortization.

Types of Intangibles

82015

Customer-Related Intangible Assets

• Examples are:

customer lists, order or production backlogs, and both contractual and non contractual customer relationships.

• Capitalize acquisition costs.

• Amortized to expense over useful life.

Types of Intangibles

92015

Artistic-Related Intangible Assets• Examples are:

plays, literary works, musical works, pictures, photographs, and video and audiovisual material.

• Copyright is granted for the life of the creator plus 70 years.

• Capitalize costs of acquiring and defending a copyright.

• Amortized to expense over useful life or legal life(Whichever is shorter)

Types of Intangibles

102015

Contract-Related Intangible Assets

• Examples are:

franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.

• Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.

• Franchise with an indefinite life should be carried at cost and not amortized.

Types of Intangibles

112015

Technology-Related Intangible Assets• Examples are:

patented technology and trade secrets granted by the U.S. Patent and Trademark Office.

• Patent gives the holder exclusive use for a period of 20 years.

• Capitalize costs of purchasing a patent.

• Expense any R&D costs in developing a patent.

• Legal fees incurred successfully defending a patent are capitalized to Patent account.

Types of Intangibles

122015

Goodwill

Created by good relationships by building up a reputation.

A going concern valuation.

Measured at the time of business to be sold.

The excess or residual amount of the cost over the fair value of the identifiable net

assets purchased.

The most intangible of the intangible assets.

Can not be amortized; can only be impaired.

Internally created goodwill should not be capitalized.

132015

Types of Intangibles