accounting chp 12 class notes

8/13/2019 Accounting Chp 12 Class Notes

1/13


2/13

CHAPTER 12 INTANGIBLE ASSETS

2

c. Amortization of IntangiblesLimited-Life Intangibles (e.g. patents, franchises and

licenses, copyrights): Amortize to expense. Credit asset account or accumulated amortization.Indefinite-Life Intangibles (e.g. trademarks, goodwill): No foreseeable limit on time the asset is expected to

provide cash flows.

No amortization.d. Accounting for Intangibles (Illustration 12-1)

Manner Acquired

Type ofIntangible Purchased

InternallyCreated Amortization Impairment Test

Limited-lifeintangibles

Capitalize Expense* Over usefullife

Recoverabilitytest and then fairvalue test

Indefinite-life

intangibles

Capitalize Expense* Do not

amortize

Fair value test

*Except for direct costs, such as legal costs.

2. Types of IntangiblesSix major categories:

(a) Marketing-related.(b) Customer-related.(c) Artistic-related.(d) Contract-related.(e) Technology-related.(f) Goodwill.


3/13


3

a. Marketing-related Intangible Assets Examples are:

o Trademarks (e.g. swoosh symbol) or trade names(e.g. Nike), newspaper mastheads (The New YorkTimes), Internet domain names (e.g. Drugs.com soldfor $800K), and noncompetition agreements.

Trademark or trade name has legal protection forindefinite number of 10 year renewal periods.

Capitalize acquisition costs (purchase cost or internallygenerated direct costs legal, registration, design).

No amortization.b. Customer-related Intangible Assets

Examples are:o customer lists (e.g. purchased by Direct Marketing,

or by a new CPA firm), order or production backlogs(e.g. bought by one manufacturer from another), andboth contractual and non-contractual customerrelationships.

Capitalize acquisition costs (purchase price). Amortized to expense over useful life.


4/13


4

Customer Related Intangible Asset Example (page 670)

Green Market purchases a customer list for $6M, with a 3year useful life, on January 1, 2012. Record the purchase and

the amortization expense at December 31, 2012.

c. 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 70years. Corporations 75 years after publication.

Capitalize acquisition costs and legal costs of defending acopyright. E.g. Walt Disney successfully defended thecopyright for Mickey Mouse to extend copyright 50-70 yrs,so this cost is capitalized.

Amortized to expense over useful life.


5/13


5

d. Contract-Related Intangible Assets Examples are:

o franchise and licensing agreements, constructionpermits, broadcast rights, and service or supplycontracts (e.g. use of waterways by a ferry, use ofpublic lands for utility lines, use of phone lines)

Franchise (or license) with a limited life should beamortized to expense over the life of the franchise (e.g.McDonalds Restaurant, Toyota Dealership, Century 21Real Estate Office).

Franchise with an indefinite life should be carried at costand not amortized.

Example of a Purchase of a Definite Life IntangibleRarified Water, Inc. obtained a franchise for $120,000 onAugust 1, 2012 granting it the right to sell water and sports

drinks at state parks in Louisiana for a five-year period.Record the initial transaction and the adjusting entry atDecember 31, 2012.


6/13


6

e. Technology-Related Intangible Assets Examples are:

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

Patent gives the holder exclusive use for a period of 20years (e.g. Merck, Polaroid, and Xerox were founded onpatents). Useful life is often shorter.

Capitalize costs of purchasing a patent. Capitalize to patent account legal fees incurred to

successfully defend a patent.

Expense any Research & Development costs in developing apatent.

Amortize cost (plus legal cost) over the life of the patentusing straight line. (Example on page 673)

f. Goodwill Only recorded when an entire business is purchased

because goodwill cannot be separated from the business asa whole.

Goodwill is recorded as the excess of:o The purchase price over the FMV of the identifiable net

assets acquired. Internally created goodwill should not be capitalized

(advertising and other marketing costs). Goodwill Write-offs

o Goodwill is considered to have an indefinite life.o It should not be amortized.o Only adjust the carrying value when goodwill is impaired.


7/13


7

Bargain Purchase (negative goodwill) Purchase price less than the fair value of net assets

acquired (bargain purchase). Results in a credit -FASB requires purchaser to disclose

the nature of the gain transaction (not reported asextraordinary).

Example, BE12-5, page 697


8/13


8

3.Impairment of Intangible Assetsa.Impairment of Limited-Life IntangiblesSame as impairment for long-lived assets in Chapter 11.

1. If the sum of the expected future net cash flows is lessthan the carrying amount of the asset, an impairment hasoccurred (recoverability test).

2.The impairment loss is the amount by which the carryingamount of the asset exceeds the fair value of the asset(fair value test).

The loss is reported as part of income from continuing

operations, Other expenses and losses section.

Example, BE 12-6, page 697


9/13


9

b.Impairment of Indefinite-Life Intangibles Other thanGoodwill

Should be tested for impairment at least annually. Impairment test is a fair value test.

o If the fair value of asset is less than the carryingamount, an impairment loss is recognized for thedifference.

o Recoverability test is not used.

ExampleTwenty-five years ago, Jones Company purchased a license for$1,800,000. The license is renewable every 10 years, butsince Jones expects cash flows to last indefinitely, Jonesreports the license as an indefinite-life intangible asset.Because of recent changes in the industry, Jones expectsreduced cash flows in the next few years. Jones performs an

impairment test and determines that the fair value of thelicense is now $700,000. Prepare the entry to record theimpairment loss.


10/13


10

c.Impairment of Goodwill (example page 679)Two Step Process:

Step 1: If fair value of the reporting unit is less thanthe carrying amount of its net assets (including goodwill),then perform a second step to determine possibleimpairment.

Step 2: Determine the fair value of the goodwill(implied value of goodwill) and compare to carrying amount.




11/13


11

d.Impairment of Goodwill Additional NotesIf, in years subsequent to recording the loss on impairment,the divisions fair value increases, do you reverse part or all of

the loss in the year the fair value increases? No entry necessary. (That is: NO!) Adjusted carrying amount of the goodwill is its new

accounting basis. Subsequent reversal of recognized impairment losses

is not permitted under SFAS No. 142.

e.Summary of Impairment Tests (Illustration 12-11)Type of Intangible Asset Impairment Test

Limited life Recoverability test, then fair value test

Indefinite life other than goodwill Fair value test

Goodwill Fair value test on reporting unit, then fair value test

on implied goodwill

P12-5 page 705


12/13


12

4. Research and Development Costs

Frequently results in something that a company patents orcopyrights such as:

New product, Formula,Process, Composition, orIdea, Literary workBecause of difficulties related to identifying costs withparticular activities and determining the future benefits, all R& D costs are expensed when incurred.

a. Identifying R&D Activities (Illustration 12-13)Research Activities - Plannedsearch or critical investigationaimed at discovery of newknowledge.

Examples

Laboratory research aimed atdiscovery of new knowledge;searching for applications of newresearch findings.

Development Activities

Translation of research findingsor other knowledge into a plan ordesign for a new product orprocess or for a significantimprovement to an existingproduct or process whether

intended for sale or use.

Examples

Conceptual formulation and designof possible product or processalternatives; construction ofprototypes and operation of pilotplants.


13/13


13

b. Accounting for R & D ActivitiesCosts Associated with R&D Activities See page 682:

Materials, Equipment, and Facilities Personnel Purchased Intangibles Contract Services, Indirect Costs

(See also Illustration 12-14, page 683)

c. Other Costs Similar to R&D Costs Start-up costs for a new operation. Initial operating losses. Advertising costs. Computer software costs.

5.Presentation of Intangibles

Balance sheet Intangible assets shown as a separate item. Contra accounts normally not shown.

Income statement Report amortization expense and impairment losses in

continuing operations. Total R&D costs charged to expense must be disclosed.

accounting chp 12 class notes

Documents