chapter 6 intangible assets. 1.describe the characteristics of intangible assets. 2.identify the...

Chapter 6

Intangible AssetsIntangible Assets

1. Describe the characteristics of intangible assets.

2. Identify the costs to include in the initial valuation of intangible assets.

3. Explain the procedure for amortizing intangible assets.

4. Describe the types of intangible assets.

5. Explain the conceptual issues related to goodwill.

6. Describe the accounting procedures for recording goodwill.

7. Explain the accounting issues related to intangible-asset impairments.

8. Identify the conceptual issues related to research and development costs.

9. Describe the accounting for research and development and similar costs.

10. Indicate the presentation of intangible assets and related items.

Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no physical existence.


Patents Copyrights Franchises

Intangible AssetsIntangible AssetsIntangible AssetsIntangible Assets



Trademarks® a registered

trademarkComputer

software costs Goodwill


IntangibleAssets

IntangibleAssets

Lack physicalsubstance.

Lack physicalsubstance.

Economic benefitslast beyond thecurrent period.

Economic benefitslast beyond thecurrent period.

Useful life isoften difficultto determine.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Usually acquired for operational

use.


Manner of acquisition

Identifiability

Exchangeability

Period of expected benefit

PatentPending

Intangible AssetsIntangible AssetsClassification AttributesClassification Attributes

Intangible AssetsIntangible AssetsClassification AttributesClassification Attributes

At acquisition:record at costcost.

At acquisition:record at costcost.

During use:use the matching principlematching principleto allocate cost to expense.

During use:use the matching principlematching principleto allocate cost to expense.

At disposition:use the revenue recognitionrevenue recognitionprinciple to record any gain or loss that might result.

At disposition:use the revenue recognitionrevenue recognitionprinciple to record any gain or loss that might result.

Intangible AssetsIntangible AssetsAccountingAccounting

Intangible AssetsIntangible AssetsAccountingAccounting

Record at current cash equivalent cost, including

purchase price, transfer, and legal fees. If the asset is acquired through a nonmonetary

exchange, cost is - cash paid, plus

- the current market value of the noncash consideration given.

Intangible Assets Determination of CostIntangible Assets Determination of CostIntangible Assets Determination of CostIntangible Assets Determination of Cost

If the asset is created internally, the cost may include - only the costs directly associated with the creation of the

intangible asset.

Costs classified as R&D must be expensed in the period

incurred. - SFAS No. 2

Intangible Assets Determination of CostIntangible Assets Determination of CostIntangible Assets Determination of CostIntangible Assets Determination of Cost

• Intangibles are written off over their useful lives, where

the assets have determinable useful lives.

• Where the intangibles have indefinite useful lives, they

are not amortized.

• Acquired intangibles should not be written off at

acquisition.

Intangible Assets Amortization of CostIntangible Assets Amortization of CostIntangible Assets Amortization of CostIntangible Assets Amortization of Cost

1. Legal, regulatory, or contractual provisions that place a limit on the maximum economic life.

2. Provisions for renewal or extension of rights or privileges covered by specific intangible assets.

3. Effects of obsolescence, customer demand, competition, rate of technological change, and other economic factors.

Factors to consider when estimating the useful life of an intangible asset:


ContinuedContinuedContinuedContinued


4. Possibility that the economic lives of intangibles

may be related to life expectancies of certain groups

of employees.

5. Expected actions of competitors, regulatory bodies,

and others.




Intangible Assets With a Finite Life Are

Amortized.

Intangible Assets With a Finite Life Are

Amortized.

The calculation of the amortization of intangible

assets follows the same principles as the depreciation

of tangible assets.


Amortization systematically and rationally allocates the acquisition cost of intangible assets to expense.

Cost

Allocation

AcquisitionCost

Expense


1. Select a method based on the pattern of

benefits, if not determinable, use the straight

line method.

2. Intangible assets do not have a residual value.


The entry to record amortization of an intangible asset

includes: - a debit to Amortization Expense.

- a credit directly to the intangible asset account.


A company purchases a patent for $85,000.A company purchases a patent for $85,000.

Patent 85,000 Cash 85,000

At year-end the patent is amortized over 10 years (no expected residual value).

At year-end the patent is amortized over 10 years (no expected residual value).

Amortization Expense (or Factory Overhead) 8,500 Patent (or Accumulated Amortization: Patent) 8,500


An exclusive right recognized by law and registered with the US Patent Office.

The holder is allowed to use, manufacture, sell, and control the item, process, or activity without interference or infringement by others.

PatentsPatentsPatentsPatents

Costs of purchasing patents are capitalized.Costs to research and develop patents are

expensed as incurred.Patents are amortized over the shorter of the

legal life (20 years) or their useful lives.Legal fees incurred to successfully defend

patents are capitalized.

PatentsPatentsPatentsPatents

Batter-Up, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees.

What is Batter-Up’s amortizable cost?

PatentsPatentsQuestionQuestionPatentsPatents

QuestionQuestion

Batter-Up, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees.


Batter-Up’s cost for the newpatent is $3,000.


QuestionQuestion

Batter-Up has estimated that the device has a useful life of 5 years. The legal life is 20 years.

At the end of year 1, what is Batter-Up’s amortization expense?


QuestionQuestion

Batter-Up has estimated that the device has a useful life of 5 years. The legal life is 20 years.

At the end of year 1, what is Batter-Up’s amortization expense?

Use the shorter of useful life or legal life; 5 years.

Amortization = Cost ÷ Est. Useful Life

= $3,000 ÷ 5 years

= $600

Use the shorter of useful life or legal life; 5 years.

Amortization = Cost ÷ Est. Useful Life

= $3,000 ÷ 5 years

= $600


QuestionQuestion

Prepare the adjusting entry to record Batter-Up’s amortization expense for the period.


QuestionQuestion

Prepare the adjusting entry to record Batter-Up’s amortization expense for the period.

GENERAL JOURNALPage: 15

Date Description PR Debit Credit

Amortization Expense 600 Device Patent 600

to record patent amortizationfor the period


QuestionQuestion

A form of protection given by law to authors of literary, musical, artistic, and similar works.

Copyright owners have exclusive rights to print, reprint, copy, sell or distribute, perform and record the work.

CopyrightsCopyrightsCopyrightsCopyrights

• Copyrights are granted for life of the creator plus 70 years.

• Copyrights can be sold or assigned, but cannot be renewed.

• Copyrights are amortized over their useful life.• Costs of acquiring copyrights are capitalized.• Research and development costs involved are

expensed as incurred.

CopyrightsCopyrightsCopyrightsCopyrights

• A symbol, design, or logo associated with a business.

• Trademarks and trade names are renewable indefinitely by the original user in periods of 10 years each.

Trademarks and Trade NamesTrademarks and Trade NamesTrademarks and Trade NamesTrademarks and Trade Names

• Costs of acquired trademarks or trade names are capitalized.

• If trademarks or trade names are developed by the a business, all direct costs (except R&D costs) are capitalized.

Trademarks and Trade NamesTrademarks and Trade NamesTrademarks and Trade NamesTrademarks and Trade Names

• A franchise is a contractual agreement under which:

The franchisor grants the franchisee:

• the right to sell certain products or services,

• the right to use certain trademarks or trade names, or

• the right to perform certain functions, within a certain geographical area.

Franchises and LicensesFranchises and LicensesFranchises and LicensesFranchises and Licenses

• A franchise may be for a limited time, for an indefinite time period, or perpetual.

• The cost of a franchise (for a limited time) is amortized over the franchise term.

• A franchise (for an unlimited time) is carried at cost and not amortized.

• Annual payments for a franchise are expensed.

Franchises and LicensesFranchises and LicensesFranchises and LicensesFranchises and Licenses

Represents the value associated with favorable characteristics of a firm that result in earnings in excess of those expected from identifiable assets of the firm.

For many large firms, goodwill is a major reported asset.

Intangible AssetsIntangible AssetsGoodwillGoodwill


Goodwill is always present, but is only recorded when one company combines with another company.

Goodwill is the excess of the actual purchase price of an acquired firm over the fair market value (FMV) of the identifiable net assets acquired.



Eddy Company paid $1,000,000 to purchase all of James Company’s assets and assumed James Company liabilities of $200,000. James Company’s assets were appraised at a fair value of $900,000.

Intangible AssetsIntangible AssetsGoodwill ExampleGoodwill ExampleIntangible AssetsIntangible AssetsGoodwill ExampleGoodwill Example

What amount of goodwill should be

recorded on Eddy Company books?

a. $100,000

b. $200,000

c. $300,000

d. $400,000

GoodwillGoodwillQuestionQuestionGoodwillGoodwillQuestionQuestion

What amount of goodwill should be

recorded on Eddy Company books?

a. $100,000

b. $200,000

c. $300,000

d. $400,000

FMV of Assets 900,000$ Debt Assumed 200,000

FMV of Net Assets 700,000$ Purchase Price 1,000,000

Goodwill 300,000$

GoodwillGoodwillQuestionQuestionGoodwillGoodwillQuestionQuestion

Individual assets and liabilities actually Individual assets and liabilities actually would be debited or credited.would be debited or credited.Individual assets and liabilities actually Individual assets and liabilities actually would be debited or credited.would be debited or credited.

Sara Company purchases all the assets of Trevor Company

for $790,000 cash and Trevor Company is dissolved. Trevor

Company’s identifiable assets had a fair value of $920,000

and its liabilities totaled $200,000.

Sara Company purchases all the assets of Trevor Company

for $790,000 cash and Trevor Company is dissolved. Trevor

Company’s identifiable assets had a fair value of $920,000

and its liabilities totaled $200,000.

Assets 920,000Goodwill 70,000 Liabilities 200,000 Cash 790,000

GoodwillGoodwillExampleExampleGoodwillGoodwillExampleExample

• Fair value of net assets acquired is higher than purchase price of assets.

• Resulting credit is negative goodwill (badwill).

• FASB requires that any remaining excess be recognized as an extraordinary gain.

Negative GoodwillNegative GoodwillNegative GoodwillNegative Goodwill

• Acquired goodwill has an indefinite life and should not be amortized but is subject to impairment.

• Impairment test should be performed at least annually.

• If applicable, loss recorded.

Goodwill Write-OffGoodwill Write-OffGoodwill Write-OffGoodwill Write-Off

• An impairment occurs when:

-- the carrying amount of an asset is not recoverable, and

-- a write-off of the impaired amount is needed

• To determine the amount of impairment, a recoverability test is used.

ImpairmentsImpairments of of IntangiblesIntangiblesImpairmentsImpairments of of IntangiblesIntangibles

Type of AssetType of Asset• Property, Plant Property, Plant

& Equipment& Equipment• Limited Live Limited Live

IntangibleIntangible• Indefinite-life Indefinite-life

intangible, intangible,

other than other than

goodwillgoodwill• GoodwillGoodwill

Impairment Tests• Recoverability test,then fair

value test

• Recoverability test, then fair

value test

• Fair value test

• Fair value test on reporting

unit, then fair value test on

implied goodwill

Impairment TestsImpairment TestsImpairment TestsImpairment Tests

Impairment?Impairment?

Sum of expected future net cash flows

from use and disposal of asset is less thanthe carrying amount

Sum of expected future net cash flows

from use and disposal of asset is

equal to or more than the carrying amount

Impairment has occurred

No impairment

Impairments: The Recoverability TestImpairments: The Recoverability TestImpairments: The Recoverability TestImpairments: The Recoverability Test

Impairment has occurred Loss =Carrying amount

lessFair value of asset

Does an active marketexist for the asset?

Determine impairment loss

Yes

No

Loss =Carrying amount

lesspresent value of

expected net cashflowsUse company’s market

rate of interest

Impairments: Measuring LossImpairments: Measuring LossImpairments: Measuring LossImpairments: Measuring Loss

• Loss = Carrying value less Fair value

• Amortize new cost basis

• Restoration of impairment loss is NOT permitted

Impairment: AccountingImpairment: AccountingImpairment: AccountingImpairment: Accounting

• Compares fair value of intangible asset with

assets' carrying amount.

• If fair value less than carrying amount,

impairment recognized.

Impairment Test: Fair Value TestImpairment Test: Fair Value TestImpairment Test: Fair Value TestImpairment Test: Fair Value Test

• The fair value of the reporting unit should be

compared to its carrying amount including

goodwill.

• The fair value of the goodwill must be determined

and compared to its carrying amount.

Impairment of GoodwillImpairment of GoodwillImpairment of GoodwillImpairment of Goodwill

The Kent Company acquired the Devon Company as a subsidiary several years ago. The Devon Company has a book value of $3.6 million, including goodwill of $400,000. Kent now Company estimates that its fair value is $3 million. If Kent Company allocates $2.7 million of the fair market value to Devon Company’s identifiable assets and liabilities, this means that $300,000 is implied for goodwill. Thus, there has been an impairment loss of $100,000.


Impairment Loss on Goodwill 100,000

Goodwill100,000

Book Value Fair ValueNet Assets $3,200,000 $2,700,000Goodwill 400,000 300,000Total $3,600,000 $3,000,000

Book Value Fair ValueNet Assets $3,200,000 $2,700,000Goodwill 400,000 300,000Total $3,600,000 $3,000,000


Research-- Planned search or critical investigation aimed

at discovery of new knowledge

Development-- The translation of research findings or other

knowledge into a plan or design for a new

product or process or for a significant

improvement to an existing product or

process whether intended for sale or use

Research and Development CostsResearch and Development CostsResearch and Development CostsResearch and Development Costs

R&D costs are expensed as incurred.

Material R&D costs must be disclosed.

Equipment, facilities, and purchased intangibles related to the research should be capitalized . . .

. . . if those items have alternative future uses.

Research and Development CostsResearch and Development CostsResearch and Development CostsResearch and Development Costs

Batter-Up, Inc. has developed a new device. Research and development costs totaled $30,000. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees.


Research and Development QuestionResearch and Development QuestionResearch and Development QuestionResearch and Development Question

Batter-Up, Inc. has developed a new device. Research and development costs totaled $30,000. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees.


Batter-Up’s cost for the new patent is $3,000. The $30,000 R & D cost is expensed as incurred.

Research and Development QuestionResearch and Development QuestionResearch and Development QuestionResearch and Development Question

All costs incurred to establish the technological feasibility of a computer software product are to be treated as R&D and expensed as incurred.

Subsequent costs to obtain product masters are to be capitalized as an intangible asset.

Accounting for the Costs of Computer Software to be Accounting for the Costs of Computer Software to be

Sold, Leased, or Otherwise MarketedSold, Leased, or Otherwise Marketed

Computer Software CostComputer Software CostSFAS No. 86SFAS No. 86

Computer Software CostComputer Software CostSFAS No. 86SFAS No. 86

Amortization of capitalized computer software costs starts when the product begins to be marketed.

Two methods are allowed:

-- Revenue method

-- Straight-line method

Computer Software CostComputer Software CostAmortizationAmortization

Computer Software CostComputer Software CostAmortizationAmortization

Balance Sheet

-- Unamortized computer software product master cost is an asset.

Income Statement

-- Amortization expense associated with computer software cost.

-- R&D expense associated with computer software development cost.

Computer Software CostComputer Software CostDisclosuresDisclosures

Computer Software CostComputer Software CostDisclosuresDisclosures

Chapter6

Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

chapter 6 intangible assets. 1.describe the characteristics of intangible assets. 2.identify the...

Documents

specific intangible

types of intangible

intangible assetsdescribe

intangibleasset impairments

useful life

economic factors

maximum economic life

economic lives of intangibles