12 Intangible Assets
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Transcript of 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
$atents, copyrights, franchises,start-up costs, trade names,
trademarks, goodwill etc..
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Intangible Assets %
Valuation of Intangibles
Intangibles are recorded at cost andare also reported at cost at the end ofan accounting period.
Intangibles with limited life are sub&ectto amorti'ation and possibleimpairment test.
Intangibles with indefinite life are onlysub&ect to impairment test at least
annually.
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Intangible Assets (
Costs of Intangibles
)osts of Intangibles include ac*uisitioncosts plus any other e+pendituresnecessary to make the intangibles ready
for the intended uses i.e., purchase price,legal fees, filing fees etc. not includinginternal !D.
/ssentially, the accounting treatment ofvaluation for intangibles closely parallels
that followed by tangible assets.
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Examples
1. Issuance of stock to ac*uire intangibles.
2. ump-sum purchase of intangibles. )osts will be allocated in accordance
with the fair market value of each
individual intangible.
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Intangibles Assets with Finite lives
Patents24 years, copyrightsthe lifeof the creator plus 04 years, franchiseand license the contractual life.
5he costs are sub&ected to amorti'ationa process of cost allocation over the
shorter of the legal or useful life, not toe+ceed #4 years.
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Amortization of Intangibles
5he impairment test needed only whenevents indicate that the book value maynot be recoverable.
Amorti'ation 7ethod8 9traight-linemethod.
:ther method can be applied if it is moreappropriate than the 9- method.
esidual value8 ;sually 'ero.
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Amortization of Intangibles !ont"#$
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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.
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'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.
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(#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.
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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.
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)# 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.
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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.
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+# 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.
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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 $atent8 2%,444.
Intangible Assets 20
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Intangible Assets 23
3 * D Contra!ts )osts of !D performed under
contracts for others are capitali'ed asinventory or receivable.
Income from these contracts can berecogni'ed based on percentage-of
completion or complete contractmethod as discussed for the long-termconstruction contracts.
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Intangible Assets 26
'ur!hase" 3*D
Chen ac*uiring another company, thepurchase price is allocated to tangible
assets, intangibles developedtechnology and in-process R&D.
5he remaining will be the goodwill.
5he in-process !D is e+pensed priorto 2446.
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Intangible Assets "4
'ur!hase" 3*D Cont"#$
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.
Intangible Assets "1
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Intangible Assets "2
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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Intangible Assets "0
a# :aster Valuation Approa!h
=oodwill1E $urchase price of a business -market value of net assets of the business.
7arket value of net assetsE 7.V. of assets - 7.V. of liabilities.
1. Goodwill is measured as the excess of cost overthe fair value of the identifiable net assets acquired.
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Intangible Assets "3
b# Capitalization of Ex!ess Earnings'ower
/+cess earnings power E the differencebetween what a firm earns and what is
normally earned for a similar firm in thesame industry.
=oodwill E Discounting the e+cessearnings over the estimated life of thee+cess earnings.
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Intangible Assets "6
b# Capitalization of Ex!ess Earnings'ower !ont"#$
/+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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Intangible Assets #1
9oo"will !ont"#$
ecording of Ac*uisition8
Assets at market value +++
=oodwill +++
iability at market value +++
)ash +++
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Intangible Assets #2
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