CHAPTER 12 INTANGIBLE ASSETS 1. Intangible Asset Issues 2. Types of Intangibles 3. Impairment of Intangibles 4. Research and Development Costs 5.

. Presentation of Intangibles 1. a. Intangible Asset Issues Characteristics 1) They lack 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

b. Valuation Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready for its intended use. Internally Created Intangibles: Generally expensed. Only capitalize direct costs incurred in developing the intangible, such as legal costs.
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CHAPTER 12 INTANGIBLE ASSETS c. Amortization of Intangibles Limited-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 Internally Purchased Created Capitalize Expense* Amortization Over useful life Do not amortize Impairment Test Recoverability test and then fair value test Fair value test

Type of Intangible Limited-life intangibles Indefinite-life intangibles

Capitalize

Expense*

*Except for direct costs, such as legal costs.

2.

Types of Intangibles

Six major categories: (a) (b) (c) (d) (e) (f) Marketing-related. Customer-related. Artistic-related. Contract-related. Technology-related. Goodwill.
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CHAPTER 12 INTANGIBLE ASSETS a. Marketing-related Intangible Assets Examples are: o Trademarks (e.g. swoosh symbol) or trade names (e.g. Nike), newspaper mastheads (The New York Times), Internet domain names (e.g. Drugs.com sold for $800K), and noncompetition agreements. Trademark or trade name has legal protection for indefinite number of 10 year renewal periods. Capitalize acquisition costs (purchase cost or internally generated 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), and both contractual and non-contractual customer relationships. Capitalize acquisition costs (purchase price). Amortized to expense over useful life.

CHAPTER 12 INTANGIBLE ASSETS Customer Related Intangible Asset Example (page 670) Green Market purchases a customer list for $6M, with a 3 year 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 70 years. Corporations 75 years after publication. Capitalize acquisition costs and legal costs of defending a copyright. E.g. Walt Disney successfully defended the

copyright for Mickey Mouse to extend copyright 50-70 yrs, so this cost is capitalized.

Amortized to expense over useful life.

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CHAPTER 12 INTANGIBLE ASSETS d. Contract-Related Intangible Assets Examples are: o franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts (e.g. use of waterways by a ferry, use of

public lands for utility lines, use of phone lines)

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

McDonalds Restaurant, Toyota Dealership, Century 21 Real Estate Office).

Franchise with an indefinite life should be carried at cost and not amortized. Example of a Purchase of a Definite Life Intangible Rarified Water, Inc. obtained a franchise for $120,000 on August 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 at December 31, 2012.

CHAPTER 12 INTANGIBLE ASSETS e. 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 (e.g. Merck, Polaroid, and Xerox were founded on 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 a patent. Amortize cost (plus legal cost) over the life of the patent using straight line. (Example on page 673) f. Goodwill Only recorded when an entire business is purchased because goodwill cannot be separated from the business as a 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.
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patents). Useful life is often shorter.

CHAPTER 12 INTANGIBLE ASSETS

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 as extraordinary). Example, BE12-5, page 697

CHAPTER 12 INTANGIBLE ASSETS 3. Impairment of Intangible Assets a. Impairment of Limited-Life Intangibles Same as impairment for long-lived assets in Chapter 11. 1. If the sum of the expected future net cash flows is less than the carrying amount of the asset, an impairment has occurred (recoverability test). 2. The impairment loss is the amount by which the carrying amount 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

CHAPTER 12 INTANGIBLE ASSETS b. Impairment of Indefinite-Life Intangibles Other than Goodwill 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 carrying amount, an impairment loss is recognized for the difference. o Recoverability test is not used.

Example Twenty-five years ago, Jones Company purchased a license for $1,800,000. The license is renewable every 10 years, but since Jones expects cash flows to last indefinitely, Jones reports the license as an indefinite-life intangible asset. Because of recent changes in the industry, Jones expects reduced cash flows in the next few years. Jones performs an impairment test and determines that the fair value of the license is now $700,000. Prepare the entry to record the impairment loss.

CHAPTER 12 INTANGIBLE ASSETS c. Impairment of Goodwill (example page 679) Two Step Process: Step 1: If fair value of the reporting unit is less than the carrying amount of its net assets (including goodwill), then perform a second step to determine possible impairment. Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount. Example, BE12-7, page 697

Example, BE12-8, page 697

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CHAPTER 12 INTANGIBLE ASSETS d. Impairment of Goodwill Additional Notes If, 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 Limited life Indefinite life other than goodwill Goodwill Impairment Test Recoverability test, then fair value test Fair value test Fair value test on reporting unit, then fair value test on implied goodwill

P12-5 page 705

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CHAPTER 12 INTANGIBLE ASSETS 4. Research and Development Costs Frequently results in something that a company patents or copyrights such as: New product, Formula, Process, Composition, or Idea, Literary work Because of difficulties related to identifying costs with particular activities and determining the future benefits, all R & D costs are expensed when incurred.

a.

Identifying R&D Activities (Illustration 12-13)

Examples Laboratory research aimed at discovery of new knowledge; searching for applications of new research findings. Examples Conceptual formulation and design of possible product or process alternatives; construction of prototypes and operation of pilot plants.

Research Activities - Planned search or critical investigation aimed at discovery of new knowledge.

Development Activities 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.

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CHAPTER 12 INTANGIBLE ASSETS b. Accounting for R & D Activities Costs 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.

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