Intermediate Accounting, 11th ed.

Kieso, Weygandt, and Warfield

Chapter 12: Intangible

Assets

Prepared by
Jep Robertson and Renae Clark
New Mexico State University
 Chapter 12: Intangible
Assets
After studying this chapter, you
should be able to:
Describe the characteristics of intangible
assets.
Identify the costs included in the initial
valuation of intangible assets.
Explain the procedure for amortizing
intangible assets.
Identify the types of intangible assets.
Explain the conceptual issues related to
goodwill.
 Chapter 12: Intangible
Assets
Describe the accounting procedures for
recording goodwill.
Explain the accounting issues related to
intangible asset impairments.
Identify the conceptual issues related to
research and development costs.
Describe the accounting procedures for
research and development costs and
for other similar costs.
Indicate the presentation of intangible
assets and related items.
 Intangibles:
Characteristics
They lack physical existence
They represent entity’s rights and
privileges
They are not financial instruments
They are long term in nature
Tangible Assets As a
Percent of All Assets
 Classification of
Intangibles
Intangibles are either grouped or
separately identified based on the
following factors:
Are the assets developed internally,
or acquired singly or in groups?
Is the expected benefit from the
asset limited or indefinite?
Are the rights transferable or are
they a substantial part of the
business?
 Valuation of Intangible
Assets
Intangibles

Purchase Internally
d -
Created
Specificall Goodwill- Specificall Goodwill-
y type y type
Identifiabl assets Identifiabl assets
e e
Expense, Expense
Capitaliz Capitaliz
e e except
direct
costs
Amortization of Intangible
Assets
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.
Specific Intangibles: Types

Marketing-related (i.e., trademark, trade

name).
Customer-related (i.e., customer lists,
customer relationships).
Artistic-related (i.e., copyrights).
Contract-related (i.e., franchise, licenses or
permits).
Goodwill.
Technology-related (i.e., product patent,
process patent).
 Marketing-Related
Intangibles: Trademarks
and Trade Names
Trademarks and trade names are
renewable indefinitely by the
original user in periods of 10 years
each.
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.
 Customer-Related
Intangibles
Examples include:
customer lists
order or production backlogs
customer relationships
Amortized over useful life.
 Artistic-Related
Intangibles: Copyrights
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.
 Contract-Related
Intangibles: Franchises
and Licenses
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 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.
 Technology-Related
Intangibles: Patents
(Product Patents and
A patentProcess Patents)
gives an exclusive right to the
holder for 20 years.
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.
 Goodwill

Goodwill is the most intangible of all

assets.
Goodwill can be sold only with the
business.
Goodwill is the excess of:
the cost (purchase price) over
the amounts (price) assigned to
tangible and intangible net assets.
Goodwill has an indefinite life and should
not be amortized.
 Goodwill

Internally created goodwill is not

capitalized.
Purchased goodwill is recognized only
when an entire business is purchased.
The initial valuation of goodwill is:
the excess of the purchase price over
the fair value of the net assets acquired.
It is sometimes referred to as a master
valuation account (or a plug figure).
 Goodwill Write-Off

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.
 Negative Goodwill

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.
Intangibles: Impairments

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.
 Impairment Tests

Type of Asset Impairment Tests

Property, Plant & Recoverability test,then fair
Equipment value test

Limited Live Recoverability test, then fair

Intangible value test
Indefinite-life
intangible, Fair value test
other than
goodwill
Fair value test on reporting
Goodwill unit, then fair value test on
implied goodwill
 Impairments: The
Recoverability Test
Impairme
nt?
Sum of expected Sum of expected
future net cash flows future net cash
from use and flows
disposal from use and
of asset is less than disposal
the carrying amount of asset is
equal to or more
than
Impairment has No amount
the carrying
occurred impairment
 Impairments: Measuring
Loss
Impairment has Loss =
occurred Carrying amount
Determine Yes less
impairment Fair value of
loss asset
Does an active
Loss =
market
Carrying amount
exist for the asset?
less
No present value of
expected net
Use company’s cash
market flows
rate of interest
 Impairment: Accounting

Impairment has
occurred
Assets are held Assets are held
for use for sale

1. Loss = Carrying value 1. Loss = Carrying value

less Fair value less Fair Value less
2. Depreciate new cost cost of disposal
basis 2. No depreciation is taken
3. Restoration of 3. Restoration of
impairment impairment
loss is NOT permitted loss is permitted
 Impairment Test: Fair
Value Test
Compares fair value of intangible
asset with assets' carrying
amount.
If fair value less than carrying
amount, impairment recognized.
Restoration of Impairment

Assets held for use: impairment loss

may not be restored.
Assets held for disposal can be
written up or down, as long as
write-up is never greater than
carrying amount before
impairment.
Losses or gains reported as “income
from continuing operations.”
Presentation of Intangibles

Contra accounts are not normally shown.

On the balance sheet, all intangible assets
should be reported as a separate item.
On income statement, amortization
expense and impairment losses should be
presented as part of income from
continuing operations.
Unless goodwill impairment loss is
associated with discontinued operations,
it should also be reported as part of
continuing operations.
Research and Development
Costs
Research activities involve:
planned search or
critical investigation aimed at discovery
of new knowledge

Example:
Laboratory research aimed at discovery
of new knowledge
Merck’s R&D Disclosure
Research and Development
Costs
R & D costs involve searching for
new products and processes
R & D costs are expensed unless the
costs have alternative future uses:
(examples)
Lab costs aimed at new knowledge
Conceptual formulation of possible
product
Presentation of R&D Costs

Disclosure is required in the

financial statements of the total R
& D costs charged to expense each
period for which an income
statement is presented.
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