Intangible Assets
Characteristics:
Lack physical existence
1.
Not financial instruments
2.
Patents, Copyrights, Franchises/Licenses, Trademarks, Goodwill
Valuation
Purchased Intangibles
Recorded at cost
1.
Includes all costs necessary to get it ready for use
Purchase Price
a.
Legal Fees
b.
Other incidental expenses
c.
2.
Internally Created Intangibles
Recorded at cost
1.
Generally expensed
2.
Only capitalize direct costs in development like legal costs
3.
Amortization of Intangibles
Limited-Life Intangibles
Amortize to expense over useful life
1.
Credit asset account or acc amort
2.
Useful life should reflect the periods over which the asset will contribute to cash flows
3.
Amort should be cost less residual value
4.
Companies should evaluate the limited life intangibles for impairment
5.
Indefinite-Life Intangibles
No foreseeable limit on time the asset is expected to provide cash flows
1.
Must test indefinite-life intangibles for impairment at least annually
2.
No amortization ; no recoverability
3.
6 Major Categories: marketing, customer, artistic, contract, tech, goodwill
Trademarks: Capitalize acquisition costs; no amortization
Customer lists/logs: capitalize acquisition costs, amortized to expense over useful life
Customer List
6000
Cash
6000
Next year amort:
Amortization Expense
2000
Customer List (or acc amort) 2000
Plays, Copyright, Works: Capitalize costs of acquiring and defending; amortized to expense
over useful life
Franchise Licenses, permits, contracts: limited life should be amortized to expense over the
life of the franchise; indefinite life should be carried at cost and not amortized
Tech Patents/Trade Secrets: capitalize costs of purchase; expense any R&D costs in
development; amortize over legal life or useful life whichever is shorter
Ex. 180,000 in legal costs to defend a patent. 12 years useful life. Straight-line amort.
Jan 1
Patents 180,000
Cash 180,000
Dec 31
Amort Expense 15,000
Patents 15,000
Companies should test indefinite life intangible assets at least annually for impairment.
Limited life = amortized; indefinite-life= not amortized
NOT intangible = R&D costs
Impairment
Same as chpt 11
Test:
Recoverability Test : if sum of expected future net cash flows is LESS THAN the carrying
value, an impairment has occurred.
1.
The impairment loss is the difference between the carrying amount and the fair value : Fair
Value Test
Loss is recorded as part of the income from continuing operations OR "Other
expenses and losses" section
Loss on Impairment 40
Patent 40
i.
a.
Restoration is NOT permitted.b.
2.
Indefinite-Life Intangibles = only conduct Fair Value Test
Balance Sheet
Intangible assets are separate items
Contra accounts are not shown
Companies should report as a separate item
Income Statement
Amort expense and impairment losses in continuing operations
R&D Costs
= not intangible assets
= must be expensed when incurred
Costs associated:
Materials, Equip, Facilities: expense the entire costs, unless there is an alternative future
use
Personnel: expense as incurred
Purchases Intangibles: recognize and measure at fair value
Contract Services: expense the costs connected w R&D as incurred
Indirect Costs: allocate to R&D
Start-Up costs
Initial operating costs
Advertising costs
Computer software costs
EXAM:
Chapter 10 and 11 !!
Two problems at end
Depreciation methods and partial years
Chapter 12
Thursday, April 8, 2021
3:38 PM
Intangible Assets
Characteristics:
Lack physical existence1.
Not financial instruments2.
Patents, Copyrights, Franchises/Licenses, Trademarks, Goodwill
Valuation
Purchased Intangibles
Recorded at cost1.
Includes all costs necessary to get it ready for use
Purchase Pricea.
Legal Feesb.
Other incidental expensesc.
2.
Internally Created Intangibles
Recorded at cost1.
Generally expensed2.
Only capitalize direct costs in development like legal costs3.
Amortization of Intangibles
Limited-Life Intangibles
Amortize to expense over useful life1.
Credit asset account or acc amort2.
Useful life should reflect the periods over which the asset will contribute to cash flows3.
Amort should be cost less residual value4.
Companies should evaluate the limited life intangibles for impairment5.
Indefinite-Life Intangibles
No foreseeable limit on time the asset is expected to provide cash flows1.
Must test indefinite-life intangibles for impairment at least annually2.
No amortization ; no recoverability3.
6 Major Categories: marketing, customer, artistic, contract, tech, goodwill
Trademarks: Capitalize acquisition costs; no amortization
Customer lists/logs: capitalize acquisition costs, amortized to expense over useful life
Customer List 6000
Cash 6000
Next year amort:
Amortization Expense
2000
Customer List (or acc amort)
2000
Plays, Copyright, Works: Capitalize costs of acquiring and defending; amortized to expense
over useful life
Franchise Licenses, permits, contracts: limited life should be amortized to expense over the
life of the franchise; indefinite life should be carried at cost and not amortized
Tech Patents/Trade Secrets: capitalize costs of purchase; expense any R&D costs in
development; amortize over legal life or useful life whichever is shorter
Ex. 180,000 in legal costs to defend a patent. 12 years useful life. Straight-line amort.
Jan 1
Patents
180,000
Cash
180,000
Dec 31
Amort Expense
15,000
Patents
15,000
Companies should test indefinite life intangible assets at least annually for impairment.
Limited life = amortized; indefinite-life= not amortized
NOT intangible = R&D costs
Impairment
Same as chpt 11
Test:
Recoverability Test : if sum of expected future net cash flows is LESS THAN the carrying
value, an impairment has occurred.
1.
The impairment loss is the difference between the carrying amount and the fair value : Fair
Value Test
Loss is recorded as part of the income from continuing operations OR "Other
expenses and losses" section
Loss on Impairment
40
Patent
40
i.
a.
Restoration is NOT permitted.
b.
2.
Indefinite-Life Intangibles = only conduct Fair Value Test
Balance Sheet
Intangible assets are separate items
Contra accounts are not shown
Companies should report as a separate item
Income Statement
Amort expense and impairment losses in continuing operations
R&D Costs
= not intangible assets
= must be expensed when incurred
Costs associated:
Materials, Equip, Facilities: expense the entire costs, unless there is an alternative future
use
Personnel: expense as incurred
Purchases Intangibles: recognize and measure at fair value
Contract Services: expense the costs connected w R&D as incurred
Indirect Costs: allocate to R&D
Start-Up costs
Initial operating costs
Advertising costs
Computer software costs
EXAM:
Chapter 10 and 11 !!
Two problems at end
Depreciation methods and partial years
Chapter 12
Thursday, April 8, 2021 3:38 PM
Intangible Assets
Characteristics:
Lack physical existence1.
Not financial instruments2.
Patents, Copyrights, Franchises/Licenses, Trademarks, Goodwill
Valuation
Purchased Intangibles
Recorded at cost1.
Includes all costs necessary to get it ready for use
Purchase Pricea.
Legal Feesb.
Other incidental expensesc.
2.
Internally Created Intangibles
Recorded at cost1.
Generally expensed2.
Only capitalize direct costs in development like legal costs3.
Amortization of Intangibles
Limited-Life Intangibles
Amortize to expense over useful life1.
Credit asset account or acc amort2.
Useful life should reflect the periods over which the asset will contribute to cash flows3.
Amort should be cost less residual value4.
Companies should evaluate the limited life intangibles for impairment5.
Indefinite-Life Intangibles
No foreseeable limit on time the asset is expected to provide cash flows1.
Must test indefinite-life intangibles for impairment at least annually2.
No amortization ; no recoverability3.
6 Major Categories: marketing, customer, artistic, contract, tech, goodwill
Trademarks: Capitalize acquisition costs; no amortization
Customer lists/logs: capitalize acquisition costs, amortized to expense over useful life
Customer List 6000
Cash 6000
Next year amort:
Amortization Expense 2000
Customer List (or acc amort) 2000
Plays, Copyright, Works: Capitalize costs of acquiring and defending; amortized to expense
over useful life
Franchise Licenses, permits, contracts: limited life should be amortized to expense over the
life of the franchise; indefinite life should be carried at cost and not amortized
Tech Patents/Trade Secrets: capitalize costs of purchase; expense any R&D costs in
development; amortize over legal life or useful life whichever is shorter
Ex. 180,000 in legal costs to defend a patent. 12 years useful life. Straight-line amort.
Jan 1
Patents 180,000
Cash 180,000
Dec 31
Amort Expense 15,000
Patents 15,000
Companies should test indefinite life intangible assets at least annually for impairment.
Limited life = amortized; indefinite-life= not amortized
NOT intangible = R&D costs
Impairment
Same as chpt 11
Test:
Recoverability Test : if sum of expected future net cash flows is LESS THAN the carrying
value, an impairment has occurred.
1.
The impairment loss is the difference between the carrying amount and the fair value : Fair
Value Test
Loss is recorded as part of the income from continuing operations OR "Other
expenses and losses" section
Loss on Impairment 40
Patent 40
i.
a.
Restoration is NOT permitted.b.
2.
Indefinite-Life Intangibles = only conduct Fair Value Test
Balance Sheet
Intangible assets are separate items
Contra accounts are not shown
Companies should report as a separate item
Income Statement
Amort expense and impairment losses in continuing operations
R&D Costs
= not intangible assets
= must be expensed when incurred
Costs associated:
Materials, Equip, Facilities: expense the entire costs, unless there is an alternative future
use
Personnel: expense as incurred
Purchases Intangibles: recognize and measure at fair value
Contract Services: expense the costs connected w R&D as incurred
Indirect Costs: allocate to R&D
Start-Up costs
Initial operating costs
Advertising costs
Computer software costs
EXAM:
Chapter 10 and 11 !!
Two problems at end
Depreciation methods and partial years
Chapter 12
Thursday, April 8, 2021 3:38 PM
