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1、,Intangible Assets,Chapter 7,Describe the characteristics of intangible assets.Identify the costs to include in the initial valuation of intangible assets.Explain the procedure for amortizing intangible assets.Describe the types of intangible assets.Explain the conceptual issues related to goodwill.
2、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 for research and development and similar costs.Indicate the presentation of
3、 intangible assets and related items.,Learning Objectives,Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no physical existence.,Intangible Assets,Intangible assets are those noncurrent economic resources that are used in the operati
4、ons of the business but have no physical existence.,Intangible Assets,IntangibleAssets,Lack physicalsubstance.,Economic benefitslast beyond thecurrent period.,Useful life isoften difficultto determine.,Usually acquired for operational use.,Intangible Assets,Manner of acquisitionIdentifiabilityExchan
5、geabilityPeriod of expected benefit,PatentPending,Intangible AssetsClassification Attributes,At acquisition:record at cost.,During use:use the matching principleto allocate cost to expense.,At disposition:use the revenue recognitionprinciple to record any gain or loss that might result.,Intangible A
6、ssetsAccounting,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 Cost,If the asset is
7、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 Cost,Intangibles are written off over their useful lives,where the assets
8、 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 Cost,Legal,regulatory,or contractual provisions that place a limit on the maximum economic life.P
9、rovisions for renewal or extension of rights or privileges covered by specific intangible assets.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:,Continued,Intangib
10、le Assets Amortization of Cost,Possibility that the economic lives of intangibles may be related to life expectancies of certain groups of employees.Expected actions of competitors,regulatory bodies,and others.,Factors to consider when estimating the useful life of an intangible asset:,Intangible As
11、sets Amortization of Cost,Intangible Assets With a Finite Life Are Amortized.,Intangible Assets Amortization of Cost,Amortization systematically and rationally allocates the acquisition cost of intangible assets to expense.,Cost,Allocation,AcquisitionCost,Expense,Intangible Assets Amortization of Co
12、st,Select a method based on the pattern of benefits,if not determinable,use the straight line method.Intangible assets do not have a residual value.,Intangible Assets Amortization of Cost,The entry to record amortization of an intangible asset includes:-a debit to Amortization Expense.-a credit dire
13、ctly to the intangible asset account.,Intangible Assets Amortization of Cost,A company purchases a patent for$85,000.,Patent85,000 Cash85,000,At year-end the patent is amortized over 10 years(no expected residual value).,Amortization Expense(or Factory Overhead)8,500 Patent(or Accumulated Amortizati
14、on:Patent)8,500,Intangible Assets Amortization of Cost,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.,Patents,Costs of purchasing pate
15、nts 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.,Patents,Batter-Up,Inc.has developed a new device.Patent regis
16、tration costs consisted of$2,000 in attorney fees and$1,000 in federal registration fees.What is Batter-Ups amortizable cost?,PatentsQuestion,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-U
17、ps amortizable cost?,Batter-Ups cost for the newpatent is$3,000.,PatentsQuestion,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-Ups amortization expense?,PatentsQuestion,Batter-Up has estimated that the device has a
18、 useful life of 5 years.The legal life is 20 years.At the end of year 1,what is Batter-Ups amortization expense?,Use the shorter of useful life or legal life;5 years.Amortization=Cost Est.Useful Life=$3,000 5 years=$600,PatentsQuestion,Prepare the adjusting entry to record Batter-Ups amortization ex
19、pense for the period.,PatentsQuestion,Prepare the adjusting entry to record Batter-Ups amortization expense for the period.,PatentsQuestion,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
20、 distribute,perform and record the work.,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 invol
21、ved are expensed as incurred.,Copyrights,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 Names,Costs of acquired trademarks or trade names are capitalized.If trademarks or
22、trade names are developed by the a business,all direct costs(except R&D costs)are capitalized.,Trademarks 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 trad
23、e names,orthe 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 t
24、ime)is carried at cost and not amortized.Annual payments for a franchise are expensed.,Franchises 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,goodwi
25、ll is a major reported asset.,Intangible AssetsGoodwill,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.,Intan
26、gible AssetsGoodwill,Eddy Company paid$1,000,000 to purchase all of James Companys assets and assumed James Company liabilities of$200,000.James Companys assets were appraised at a fair value of$900,000.,Intangible AssetsGoodwill Example,What amount of goodwill should be recorded on Eddy Company boo
27、ks?a.$100,000b.$200,000c.$300,000d.$400,000,GoodwillQuestion,What amount of goodwill should be recorded on Eddy Company books?a.$100,000b.$200,000c.$300,000d.$400,000,GoodwillQuestion,Sara Company purchases all the assets of Trevor Company for$790,000 cash and Trevor Company is dissolved.Trevor Comp
28、anys identifiable assets had a fair value of$920,000 and its liabilities totaled$200,000.,Assets920,000Goodwill70,000 Liabilities200,000 Cash790,000,GoodwillExample,Fair value of net assets acquired is higher than purchase price of assets.Resulting credit is negative goodwill(badwill).FASB requires
29、that any remaining excess be recognized as an extraordinary gain.,Negative 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-Off,An impairment oc
30、curs 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.,Impairments of Intangibles,Type of AssetProperty,Plant&EquipmentLimited Live IntangibleIndefinite-life intangible,other
31、than goodwillGoodwill,Impairment TestsRecoverability test,then fair value testRecoverability test,then fair value testFair value testFair value test on reporting unit,then fair value test on implied goodwill,Impairment Tests,Impairment?,Sum of expected future net cash flowsfrom use and disposal of a
32、sset is less thanthe carrying amount,Sum of expected future net cash flowsfrom use and disposal of asset is equal to or more than the carrying amount,Impairments:The Recoverability Test,Loss=Carrying amountlessFair value of asset,Does an active marketexist for the asset?,Impairments:Measuring Loss,L
33、oss=Carrying value less Fair value Amortize new cost basis Restoration of impairment loss is NOT permitted,Impairment:Accounting,Compares fair value of intangible asset with assets carrying amount.If fair value less than carrying amount,impairment recognized.,Impairment Test:Fair Value Test,The fair
34、 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 Goodwill,The Kent Company acquired the Devon Company as a subsidiary several years ago.The Devon Company has
35、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 Companys identifiable assets and liabilities,this means that$300,000 is implied for goodwill.Thus,there has be
36、en an impairment loss of$100,000.,Impairment of Goodwill,Impairment Loss on Goodwill 100,000Goodwill100,000,Book Value Fair ValueNet Assets$3,200,000$2,700,000Goodwill400,000300,000Total$3,600,000$3,000,000,Impairment of Goodwill,Research-Planned search or critical investigation aimed at discovery o
37、f 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 Costs,R&D costs are expensed as incurred
38、.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 Costs,Batter-Up,Inc.has developed a new device.Research and development costs totaled$30,000.Patent
39、 registration costs consisted of$2,000 in attorney fees and$1,000 in federal registration fees.What is Batter-Ups amortizable cost?,Research 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
40、 attorney fees and$1,000 in federal registration fees.What is Batter-Ups amortizable cost?,Batter-Ups cost for the new patent is$3,000.The$30,000 R&D cost is expensed as incurred.,Research and Development Question,All costs incurred to establish the technological feasibility of a computer software p
41、roduct 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 Sold,Leased,or Otherwise Marketed,Computer Software CostSFAS No.86,Amortization of capitalized compute
42、r software costs starts when the product begins to be marketed.Two methods are allowed:-Revenue method-Straight-line method,Computer Software CostAmortization,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 CostDisclosures,
