intangibles c hapter 12 an electronic presentation by norman sunderman angelo state university an...

Intangibles

Chapter 12

An electronic presentation by Norman Sunderman Angelo State University

An electronic presentation by Norman Sunderman Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley JonesNikolai Bazley Jones

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Characteristics that Distinguish Intangibles

1. There is generally a higher degree of uncertainty regarding the future benefits that may be derived.

2. Their value is subject to wider fluctuations because it may depend to a considerable extent on competitive conditions.

3. They may have value only to a particular company.

4. Goodwill and intangible assets with indefinite lives are not expensed.

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Intangible AssetsIntangible assets are those noncurrent economic resources that are used in the operations of the business but have no

physical existence.

Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no

physical existence.

Patents Copyrights Franchises

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Intangible AssetsIntangible assets are those noncurrent economic resources that are used in the operations of the business but have no

physical existence.

Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no

physical existence.

Trademarks® a registered

trademarkComputer

software costs Goodwill

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1. Purchased Identifiable Intangibles. A company may purchase an intangible asset from another company. The purchase is handled in the same manner as the acquisition of a single asset, in a group of assets, or in an exchange of similar or dissimilar assets.

Accounting for the cost of intangibles is discussed in FASB Statement No. 142 as

follows:


follows:

ContinuedContinuedContinuedContinued

Accounting for Intangibles

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2. Purchased Unidentifiable Intangibles. A company capitalizes the cost of a purchased unidentifiable intangible asset. The principal example of an unidentifiable intangible is goodwill.


Accounting for IntangiblesAccounting for the cost of intangibles is

discussed in FASB Statement No. 142 as follows:


follows:

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3. Internally Developed Identifiable Intangibles. When a company internally develops an intangible assets, such as a patent, it can capitalize only certain costs. The costs of a patent the legal and related costs, but NOT the costs of developing the product or process being patented.





follows:

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4. Internally Developed Unidentifiable Intangibles. A company expenses the costs of internally developed unidentifiable intangibles as incurred even though they may be expected to have benefits extending beyond the current period.




follows:

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Effects on Income

Intangible assets that are typically amortized1. Patents2. Copyrights3. Franchises4. Computer software costs5. Leasehold improvementsIntangible assets that are typically reviewed

for impairment1. Trademarks and tradenames2. Licenses that may be renewed indefinitely3. Goodwill

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1. Legal, regulatory, or contractual provisions that place a limit on the maximum economic life.

2. Provisions for renewal or extension of rights or privileges covered by specific intangible assets.

3. 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:



Amortization of Intangibles

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4. Possibility that the economic lives of intangibles may be related to life expectancies of certain groups of employees.

5. Expected actions of competitors, regulatory bodies, and others.




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Intangible Assets With a Finite Life Are

Amortized.

Intangible Assets With a Finite Life Are

Amortized.

The calculation of the amortization of intangible

assets follows the same principles as the depreciation

of tangible assets.


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1. Select a method based on the pattern of benefits, if not determinable, use the straight line method.

2. Intangible assets do not have a residual value.


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A company purchases a patent for $85,000.A company purchases a patent for $85,000.

Patent 85,000 Cash 85,000

At year-end the patent is amortized over 10 years (no expected residual value).

At year-end the patent is amortized over 10 years (no expected residual value).

Amortization Expense (or Factory Overhead) 8,500 Patent (or Accumulated Amortization: Patent) 8,500


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Research and DevelopmentA company must expense all of its

research and development as incurred. Even though R&D often benefit future

periods, requiring all companies to expense these costs enhances

comparability and eliminates the possibility of income manipulation.

A company must expense all of its research and development as incurred. Even though R&D often benefit future

periods, requiring all companies to expense these costs enhances

comparability and eliminates the possibility of income manipulation.

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Costs associated with activities

excluded from R&D are either

expensed or capitalized.

Costs associated with activities

excluded from R&D are either

expensed or capitalized.

Research and Development Costs

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The company includes all these costs in R&D expenses, and records them as follows:

Research and Development Expense 215,000Cash, Payables, etc. 140,000Inventory 50,000Accumulated Depreciation, Building 25,000

Research and Development Costs

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A patent is an exclusive right granted by the federal government

giving the owner control…

A patent is an exclusive right granted by the federal government

giving the owner control…

Patents

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…of the manufacture, sale, or other use of an invention for 20 years from the date of filing.

…of the manufacture, sale, or other use of an invention for 20 years from the date of filing.

Patents

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A company can capitalize the costs of successfully defending the

legal validity of a patent. If the suit is lost, all legal costs are

expensed.

A company can capitalize the costs of successfully defending the

legal validity of a patent. If the suit is lost, all legal costs are

expensed.

Patents

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©BooksMusic FilmsArt

Software

A copyright is a grant by the federal government to publish, sell or

otherwise control literary or artistic products for the life of the author

plus 70 years.

A copyright is a grant by the federal government to publish, sell or

otherwise control literary or artistic products for the life of the author

plus 70 years.

Copyrights

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A franchise is an agreement entered into by two parties in which, for a fee, one party gives the

other party the right to perform certain functions or sell certain products or services.

Burger KingMcDonald’s

Midas MufflerKFC

Franchises

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Technological Feasibility

General Release

R & D Expense Capitalize Expense

Technological feasibility is established either on the date the company

completes a detail program design or, in its absence, when it completes a

working model of the product.

Computer Software Costs

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1. The preliminary stage is completed,

2. management authorizes and commits to funding a company software project, and

3. interest costs are incurred when developing the software.

Internal-Use SoftwareInternal-Use Software

AICPA Statement of Position No. 98-1 specifies that the capitalization of costs begins when---

Computer Software Costs

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Registration of a trademark or tradename with the U.S. Patent Office establishes a right to exclusive

use of a name, symbol, or other device used for product identification for 20 years. The right is

renewable indefinitely as long as it is used continuously.

Tradenames and Trademarks

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Other Intangibles

Leases and leasehold improvements

Deferred charges (a catch-all category in which several individually immaterial items are accumulated)

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AICPA Statement of Position (SOP) No. 98-5 now requires that

the costs of start-up activities, including organization costs be

expensed as incurred.

Organization Costs

http://www.aicpa.org/

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Purchased goodwill arises when a

company is acquired. It is the difference

between the purchase price of the acquired company as a whole and the fair value of

the reported identifiable net assets.

Purchased goodwill arises when a

company is acquired. It is the difference

between the purchase price of the acquired company as a whole and the fair value of

the reported identifiable net assets.

Purchased Goodwill

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Individual assets and liabilities Individual assets and liabilities actually would be debited or actually would be debited or credited.credited.

Individual assets and liabilities Individual assets and liabilities actually would be debited or actually would be debited or credited.credited.

Sara Company purchases all the assets of Trevor Company for $790,000 cash and Trevor Company is dissolved. Trevor Company’s identifiable assets had

a fair value of $920,000 and its liabilities totaled $200,000.

Sara Company purchases all the assets of Trevor Company for $790,000 cash and Trevor Company is dissolved. Trevor Company’s identifiable assets had

a fair value of $920,000 and its liabilities totaled $200,000.

Assets 920,000Goodwill 70,000 Liabilities 200,000 Cash 790,000

Goodwill

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A company must review its goodwill for

impairment annually at the reporting unit level.

A company must review its goodwill for

impairment annually at the reporting unit level.

Impairment of Goodwill

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A company must also review its goodwill for impairment whenever events or changes in circumstances occur that would more-likely-than-

not reduce the fair value of the goodwill below its carrying value.

A company must also review its goodwill for impairment whenever events or changes in circumstances occur that would more-likely-than-

not reduce the fair value of the goodwill below its carrying value.

Impairment of Goodwill

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FASB Statement No. 142 requires a company to disclose certain information about its intangible

assets, in either the financial statement or its footnotes, including:



1. In the period a company acquires intangible assets:a. The cost of any intangible asset acquired,

separated into categories.b. For assets subject to amortization, the residual

value and the weighted-average amortization expense for the next five years.

c. The cost of any R&D acquired and written off, and where it is included in the income statement.


Disclosure of Intangibles

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2. In each period for which the company presents a balance sheet:a. For intangible assets that are amortized, the total

cost, the accumulated amortization, the amortization expense, and the estimated amortization expense for the next five years.

b. For intangible assets that are not amortized, the total cost and the cost of each major intangible asset class. ContinuedContinuedContinuedContinued

Disclosure of IntangiblesFASB Statement No. 142 requires a company to

disclose certain information about its intangible assets, in either the financial statement or its

footnotes, including:



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2. In each period for which a company presents a balance sheet:c. For goodwill, the amount of goodwill acquired,

the amount of any impairment losses recognized, and the amount of goodwill included in the disposal of a reporting unit.

d. For any intangible asset impairment, the facts and circumstances leading to the impairment, the amount of the loss, and the method used.

Disclosure of IntangiblesFASB Statement No. 142 requires a company to

disclose certain information about its intangible assets, in either the financial statement or its

footnotes, including:



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Chapter12

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intangibles c hapter 12 an electronic presentation by norman sunderman angelo state university an...

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