Operational Assets Intangibles
Chapter 12
Kieso, Weygandt, Warfield
Types of Operational Assets
Actively Used in Operations
Expected to Benefit Future Periods
Tangible
Property, Plant,
Equipment &
Natural
Resources
Intangible
No Physical
Substance
Intangible Assets
Two features of Intangible Assets
1. They lack physical existence
2. They are not financial instruments
** Examples include:
Trademarks, Copyrights, Patents,
Franchise Agreements, and Goodwill
Purchased Intangibles
Intangibles purchased from another
party are recorded at cost [all costs
necessary to make the intangible
asset ready for its intended use].
Internally Created Intangibles
Intangibles created internally are
generally expensed as incurred.
The only internal costs capitalized to
intangible asset accounts are direct
costs such as legal costs and fees.
Research & Development
Costs
Research and Development (R&D)
Costs are not intangible assets.
Any R&D costs incurred in the
development of intangibles such as
copyrights, patents, or trademarks
MUST be expensed when incurred.
Research & Development
Costs
If an enterprise owns a research facility
consisting of building, labs, or equipment that
conducts R&D activities and that have alternative
future uses, the facility should be accounted for as
a Capitalized Operational Asset.
The depreciation should be accounted for as
R&D expenses.
Start Up Costs
All Start-Up costs and
Organizational Costs incurred in
organizing a new entity should be
expensed as incurred.
Limited Life Intangibles
Intangibles with a limited life are amortized over time using
Straight-Line Amortization. There is typically no salvage
value for an intangible asset.
Ex) A patent is purchased for $50,000 with a useful remaining
life of 10 years. Amortization for the patent would be
recorded as follows:
Amortization Expense 5,000
Accumulated Amortization 5,000
Indefinite-Life Intangibles
Intangibles with indefinite lives are NOT
amortized over time.
Ex) Trademarks, Trade Names, Goodwill
Types of Intangibles
Trademarks – Marketing Related Intangible
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A trademark is a word, phrase, or symbol that
identifies a particular company or product.
Registration with the U.S. Patent and Trademark
Office provides legal protection for an indefinite number
of renewals for periods of 10 years each.
Trademarks are considered to have an indefinite life
and are typically not amortized.
ex.) Kleenex, GE, Amazon.com
Types of Intangibles
Copyrights – Artistic Related Intangible
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
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Copyrights are federally granted rights to artistic
creations with a life of the creator plus 70 years.
Copyrights are not renewable.
Copyrights are to be amortized over the lesser of their
useful life or their legal life. Generally, the useful life is less
than the legal life, and therefore, the asset is amortized over
its useful life.
Legal costs or fees incurred during the life of a Copyright
asset for the purpose of defending the copyright may be
capitalized to the cost of the Asset and amortized over its
remaining useful life.
ex) Songs, Paintings, Books, etc.
Types of Intangibles
Patent – Technology Related Intangibles
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A patent gives the holder the right to use, manufacture, and
sell a product or process for a period of 20 years without
interference or infringement by others.
The original patent is not renewable, but small changes may
lead to a new patent extending the life another 20 years.
[Pharmaceutical companies often do this by simply changing the
color of a pill.]
A patent should be amortized over its legal life of 20 years
or its useful life – whichever is shorter.
Legal costs or fees incurred during the life of the patent to
successfully defend the Asset are capitalized to the Patent Asset
account and amortized over its remaining useful life.
Patents
Torch, Inc. has developed a new device.
Research and development costs totaled
$30,000. Patent registration costs
consisted of $2,000 in attorney fees and
$1,000 in federal registration fees.
What is Torch’s patent cost to be
capitalized?
Torch’s cost for the new patent is
$3,000. The $30,000 R & D cost is
expensed as incurred.
Types of Intangibles
Franchise – Contract Related Intangible
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
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A contract under which the franchisor grants the
franchisee the right sell certain products or services &
use certain trademarks usually with a specific
geographic area.
Franchise agreements may have a definite life or an
indefinite life.
If the Franchise agreement has a limited or
definite life, it should be amortized over the life of the
Asset.
Types of Intangibles
Goodwill – “The most intangible of the intangibles”

Goodwill is only recorded when an entire business has been
purchased.

Goodwill is the difference between FMV of the Net
Identifiable Assets and the Purchase Price of the business.

Goodwill has an indefinite life and should NOT be
amortized.

If the Purchase Price of a company is less than the FMV of
Net Identifiable Assets then there is Negative Goodwill.
Negative Goodwill is reported as a Gain on the Purchase and is
disclosed in the Non-Operating section of the Income
Statement.
Goodwill
Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Goodwill
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed James Company’s liabilities
of $200,000. James Company’s assets
were appraised at a fair value of
$900,000.
Goodwill
What
amount
of of
goodwill
should
bebe
What
amount
goodwill
should
recorded
onon
Eddy
Company
books?
recorded
Eddy
Company
books?
FMV of Assets
a. a.
$100,000
$100,000Debt Assumed
b. b.
$200,000
$200,000FMV of Net Assets
Purchase Price
c. c.
$300,000
$300,000Goodwill
d. d.
$400,000
$400,000
$ 900,000
200,000
$ 700,000
1,000,000
$ 300,000