Intermediate
Accounting
12-1
Prepared by
Coby Harmon
University of California, Santa Barbara
12 Intangible Assets
Intermediate Accounting
14th Edition
Kieso, Weygandt, and Warfield
12-2
Learning Objectives
1.
Describe the characteristics of intangible assets.
2.
Identify the costs to include in the initial valuation of intangible assets.
3.
Explain the procedure for amortizing intangible assets.
4.
Describe the types of intangible assets.
5.
Explain the conceptual issues related to goodwill.
6.
Describe the accounting procedures for recording goodwill.
7.
Explain the accounting issues related to intangible asset impairments.
8.
Identify the conceptual issues related to research and development
costs.
9.
Describe the accounting for research and development and similar costs.
10. Indicate the presentation of intangible assets and related items.
12-3
Intangible Assets
Intangible
Asset Issues
Types of
Intangibles
Impairment of
Intangibles
Research and
Development
Costs
Characteristics
Marketingrelated
Limited-life
intangibles
Identifying
R&D
Intangible
assets
Customerrelated
Indefinite-life
intangibles
other than
goodwill
Accounting
for R&D
R&D costs
Valuation
Amortization
Artisticrelated
Contractrelated
Technologyrelated
Goodwill
12-4
Goodwill
Summary
Similar costs
Conceptual
questions
Presentation of
Intangibles and
Related Items
Intangible Asset Issues
Characteristics
(1) Lack physical existence.
(2) Not financial instruments.
Normally classified as long-term asset.
Common types of intangibles:
12-5
Patents
Trademarks or trade names
Copyrights
Goodwill
Franchises or licenses
LO 1 Describe the characteristics of intangible assets.
Intangible Asset Issues
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible asset
ready for its intended use.
12-6
Typical costs include:
►
Purchase price.
►
Legal fees.
►
Other incidental expenses.
LO 2 Identify the costs to include in the initial valuation of intangible assets.
Intangible Asset Issues
Valuation
Internally Created Intangibles:
Generally expensed.
Only capitalize direct costs incurred in developing the
intangible, such as legal costs.
12-7
LO 2 Identify the costs to include in the initial valuation of intangible assets.
Intangible Asset Issues
Amortization of Intangibles
Limited-Life Intangibles:
12-8
Amortize by systematic charge to expense over useful life.
Credit asset account or accumulated amortization.
Useful life should reflect the periods over which the asset
will contribute to cash flows.
Amortization should be cost less residual value.
LO 3 Explain the procedure for amortizing intangible assets.
Intangible Asset Issues
Amortization of Intangibles
Indefinite-Life Intangibles:
12-9
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Must test indefinite-life intangibles for impairment at least
annually.
LO 3 Explain the procedure for amortizing intangible assets.
Intangible Asset Issues
Amortization of Intangibles
12-10
Illustration 12-1
Accounting Treatment
for Intangibles
LO 3 Explain the procedure for amortizing intangible assets.
Types of Intangibles
Six Major Categories:
12-11
(1) Marketing-related.
(4) Contract-related.
(2) Customer-related.
(5) Technology-related.
(3) Artistic-related.
(6) Goodwill.
LO 4 Describe the types of intangible assets.
Types of Intangibles
Marketing-Related Intangible Assets
Examples:
►
12-12
Trademarks or trade names, newspaper
mastheads, Internet domain names, and noncompetition agreements.
In the United States trademark or trade name has
legal protection for indefinite number of 10 year renewal
periods.
Capitalize acquisition costs.
No amortization.
LO 4 Describe the types of intangible assets.
Types of Intangibles
Customer-Related Intangible Assets
Examples:
►
12-13
Customer lists, order or production backlogs, and both
contractual and non-contractual customer
relationships.
Capitalize acquisition costs.
Amortized to expense over useful life.
LO 4 Describe the types of intangible assets.
Types of Intangibles
Illustration: Green Market Inc. acquires the customer list of a
large newspaper for $6,000,000 on January 1, 2012. Green
Market expects to benefit from the information evenly over a
three-year period. Record the purchase of the customer list and
the amortization of the customer list at the end of each year.
Jan. 1
Customer List
6,000,000
Cash
Dec. 31
2010
2011
2012
12-14
Amortization expense
Customer list
6,000,000
2,000,000
2,000,000
LO 4 Describe the types of intangible assets.
Types of Intangibles
Artistic-Related Intangible Assets
Examples:
►
Plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Copyright granted for the life of the creator plus 70 years.
Capitalize costs of acquiring and defending.
Amortized to expense over useful life.
and
12-15
Mickey
Mouse
LO 4
Types of Intangibles
Contract-Related Intangible Assets
Examples:
►
12-16
Franchise and licensing agreements, construction
permits, broadcast rights, and service or supply
contracts.
Franchise (or license) with a limited life should be amortized
to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost
and not amortized.
LO 4
Types of Intangibles
Technology-Related Intangible Assets
Examples:
►
12-17
Patented technology and trade secrets granted by the
U.S. Patent and Trademark Office.
Patent gives holder exclusive use for a period of 20 years.
Capitalize costs of purchasing a patent.
Expense any R&D costs in developing a patent.
Amortize over legal life or useful life, whichever is shorter.
LO 4 Describe the types of intangible assets.
Types of Intangibles
Illustration: Harcott Co. incurs $180,000 in legal costs on
January 1, 2012, to successfully defend a patent. The patent’s
useful life is 20 years, amortized on a straight-line basis. Harcott
records the legal fees and the amortization at the end of 2012 as
follows.
Jan. 1
Patents
180,000
Cash
Dec. 31
Amortization expense
Patents
12-18
180,000
9,000
9,000
LO 4 Describe the types of intangible assets.
Types of Intangibles
Goodwill
Conceptually, represents the future economic benefits arising
from the other assets acquired in a business combination that
are not individually identified and separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of ...
cost of the purchase over the FMV of the identifiable net
assets purchased.
Internally created goodwill should not be capitalized.
12-19
LO 5 Explain the conceptual issues related to goodwill.
Recording Goodwill
Illustration: Multi-Diversified, Inc. decides that it needs a parts
division to supplement its existing tractor distributorship. The
president of Multi-Diversified is interested in buying Tractorling
Company. The illustration presents the statement of financial
position of Tractorling Company.
Illustration 12-3
12-20
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Illustration: Multi-Diversified investigates Tractorling’s underlying
assets to determine their fair values.
Illustration 12-4
Tractorling Company decides to accept Multi-Diversified’s offer of
$400,000. What is the value of the goodwill, if any?
12-21
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Illustration: Determination of Goodwill.
Illustration 12-5
12-22
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Illustration: Multi-Diversified records this transaction as follows.
Property, Plant, and Equipment
Patents
18,000
Inventories
122,000
Receivables
35,000
Cash
25,000
Goodwill
50,000
Liabilities
Cash
12-23
205,000
55,000
400,000
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Example: Global Corporation purchased the net assets of Local
Company for $300,000 on December 31, 2012. The balance sheet of
Local Company just prior to acquisition is:
Assets
Cash
Receivables
Inventories
Equipment
Total
$
$
Liabilities and Equities
Accounts payable
Common stock
Retained earnings
Total
12-24
$
$
Cost
15,000
10,000
50,000
80,000
155,000
25,000
100,000
30,000
155,000
$
FMV
15,000
10,000
70,000
130,000
225,000
$
25,000
$
25,000
$
FMV of Net
Assets =
$200,000
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Example: Global Corporation purchased the net assets of Local
Company for $300,000 on December 31, 2012. The value assigned to
goodwill is determined as follows:
Book Value = $130,000
Revaluation
$70,000
Fair Value = $200,000
Goodwill
$100,000
Purchase Price = $300,000
12-25
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Example: Global Corporation purchased the net assets of Local
Company for $300,000 on December 31, 2012. The value assigned to
goodwill is determined as follows:
Calculation of Goodwill:
Cash
15,000
Receivables
10,000
Inventories
70,000
Equipment
130,000
Accounts payable
(25,000)
FMV of identifiable net assets
200,000
Purchase price
300,000
Goodwill
12-26
$
$
100,000
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Example: Global Corporation purchased the net assets of Local
Company for $300,000 on December 31, 2012. Prepare the journal entry
to record the purchase of the net assets of Local.
Journal entry recorded by Global:
Cash
15,000
Receivables
10,000
Inventory
70,000
Equipment
130,000
Goodwill
100,000
Accounts payable
Cash
12-27
25,000
300,000
LO 6 Describe the accounting procedures for recording goodwill.
Goodwill
Goodwill Write-off
Goodwill considered to have an indefinite life.
Should not be amortized.
Only adjust carrying value when goodwill is impaired.
Bargain Purchase
12-28
Purchase price less than the fair value of net assets
acquired.
Amount is recorded as a gain by the purchaser.
LO 6 Describe the accounting procedures for recording goodwill.
Impairment of Intangible Assets
Impairment of Limited-Life Intangibles
Same as impairment for long-lived assets in Chapter 11.
1. If the sum of the expected future net cash flows is less
than the carrying amount of the asset, an impairment has
occurred (recoverability test).
2. The impairment loss is the amount by which the carrying
amount of the asset exceeds the fair value of the asset
(fair value test).
The loss is reported as part of income from continuing
operations, “Other expenses and losses” section.
12-29
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
E12-14: (Copyright Impairment) Presented below is information
related to copyrights owned by Botticelli Company at December 31,
2012.
Cost
Carrying amount
Expected future net cash flows
Fair value
$
8,600,000
4,300,000
4,000,000
3,200,000
The copyright has a remaining useful life of 10 years.
(a) Prepare the journal entry (if any) to record the impairment of the
asset at December 31, 2012.
(b) Prepare the journal entry to record amortization expense for 2013
related to the copyrights.
12-30
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Recoverability test: If the sum of the expected future net cash
flows is less than the carrying amount of the asset, an
impairment has occurred.
Expected future cash flow
Carrying value
$
$
4,000,000
4,300,000
(300,000)
Asset is Impaired
12-31
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
(a) Prepare the journal entry (if any) to record the impairment of
the asset at December 31, 2012.
Loss on impairment
1,100,000
Copyrights
Fair value test:
Carrying amount
Fair value
Loss on impairment
12-32
1,100,000
$
$
4,300,000
3,200,000
(1,100,000)
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
(b) Prepare the journal entry to record amortization expense for
2013 related to the copyrights.
Amortization expense
320,000
Copyrights
Useful life
Amortization per year
12-33
$
3,200,000
÷
Carrying amount
320,000
$
10 years
320,000
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Indefinite-Life Intangibles Other
than Goodwill
12-34
Should be tested for impairment at least annually.
Impairment test is a fair value test.
►
If the fair value of asset is less than the carrying
amount, an impairment loss is recognized for the
difference.
►
Recoverability test is not used.
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Illustration: Arcon Radio purchased a broadcast license for
$2,000,000. Arcon Radio has renewed the license with the FCC
twice, at a minimal cost. Because it expects cash flows to last
indefinitely, Arcon reports the license as an indefinite-life intangible
asset. Recently the FCC decided to auction these licenses to the
highest bidder instead of renewing them. Arcon Radio expects cash
flows for the remaining two years of its existing license. It performs an
impairment test and determines that the fair value of the intangible
asset is $1,500,000.
Illustration 12-7
12-35
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Goodwill
Two Step Process:
Step 1: If fair value is less than the carrying amount of the
net assets (including goodwill), then perform a
second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill (implied
value of goodwill) and compare to carrying amount.
12-36
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
E12-15: (Goodwill Impairment) Presented below is net asset information
related to the Mischa Division of Santana, Inc. as of December 31, 2012
(in millions):
Management estimated its future net cash flows from the division to be
$400 million. Management has also received an offer to purchase the
division for $335 million. All identifiable assets’ and liabilities’ book and fair
value amounts are the same.
12-37
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
E12-15 Instructions
(a) Prepare the journal entry (if any) to record the impairment at
December 31, 2012.
Step 1: The fair value
of the reporting unit is
below its carrying
value. Therefore, an
impairment has
occurred.
Step 2:
Fair value
Carrying amount, net of goodwill
Implied goodwill
Carrying value of goodwill
Loss on impairment
Loss on impairment
Goodwill
12-38
(in millions)
$ 335
160
$
175
200
(25)
25,000,000
25,000,000
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
E12-15 Instructions
(b) At December 31, 2011, it is estimated that the division’s fair value
increased to $345 million. Prepare the journal entry (if any) to record
this increase in fair value.
12-39
No entry necessary.
Adjusted carrying amount of the goodwill is its new accounting
basis.
Subsequent reversal of recognized impairment losses is not
permitted under SFAS No. 142.
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Summary of Impairment Tests
Illustration 12-11
12-40
LO 7 Explain the accounting issues related to intangible-asset impairments.
Research and Development Costs
Research and development (R&D) costs are not in
themselves intangible assets.
Frequently results in something that a company patents or
copyrights such as:
12-41
new product,
formula,
process,
composition, or
idea,
literary work.
LO 8 Identify the conceptual issues related to research and development costs.
Research and Development Costs
Companies spend considerable sums on research and
development.
Illustration 12-12
12-42
LO 8 Identify the conceptual issues related to research and development costs.
Research and Development Costs
Identifying R & D Activities
Illustration 12-13
Research Activities
Planned search or critical investigation
aimed at discovery of new knowledge.
Development Activities
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.
12-43
Examples
Laboratory research aimed at discovery of
new knowledge; searching for applications of
new research findings.
Examples
Conceptual formulation and design of
possible product or process alternatives;
construction of prototypes and
operation of pilot plants.
LO 8 Identify the conceptual issues related to research and development costs.
Research and Development Costs
Accounting for R & D Activities
Costs Associated with R&D Activities:
12-44
Materials, Equipment, and Facilities.
Personnel.
Purchased Intangibles.
Contract Services.
Indirect Costs.
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
E12-1: Indicate how items on the list below would generally be
reported in the financial statements.
Item
Classification
1.
Investment in a subsidiary company.
1.
Long-term investments
2.
Timberland.
2.
PP&E
3.
Cost of engineering activity required
to advance the design of a product to
the manufacturing stage.
3.
R&D expense
4.
Prepaid rent
5.
PP&E
6.
R&D expense
4.
Lease prepayment.
5.
Cost of equipment obtained.
6.
Cost of searching for applications of
new research findings.
12-45
LO 9
Research and Development Costs
Item
7.
8.
9.
Classification
Cost incurred in the formation of a
corporation.
7.
Expense
8.
Operating loss
Operating losses incurred in the
start-up of a business.
9.
Expense
Training costs incurred in start-up
of new operation.
11. Not recorded
10. Purchase cost of a franchise.
10. Intangible
12. R&D expense
11. Goodwill generated internally.
12. Cost of testing in search of product
alternatives.
12-46
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Item
Classification
13. Goodwill acquired in the purchase
of a business.
13. Intangible
14. Cost of developing a patent.
15. Intangible
15. Cost of purchasing a patent from
an inventor.
16. Intangible
14. R&D expense
17. Intangible
16. Legal costs incurred in securing a
patent.
17. Unrecovered costs of a successful
legal suit to protect the patent.
12-47
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Item
Classification
18. Cost of conceptual formulation of
possible product alternatives.
18. R&D expense
19. Cost of purchasing a copyright.
20. R&D expense
20. Research and development costs.
21. Long-term investment
21. Long-term receivables.
22. Expense
22. Cost of developing a trademark.
23. Intangible
19. Intangible
23. Cost of purchasing a trademark.
12-48
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Costs Similar to R & D Costs
12-49
Start-up costs for a new operation.
Initial operating losses.
Advertising costs.
Computer software costs.
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
E12-17: Compute the amount to be reported as research and
development expense.
$330,000 / 5 = $66,000
Cost of equipment acquired that will have alternative
uses in future R&D projects over the next 5 years.
R&D
Expense
$330,000
$66,000
59,000
59,000
Consulting fees paid to outsiders for R&D projects
100,000
100,000
Personnel costs of persons involved in R&D projects
128,000
128,000
Indirect costs reasonably allocable to R&D projects
50,000
50,000
Materials purchased for future R&D projects
34,000
0
Materials consumed in R&D projects
$403,000
12-50
LO 9 Describe the accounting for research and development and similar costs.
Presentations of Intangibles and Related Items
Presentation of Intangible Assets
Balance Sheet
12-51
Intangible assets shown as a separate item.
Reporting is similar to the reporting of property, plant, and
equipment.
Contra accounts may not be shown for intangibles.
Companies should report as a separate item all intangible
assets other than goodwill.
LO 10 Indicate the presentation of intangible assets and related items.
Presentations of Intangibles and Related Items
Presentation of Intangible Assets
Income Statement
12-52
Report amortization expense and impairment losses in
continuing operations.
Total R&D costs charged to expense must be disclosed.
LO 10 Indicate the presentation of intangible assets and related items.
Presentations of Intangibles
Illustration 12-15
12-53
LO 10 Indicate the presentation of intangible assets and related items.
Presentations of R&D Costs
Illustration 12-16
12-54
LO 10 Indicate the presentation of intangible assets and related items.
APPENDIX
12A
ACCOUNTING FOR COMPUTER SOFTWARE COSTS
Diversity in Practice
Companies can either
purchase computer software or
create it.
How should companies account for the costs of developing
software?
Should they expense such costs immediately, or capitalize
and amortize them in the future?
12-55
LO 11 Understand the accounting treatment for computer software costs.
APPENDIX
12A
ACCOUNTING FOR COMPUTER SOFTWARE COSTS
The Profession’s Position
FASB ASC 985-20-05 - Major recommendations of this
pronouncement are:
1. Until a company has established technological
feasibility for a software product, it should charge to
R&D expense the costs incurred in creating the product.
2. Technological feasibility is established when the
company has completed a detailed program design or a
working model.
12-56
LO 11 Understand the accounting treatment for computer software costs.
APPENDIX
12A
ACCOUNTING FOR COMPUTER SOFTWARE COSTS
Accounting for Capitalized Software Costs
If companies are to capitalize software costs, then they must
establish a proper amortization pattern.
As a basis for amortization, one of two amounts is used:
1. the ratio of current revenues to current and anticipated
revenues (the percent-of-revenue approach), or
2. the straight-line method over the remaining useful life of the
asset (straight-line approach).
Must use whichever of those amounts is greater.
12-57
LO 11 Understand the accounting treatment for computer software costs.
APPENDIX
12A
ACCOUNTING FOR COMPUTER SOFTWARE COSTS
Illustration: AT&T has capitalized software costs of $10 million,
and current (first-year) revenues from sales of this product of $4
million. AT&T anticipates earning $16 million in additional future
revenues from this product; it estimates that the product has an
economic life of four years. Under the two approaches, the
calculations are as follows for the first year’s amortization:
Percent-of-revenue approach
12-58
Straight-line approach
LO 11 Understand the accounting treatment for computer software costs.
APPENDIX
12A
ACCOUNTING FOR COMPUTER SOFTWARE COSTS
Reporting Software Costs
Companies should report the following information relating to
software.
1. Unamortized software costs.
2. The total amount charged to expense and the amounts, if any,
written down to net realizable value.
12-59
LO 11 Understand the accounting treatment for computer software costs.
RELEVANT FACTS
12-60
Like GAAP, under IFRS intangible assets (1) lack physical
substance and (2) are not financial instruments. In addition, under
IFRS an intangible asset is identifiable. To be identifiable, an
intangible asset must either be separable from the company (can be
sold or transferred) or it arises from a contractual or legal right from
which economic benefits will flow to the company. Fair value is used
as the measurement basis for intangible assets under IFRS, if it is
more clearly evident.
As in GAAP, under IFRS the costs associated with research and
development are segregated into the two components. Costs in the
research phase are always expensed under both IFRS and GAAP.
Under IFRS, costs in the development phase are capitalized once
technological feasibility is achieved.
RELEVANT FACTS
12-61
IFRS permits revaluation on limited-life intangible assets.
Revaluations are not permitted for goodwill and other indefinite-life
intangible assets.
IFRS permits some capitalization of internally generated intangible
assets (e.g., brand value) if it is probable there will be a future
benefit and the amount can be reliably measured.
IFRS requires an impairment test at each reporting date for longlived assets and intangibles and records an impairment if the asset’s
carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of the asset’s fair value less costs to sell and its
value-in-use. Value-in-use is the future cash flows to be derived from
the particular assets, discounted to present value.
RELEVANT FACTS
12-62
IFRS allows reversal of impairment losses when there has been a
change in economic conditions or in the expected use of limited-life
intangibles. IFRS and GAAP are similar in the accounting for
impairments of assets held for disposal.
IFRS and GAAP are very similar for intangibles acquired in a
business combination. That is, companies recognize an intangible
asset separately from goodwill if the intangible represents
contractual or legal rights or is capable of being separated or divided
and sold, transferred, licensed, rented, or exchanged. In addition,
under both GAAP and IFRS, companies recognize acquired inprocess research and development (IPR&D) as a separate
intangible asset if it meets the definition of an intangible asset and its
fair value can be measured reliably.
IFRS SELF-TEST QUESTION
Research and development costs are:
a. expensed under GAAP.
b. expensed under IFRS.
c.
expensed under both GAAP and IFRS.
d. None of the above.
12-63
IFRS SELF-TEST QUESTION
A loss on impairment of an intangible asset under IFRS is the asset’s:
a. carrying amount less the expected future net cash flows.
b. carrying amount less its recoverable amount.
c.
recoverable amount less the expected future net cash flows.
d. book value less its fair value.
12-64
IFRS SELF-TEST QUESTION
Recovery of impairment is recognized for all the following except:
a. patent held for sale.
b. patent held for use.
c.
trademark.
d. goodwill.
12-65
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
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programs or from the use of the information contained herein.
12-66
