INTANGIBLE ASSETS
Chapter 12
Characteristic of Intangibles
 They lack of physical existence
 They are not financial instrument
Valuation of Intangibles
 Purchased intangibles – record at cost
 Internally-Created Intangibles
– generally expensed as incurred
– capitalize only direct cost such as legal costs
Amortization of Intangible
 Limited (finite) useful life – amortize by systematic charges over their
useful life
 Indefinite life – no amortization allowed
Limited-life Intangibles – Factors to consider in determining useful
life
 The expected use of the asset by the entity
 The expected useful life of another asset or group of assets to which
the useful life of the asset may relate
 Any legal, regulatory or contractual provisions that may limit the
useful life
 Any legal, regulatory, contractual provisions that enable renewal or
extension of the asset’s legal or contractual life without substantial
costs
 The effect of obsolescence, demand, competition, and other economic
factors
 The level of maintenance expenditure required to obtain the expected
future cash flows from the asset
Limited-Life Intangibles
 The amount of amortization expense should reflect the pattern in
which the asset is consumed or used up
 The amount to be amortized should be the cost less residual value
 Residual value is assumed to be Zero unless at the end of its useful
life the intangible asset has value to another entity
 Revision of estimated useful life is prospective
 Limited-life intangibles should be continually evaluated for
impairment (similar to PPE)
Indefinite-Life Intangibles
 If no legal, regulatory, contractual, competitive, or other factors limit
useful life of an intangible asset, the useful life is considered
indefinite
 An intangible with indefinite life is not amortized.
 Indefinite-life intangibles should be tested for impairment at least
annually
 The impairment test compares the fair value of an intangible asset
with its carrying amount
 Recoverability test does not apply to indefinite-life intangibles, unlike
limited-life intangibles
Types of Intangible Assets
 Marketing-related intangibles
 Consumer-related intangibles
 Artistic-related intangibles
 Contract-related intangibles
 Technology-related intangibles
 Goodwill
Marketing-related Intangible Assets
 Those assets primarily used in the marketing or promotion of
products or services
- Examples: trademarks or trade names, Internet domain names and
non-competition agreements
- Trademarks have legal protection for an indefinite number of
renewals for periods of 10 years each and therefore, would be
considered to have indefinite life
Consumer-Related Intangible Assets
 These assets result from interaction with outside parties
- Examples: Customer lists, order or production backlogs, and both
contractual and non-contractual customer relationships
Artistic-Related Intangibles Assets
 These assets involve ownership rights to plays, literary works,
musical works, pictures, photographs, and video and audiovisual
material.
 These ownership rights are protected by copyrights
 A copyright is granted for the life of the creator plus 70 years
 It gives the owner the, or heirs, the exclusive right to reproduce and
sell an artistic or published work.
 Copyrights are not renewable
 The cost of acquiring and defending a copyright may be capitalized,
but the R&D cost must be expensed as incurred.
 Generally, the useful life is less than its legal life
Contract-Related Intangible Assets
 These assets represent the value of the rights that arise from
contractual arrangements.
Examples: Franchise and licensing agreements, construction permits,
broadcast rights, and service or supply contracts
 A franchise is a contractual arrangement under which the franchisor
grants the franchisee the rights to sell certain products or services, to
use certain trademarks or trade names, or to perform certain
functions, usually within a designated geographical area
 Franchises and licenses may be for a definite period of time, for an
indefinite period of time, or perpetual
Technology-Related Intangible Assets
 Assets related to innovations or technological advances.
Examples: Patented technology and trade secrets
 A patent gives the holder the exclusive to use, manufacturer, and sell
a product or process for a period of 20 years without infringement by
others.
 Amortization should be over the useful or legal life whichever is
shorter
Goodwill
 Generally results from the purchase of a business
 It is a residual amount after assigning values to identifiable tangible
assets
 Goodwill generated internally should not be capitalized
 Purchased Goodwill – recorded only when an entire business is
purchased, because goodwill is a “going concern” valuation and
cannot be separated from the business as a whole
 Goodwill acquired in a business combination is considered to have an
indefinite life and there fore should not be amortized
 Negative goodwill-Badwill – arises when the fair values of the assets
acquired is higher than the purchase price of the assets (excess of fair
values over acquired costs)
 FASB requires that negative goodwill (excess over fair values) be
recognized as an extraordinary gain.
Impairments of Intangible Assets
 Limited-Life Intangibles – Same rules as applied to PPE
 Indefinite-Life Intangibles Other Than Goodwill – should be tested
for impairment at least annually
 Use fair value test – compares the fair value of the intangible with the
carrying amount
 Impairment rule for goodwill is a two-step
- First, the fair value of the reporting unit should be compared to its
carrying amount including goodwill
- If the fair value of the reporting units is greater than the carrying
amount, goodwill is considered not to be impaired, and the
company does not have to do anything else
- If the fair value is less than the carrying amount of the net assets,
then a second step must be performed to determine if impairment
has occurred
- In the second step, the fair value of the goodwill must be
determined (implied goodwill) and compared to its carrying
amount
- The implied goodwill is then compared to the recorded goodwill to
see if impairment has occurred
EXAMPLE
Cash
Receivables
Inventory
Property Plant & Equipment
Goodwill
Less: Accounts and notes payable
Net Assets
$ 200,000
300,000
700,000
800,000
900,000
(500,000)
$2,400,000
1. Fair value of reporting unit’s assets is $2,800,000. Since fair value
($2,800,000) exceeds carrying value above, no impairment is
recognized.
2. Assume fair value fair value is $1,900,000 the impairment would be
computed as follows;
Fair Value of reporting unit
Net identifiable assets (excluding goodwill)
Implied goodwill
Carrying amount of goodwill
Implied goodwill
Loss on impairment
$1,900,000
1,500,000
$ 400,000
$900,000
400,000
$500,000
Research & Development Costs
 Not considered an intangible asset
 Expense as incurred even if cost is incurred in connection with other
intangibles
Other Cost
 Start-up costs – expense as incurred
 Initial operating loss – do not capitalize

 Advertising cost – generally expensed
 Computer software costs – special issues (see appendix)
Presentation of Intangibles
 Report as separate items on the balance sheet
 Report goodwill as separate item
 Show amortization and impairment separately as part of continuing
operations
 Show goodwill impairment separately
 Notes should include information about acquired intangible assets,
including aggregate amortization expense for each of the succeeding
5 years