CHAPTER
12
Intangible
Assets
……..…………………………………………………………...
Valuation
 Purchased – recorded as an asset at cost
 Internally-created

most costs are expensed – valuation is
too subjective to capitalize

legal costs to obtain the intangible may
be capitalized
Amortization
 Limited life intangibles

limited through legal or contractual
provisions, obsolescence, competition

amortized
 Indefinite life

not amortized

the “40-year “ rule has been dropped!
Types of Intangible Assets
1) Marketing-related intangibles: eg. Trademark
 capitalize design and registration fees
 indefinite life
2) Customer-related intangibles:
eg. Customer list
 capitalize acquisition costs
3) Artistic-related intangibles: eg. Copyright
 capitalize costs to acquire and defend
 amortize over useful life
4) Contract-related intangibles: eg. Franchise
 initial cost amortized if life is limited
 annual payments are not capitalized
5) Technology-related intangibles: eg. Patent
 R&D related to the development of a
product or process is not capitalized
 patent costs are amortized over legal
or useful life
6) Goodwill
Goodwill
 Recognizing goodwill

when an entire business is purchased

excess of cost over fair value of identifiable
assets
 Write-off of goodwill

indefinite life: do not amortize

record decrease in value if goodwill
becomes impaired
 Negative goodwill

fair value of assets is greater than cost

recorded as an extraordinary gain
Exercise 12-1
1. Investment in subsidiary
2. Timberland
3. Pre-manuf. engineering
4. Lease prepayment
5. Equipment
6. Search of research
7. Start-up costs
8. Oper. losses during start-up
9. Training during start-up
10. Cost of franchise
11. Goodwill made internally
12. Testing for new products
13. Goodwill: purch of business
14. Patent development
15. Patent purchase
16. Legal costs to acquire patent
17. Legal costs to defend patent
18. Product formulation
19. Copyright purchase
20. R&D costs
21. Long-term receivables
22. Trademark development
IMPAIRMENT OF INTANGIBLE ASSETS
Limited-Life Intangibles
 Rules for long-lived assets apply (Chapter 11)
1. Recoverability test for impairment
future net cash flows (undiscounted) < carrying value
2. If impaired, calculate the amount of the loss.
carrying value - fair value of the asset
3. Entry:
Loss on Impairment
Patents
150,000
150,000
Indefinite-Life Intangibles Other than Goodwill
 Test for impairment at least annually
1. Fair value test for impairment
fair value of the asset < carrying value
2. If impaired, record the difference as a loss.
(as with limited-life intangibles)
Goodwill
 Test for impairment is a two-step process
1. Fair value test on the reporting unit
fair value of the unit < carrying value
Cash & Receiv.
PP&E
Goodwill
Less: Notes Payable
Value of unit
Carrying
Value
$ 1,050
8,700
2,100
(950)
$10,900
Fair
Value
$10,000
Perhaps based on expected net cash flows.
2. Fair value test of goodwill
fair value of goodwill < carrying value
Cash & Receiv.
PP&E
Less: Notes Payable
Identifiable Assets
Goodwill
Value of Unit
3. Entry:
Carrying
Value
$ 1,050
8,700
(950)
$ 8,800
2,100
$10,900
Fair
Value
$ 1,050
8,400
(950)
$ 8,500
?
$10,000
R&D AND SIMILAR COSTS
 R&D

R: search for new knowledge

D: translate into new or significantly
improved product

does not include routine alternatives to
existing products
 Accounting for R&D

charge to expense when incurred

assets may be capitalized & depreciated if
they have alternative future uses

R&D includes reasonable indirect costs
 Start-up costs

expensed as incurred

assets are capitalized
 Initial operating losses

reported like any other operating losses
 Advertising costs

expensed as incurred or the first time the
advertising takes place
 Computer software costs
PRESENTATION
Balance Sheet
Intangible assets (Note C)
Goodwill (Note D)
$3,840
2,575
Grouped into two categories
Contra accounts not shown.
Notes
 Detail on types of intangible assets.
 Estimated amortization for next 5 years.
 Changes in value of goodwill.
Income Statement
Included in continuing operations:
R&D expenses (disclosed separately)
Amortization expense
Intangible impairment losses
Goodwill impairment losses
(unless the operating unit is discontinued.)