Chapter 12
Intangible Assets
ACCT373 Intermediate Accounting
Otto Chang
Professor of Accounting
Chang, O.H.
1
Characteristics of Intangible
Assets
• Intangible assets are characterized by lack
of physical existence and high degree of
uncertainty concerning the future benefits
• General rules of accounting:
– Purchased: recorded at cost, amortized over
economic life of legal life whichever is shorter
(but no more than 40 years in any case)
– Internally developed: all costs expensed unless
future benefits are very much ascertained
– Contra-asset account is not generally used
Chang, O.H.
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Specifically Identifiable
Intangibles
• Patents
– Economic life: 17 years or shorter
– Capitalizable costs: purchase price, registration
fee, attorney fee, cost of a successful legal suit to
defend the patent.
– Non-capitalizable: R&D expense
• Copyrights
– legal life (author’s life plus 50 years) or 40 years
Chang, O.H.
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• Trademarks and Trade Names
– No definite legal life, so amortize over 40 years
or less
• Leaseholds: the right to lease a property
– rents are capitalized if prepaid or under a
capital lease
• Leasehold Improvements
– capitalize and amortize over the shorter of
remaining lease term or economic life
Chang, O.H.
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• Organization costs
– Fees to underwriters of stocks or bonds, attorney
fees, state fees, promoter’s salaries etc.
– Generally amortize over 60 months
• Development stage enterprises
– Should be treated the same as regular enterprises
– Operating losses in the start-up of a business
should not be capitalized
Chang, O.H.
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Goodwill
• The excess of purchase price over FMV of
identifiable assets purchased
• Estimation of purchase price = Future
annual earnings (adjusted for extraordinary
items) / capitalization rate
• Estimation of goodwill = Excess earning* /
capitalization rate
* Excess earning = Future annual earning - normal annual
earning**
**Normal earning = FMV of assets x expected rate of return
Chang, O.H.
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Accounting for Goodwill
• Recording Goodwill
Assets acquired (revised to FMV)
Goodwill
Liabilities acquired (revised to FMV)
Cash
• Amortization of Goodwill over useful life
– but no more than 40 years
Chang, O.H.
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Badwill
• Badwill = FMV of assets - purchase price
• should be allocated to reduce
proportionately the values assigned for noncurrent assets.
• If the allocation reduces the non-current
assets to zero, the remainder will be
classified as deferred credit and amortized
Chang, O.H.
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Impairment of Intangible Assets
• Treatment similar to impairment of longlived assets
• For specifically identifiable intangible
assets (such as patents, copyrights etc.),
write down the asset to its fair value
• For goodwill-type intangibles, reduce any
goodwill (or if no goodwill, the long-lived
assets) by the amount of loss recognized
Chang, O.H.
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Accounting for R &D Activities
• General rule: expensed unless the assets are
can be used in other future projects (e.g.,
acquisition of research facilities or
equipment) or capitalizable as cost of
patents
• Reimbursed R&D expenses:
Dr. A/R (= R&D costs)
Cr. Cash or other credits
Chang, O.H.
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Accounting for Software Costs
• Developed for external sale:
– Capitalize costs after technical feasibility has
been established (upon completion of a detailed
program design or working model)
– Annual amortization = greater of S-L
amortization or amortization in relation to % of
revenues estimated for future years
– Value at lower of cost or NRV on B/S
• Developed for internal usage:
– Expensed (FASB) or capitalized if future
benefit is clearly evident (IMA)
Chang, O.H.
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Other Assets
• Sometimes referred to as Deferred Charges
• A catch-all category for everything not
belonging to other categories
• Examples:
– Property held for sale
– Prepaid pension costs
– Deferred income taxes
Chang, O.H.
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