Chapter 12
Intangibles
Intermediate Accounting 11th edition
Nikolai Bazley Jones
An electronic presentation
By Norman Sunderman
and Kenneth Buchanan
Angelo State University
COPYRIGHT © 2010 South-Western/Cengage Learning
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Intangible Assets
Intangible assets are replacing tangible
assets as the key value driver for the
economy. In a recent survey, 49% of
executives indicated that their company
primarily relies on intangible assets to
create shareholder wealth.
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Intangible Assets
Given the large percentage of wealth tied
up in the value of intangible assets, the
financial implications of maintaining and
defending intangible assets can be quite
large.
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Characteristics that Distinguish Intangible Assets from Tangible Assets
1. There is generally a higher degree of
uncertainty regarding the future benefits that
may be derived.
2. Their value is subject to wider fluctuations
because it may depend, to a considerable
extent, on competitive conditions.
3. They may have value only to a particular
company.
4. Goodwill and intangible assets with indefinite
lives are not expensed , but are reviewed for
impairment at least annually.
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Intangible Assets
Intangible assets are those noncurrent economic
resources that a company uses in its operations but
have no physical existence.
Patents
Copyrights
Franchises
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Intangible Assets
Intangible assets are those noncurrent economic
resources that a company uses in its operations but
have no physical existence.
® a registered
trademark
Trademarks
Computer
software costs
Goodwill
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Accounting for Intangibles
A company accounts for the cost of its intangibles
as follows:
1. Purchased Identifiable Intangibles. A
company may purchase an intangible asset
from another company. The purchase is
handled in the same manner as the acquisition
of a single asset, in a group of assets, or in an
exchange of assets.
Continued
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Accounting for Intangibles
A company accounts for the cost of its intangibles
as follows:
2. Purchased Unidentifiable Intangibles. A
company capitalizes the cost of a purchased
unidentifiable intangible asset. The principal
example of an unidentifiable intangible is
goodwill.
Continued
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Accounting for Intangibles
A company accounts for the cost of its intangibles
as follows:
3. Internally Developed Identifiable
Intangibles. When a company internally
develops an intangible assets, such as a patent,
it can capitalize only certain costs. The costs of
a patent include the legal and related costs of
establishing the rights associated with a patent
but NOT the costs of developing the product
or process that is being patented.
Continued
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Accounting for Intangibles
A company accounts for the cost of its intangibles
as follows:
4. Internally Developed Unidentifiable
Intangibles. A company expenses the costs of
internally developed unidentifiable intangibles
as incurred, even though they may be expected
to have benefits extending beyond the current
period.
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Amortization of Intangibles
Factors to consider in estimating the useful life of
an intangible asset include:
1. The expected life of the asset.
2. The expected useful life of another asset that
is related to the life of the intangible asset,
such as the mineral rights that relate to a
depleting asset.
Continued
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Amortization of Intangibles
Factors to consider in estimating the useful life of
an intangible asset include:
3. Any legal or contractual provisions that enable
renewal or extension of the asset’s legal or
contractual life without substantial economic
cost.
4. The effects of obsolescence, demand,
competition, and other economic factors.
5. The level of maintenance costs required to
obtain the expected future cash flows from the
asset.
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Amortization of Intangibles
Intangible assets
with a finite life
are amortized.
The calculation of the
amortization of intangible assets
follows the same principles as
the depreciation of tangible
assets.
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Amortization of Intangibles
1. Select the amortization method based on the
expected pattern of benefits. If not
determinable, use the straight-line method.
2. The amount of an intangible asset to be
amortized is the cost less the residual value, if
any.
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Research and Development Costs
A company must expense all of its research and
development costs as incurred. Even though
R&D costs often benefit future periods, requiring
all companies to expense these costs enhances
comparability and eliminates the possibility of
income manipulation.
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Research and Development Costs
 Research is the planned search or critical
investigation aimed at discovering new
knowledge.
 Development is the translation of research
findings into a plan or design for a new
product or process or for a significant
improving an existing product or process.
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Research and Development Costs
Costs associated
with activities
excluded from
R&D are either
expensed or
capitalized.
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Research and Development Costs
Expenditures for the following elements of R&D
activities are included in R&D costs and thus are
expensed as incurred:
1. Materials, equipment, and facilities
2. Personnel
3. Intangibles purchased from others
4. Contract services
5. Indirect costs (R&D includes a reasonable
allocation of indirect costs)
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Patents
A patent is an exclusive right
granted by the federal
government giving the owner
control…
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Patents
…of the manufacture, sale, or
other use of an invention for 20
years from the date of filing.
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Patents
A company can capitalize the costs of
successfully defending the legal validity
of a patent. If the suit is lost, all legal
costs are expensed.
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Copyrights
A copyright is a grant by the federal
government to publish, sell, or otherwise
control literary or artistic products for the
life of the author plus 70 years.
©
Books
Music
Films
Art
Software
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Franchises
A franchise is an agreement entered into by two
parties in which, for a fee, one party (the
franchisor) gives the other party (the franchisee)
the right to perform certain functions or sell
certain products or services.
Burger King
McDonald’s
Midas Muffler
KFC
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Computer Software Costs
R & D Expense
Capitalize
Technological
Feasibility
Expense
General
Release
Technological feasibility is
established either on the date
the company completes a detail
program design or, in its
absence, when it completes a
working model of the product.
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Internal-Use Software
The costs that are incurred in the preliminary
stage of developing internal-use computer
software are expensed as incurred.
Capitalization of costs begins when:
1. The preliminary stage is completed.
2. Management agrees to fund a computer
software project.
a. It is probable that the project will be completed.
b. The software will be used to perform the function
intended.
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Internal-Use Software
The following costs are capitalized once the
criteria are met:
1. External direct costs of materials and services
used in developing the internal-use software.
2. Payroll costs for employees who are directly
associated with the project.
3. Interest costs incurred when developing the
software.
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Tradenames and Trademarks
Registration of a trademark or tradename with
the U.S. Patent Office establishes a right to
exclusive use of a name, symbol, or other device
used for product identification for 20 years. The
right is renewable indefinitely as long as the
trademark or tradename is used continuously.
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Other Intangibles
 Leases and leasehold
improvements
 Deferred charges (a
catchall category in
which several
individually
immaterial items are
accumulated)
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Organization Costs
 Organization costs include legal fees, stock
certificate costs, underwriting fees,
accounting fees, and promotional fees.
 GAAP requires that the costs of start-up
activities (including organization costs) be
expensed as incurred.
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Purchased Goodwill
Purchased goodwill arises
when a company is
acquired. It is the
difference between the
purchase price of the
acquired company and
the fair value of the
reported identifiable net
assets.
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Impairment of Goodwill
A company must review its goodwill
for impairment annually at the
reporting unit level, which is the same
as the operating segment.
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Impairment of Goodwill
A company must also review its
goodwill for impairment whenever
events or changes in circumstances
occur that would, more likely than not,
reduce the fair value of the goodwill
below its carrying value.
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IFRS vs. U.S. GAAP
 IFRS allow a company to capitalize some
internally generated intangibles as assets.
 The company must classify activities leading to
the generation of an intangible asset into a
research and a development phase.
 Research costs are expensed but development
costs may be capitalized if future economic
benefits are likely.
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IFRS vs. U.S. GAAP
 IFRS allow intangibles to be revalued
upwards, with a corresponding increase in
stockholders’ equity.
 IFRS allow an impairment loss to be reversed
if the value is recovered.
 The accounting for goodwill is similar to that
of U.S. GAAP.
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Disclosure of Intangible Assets
GAAP requires a company to disclose certain
information about its intangible assets, including:
1. In the period the company acquires intangible
assets:
a. The cost of any intangible assets acquired,
separated into assets that are, and are not,
amortized, and goodwill
b. For assets that are amortized, the residual value
and the weighted-average amortization period
c. The cost of any R&D acquired and written off, and
where it is included in the income statement
Continued
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Disclosure of Intangible Assets
GAAP requires a company to disclose certain
information about its intangible assets, including:
2. In each period for which the company presents
a balance sheet:
a. For intangible assets that are amortized, the total
cost, the accumulated amortization, the
amortization expense, and the estimated
amortization expense for the next five years
b. For intangible assets that are not amortized, the
total cost and the cost of each major intangible
asset class
Continued
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Disclosure of Intangible Assets
GAAP requires a company to disclose certain
information about its intangible assets, including:
3. In each period for which the company presents
a balance sheet:
a. For goodwill, the amount of goodwill acquired and
the amount of any impairment losses recognized
b. For any intangible asset impairment, the facts
leading to the impairment, the amount of the
impairment loss, and the method of determining
the fair value
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Conceptual Evaluation of Accounting for Intangibles
GAAP for internally developed and purchased intangibles
is complex and has some inconsistencies.
 Capitalize or expense R&D?
 Purchased goodwill recorded as asset while
internally developed goodwill is expensed.
 Difficult to measure cost of internally
generated goodwill.
 Which costs should be capitalized and which
should be expensed?
 Difficult to identify revenues generated by
goodwill and therefore to decide the periods
benefited.
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Chapter 12
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