Intangibles - 1
INTANGIBLE ASSETS
Intangibles - 2
INTANGIBLE ASSETS
Useful life is
often difficult
to determine.
Lack physical
substance.
Intangible
assets
Economic benefits
last beyond the
current period.
Usually acquired
for operational
use.
Intangibles - 3
INTANGIBLE ASSETS
Accounting
At acquisition:
record at cost.
During use:
use the matching principle
to allocate cost to expense.
At disposition:
use the revenue recognition
principle to record any gain
or loss that might result.
Intangibles - 4
Intangible Assets
Determination of Cost
 Record at current cash equivalent cost,
including purchase price, transfer, and
legal fees.
 If the asset is acquired through a
nonmonetary exchange, cost is
– cash paid, plus
– the current market value of the noncash
consideration given.
Intangibles - 5
Intangible Assets
Determination of Cost
 If the asset is created internally, the
cost may include
– only the costs directly associated with
the creation of the intangible asset.
 Costs classified as R&D must be
expensed in the period incurred.
– SFAS No. 2
Intangibles - 6
INTANGIBLE ASSETS
Amortization of Cost
Amortization systematically and
rationally allocates the acquisition cost
of intangible assets to expense.
Acquisition
Cost
Cost
Allocation
Expense
Intangibles - 7
INTANGIBLE ASSETS -AMORTIZATION
SFAS No. 142
 Limited-life intangibles
– Economic life (considering obsolescence)
– Legal, regulatory, or contractual provisions
– Amortization method
• Consider the pattern of use
• Residual value is considered
• Also evaluated for impairment
 Indefinite-life intangibles
– Not amortized
– Tested annually for impairment (only fair
value test)
Intangibles - 8
INTANGIBLE ASSETS
Patents
 An exclusive right recognized by law and
registered with the US Patent Office.
 The holder is allowed to use, manufacture,
sell, and control the item, process, or activity
without interference or infringement by
others.
 The legal life is 20 years.
“Band-Aid”
Intangibles - 9
INTANGIBLE ASSETS
Copyrights
 A form of protection given by law to authors of
literary, musical, artistic, and similar works
 Copyright owners have exclusive rights to
print, reprint, copy, sell or distribute, perform
and record the work
 Life of creator + 50 years
– Economic life often less
Intangibles - 10
INTANGIBLE ASSETS
Trademarks
 A symbol, design, or logo associated with a
business
– Granted for 10 years with indefinite renewals
 If internally developed, trademarks often have
no recorded asset cost
 If purchased, a trademark is recorded at cost
 Amortization depends on whether they are
considered limited-life or indefinite – life
– Normally not amortized
Intangibles - 11
INTANGIBLE ASSETS
Franchises
 Right to sell products or provide
services purchased by franchisee from
franchiser (also referred to as licenses or permits)
 Purchase price is intangible asset which
is amortized over shorter of legal life or
economic life
– Might be indefinite ??
– Annual payments are operating expenses
Intangibles - 12
INTANGIBLE ASSETS
Leasehold Improvements
 A lease grants property
use rights from lessor
to lessee.
 Improvements to the
leased property made
by the lessee are
called leasehold
improvements.
Intangibles - 13
INTANGIBLE ASSETS
Leasehold Improvements
The cost of leasehold
improvements are
amortized over . . .
– the remaining term
of the lease, or
– the estimated useful
life,
– whichever is shorter.
Intangibles - 14
INTANGIBLE ASSETS
Goodwill
 Represents the value associated with
favorable characteristics of a firm that
result in earnings in excess of those
expected from identifiable assets of the
firm
 For many large firms, goodwill is a
major reported asset.
Intangibles - 15
INTANGIBLE ASSETS
Goodwill
 Goodwill is often present, but is only
recorded when one company combines
with another company.
 Goodwill is the excess of the actual
purchase price of an acquired firm over
the fair market value (FMV) of the
identifiable net assets acquired.
– SFAS No. 141
Intangibles - 16
INTANGIBLE ASSETS
Goodwill Example
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed James Company liabilities
of $200,000. James Company’s assets
were appraised at a fair value of
$900,000.
Intangibles - 17
Goodwill
Question
What amount of goodwill should be
recorded on Eddy Company books?
a.
b.
c.
d.
$100,000
$200,000
$300,000
$400,000
FMV of Assets
Debt Assumed
$
FMV of Net Assets
Purchase Price
Goodwill
$
900,000
200,000
700,000
1,000,000
$ 300,000
Intangibles - 18
ACCOUNTING FOR GOODWILL
SFAS No. 142
 Goodwill is no longer amortized
– Considered an indefinite-life intangible
 Goodwill is tested annually for
impairment
– Test is done at the “component” level
 Negative goodwill = extraordinary gain
Intangibles - 19
RESEARCH AND
DEVELOPMENT COSTS
 Research
– Planned search or critical investigation
aimed at discovery of new knowledge . . .
 Development
– The translation of research findings or
other knowledge into a plan or design . . .
Intangibles - 20
RESEARCH AND
DEVELOPMENT COSTS
 R&D costs are expensed as incurred
 Material R&D costs must be disclosed
 Equipment, facilities, and purchased intangibles
related to the research should be capitalized . . .
. . . if those items have alternative future
uses
Intangibles - 21
COMPUTER SOFTWARE COST
SFAS No. 86
“Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed”
 All costs incurred to establish the
technological feasibility of a computer
software product are to be treated
as R&D and expensed as incurred.
 Subsequent costs to obtain product
masters are to be capitalized as an
intangible asset.
Intangibles - 22
COMPUTER SOFTWARE COST
Amortization
 Amortization of capitalized computer
software costs starts when the product
begins to be marketed.
 Two methods are allowed:
– Revenue method
– Straight-line method
Company must use method giving the
greater charge annually
Intangibles - 23
COMPUTER SOFTWARE COST
Disclosures
 Balance Sheet
– Unamortized computer software
product master cost is an asset
• Shown at LCM
 Income Statement
– Amortization expense associated with
computer software cost.
– R&D expense associated with
computer software development cost.
Intangibles - 24
“Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed”
Initial development activities
on software product
Costs of planning, design,
coding, and testing PRIOR
to technological feasibility
Expense immediately as
Costs are incurred
ESTABLISH
TECHNOLOGICAL
FEASIBILITY
Capitalize as computer
software costs
Costs of coding, testing, debugging,
and manual preparation up to
obtaining master copies
Costs to produce software
BEGIN SALES OF PRODUCT
Customer support & maintenance costs
Capitalize as inventory
Expense as CGS
Match with
related revenue
Amortize to expense using
GREATER OF
revenue method or
straight-line method
Intangibles - 25
THE END
THIS CHAPTER HAS
BEEN A MOUNTAIN-TOP
EXPERIENCE, BUT I’M
GLAD IT IS FINISHED!