INTERMEDIATE
ACCOUNTING
Chapter 12
Intangibles
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Where’s the Value?
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Even though intangible assets do not have a physical or financial
nature, they can create an enormous value for companies.
The World Bank estimates that intangible assets are not only the
single most important component of wealth, but the fastest
growing one as well.
Intangible assets are assets that do not have a physical or
financial nature but do have value based on the rights and
privileges they convey to the company that owns and uses them.
Intangible assets generally have a higher degree of uncertainty
regarding their future economic benefits due, in large part, to
their intangible nature that makes them harder to separate and
sell relative to tangible assets.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature and Accounting for Intangible Assets
(Slide 1 of 3)
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Intangible assets that are externally acquired are purchased
from others, either in a separate transaction or as a part of a
business acquisition.
Purchased intangible assets are capitalized at the cost to
obtain the asset and prepare it for use.
Intangible assets that are internally developed are generally
expensed because the future economic benefits associated with
them are difficult to measure.
The costs incurred to develop internally developed intangible
assets are often difficult to measure separately from the
normal, ongoing operating costs of the business.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature and Accounting for Intangible Assets
(Slide 2 of 3)
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Identifiable intangible assets are intangible assets that can
be separated from the company and sold, transferred,
licensed, rented, or exchanged. Examples of identifiable
intangible assets include:
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Trademarks and trade names
Patents
Copyrights
Franchise rights
Customer lists and relationships
Unidentifiable intangible assets are intangible assets that
cannot be separated from the entity and sold, transferred,
licensed, rented, or exchanged.
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The primary unidentifiable intangible asset is goodwill.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature and Accounting for Intangible Assets
(Slide 3 of 3)
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Purchased intangible assets
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Those that are purchased from others, either in a separate
transaction or as a part of a business acquisition.
Purchased intangibles are capitalized at the cost to obtain the asset
and prepare for use.
Internally developed intangible assets
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Internally developed intangible assets are generally expensed
because the future economic benefits associated with them are
difficult to measure.
The costs incurred to develop internally developed intangible assets
are often difficult to measure separately from the normal, ongoing
operating costs of the business.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Classification and Accounting for
Intangible Assets
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Amortization and Impairment of
Intangible Assets
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The allocation of the cost of intangible assets in a systematic
and rational manner over the asset’s useful life is called
amortization.
An impairment of an intangible asset occurs when the fair
value of the asset is less than its carrying value.
Intangible assets are separated into two categories to
determine whether they are amortized and how they are
reviewed for impairment. The two categories are:
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intangible assets with a finite, or limited life
intangible assets with an indefinite life
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Intangible Assets with a Finite Life
(Slide 1 of 2)
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An identifiable intangible asset that has a finite life is
amortized over its useful life.
Factors that a company should consider in estimating the useful
future life of an intangible asset are:
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Expected use of the intangible asset
Expected useful life of another asset that is related to the life of the
intangible asset
Any legal, regulatory, or contractual provisions that enable renewal or
extension of the intangible asset’s legal or contractual life without
substantial economic cost
Effects of obsolescence, demand, competition, and other economic
factors
Level of maintenance costs required to obtain the expected future cash
flows from the asset
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Intangible Assets with a Finite Life
(Slide 2 of 2)
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GAAP requires that a company review its intangible
assets for impairment.
Testing of impairment of intangible assets with a finite life
consists of two steps:
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Recoverability Test. If the total undiscounted cash flows expected
to result from the use of the intangible asset are less than the
asset’s book value, the book value is not recoverable, and the
company must recognize an impairment loss.
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Measurement of the Loss. The impairment loss is measured as the
difference between the asset’s book value and its fair value.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Intangible Assets with an Indefinite Life
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An intangible asset with an indefinite life is not
amortized but is reviewed for impairment.
An intangible asset with an indefinite life is
impaired when its fair value is less than its book
value.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Research and Development Costs
(Slide 1 of 3)
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Research is a the planned search or critical
investigation aimed at discovering new knowledge
that hopefully will be useful in developing or
improving a new product or process or in
significantly improving an existing product or
process.
Development is the translation of research findings
into a plan or design for a new product or process
or for significantly improving an existing product or
process.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Example of Activities Included in R&D
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Example of Activities Excluded From R&D
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
In-Process R&D
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In-process R&D is the intangible asset created in an
acquisition when the acquiring company allocates a
portion of the purchase price to the R&D activities
that are purchased.
In-process R&D is initially capitalized at fair value
and treated as an intangible asset with an
indefinite life until the R&D activities are completed
or abandoned.
In-process R&D is expensed immediately if the
project is abandoned.
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Start-Up Costs
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Start-up costs are the costs incurred for one-time activities
related to:
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Opening a new facility or commencing a new operation
Introducing a new product or service
Conducting business in a new territory or with an entirely new
class of customer
Initiating a new process in an existing facility
Start-up costs include organization costs such as legal
fees, stock certificate costs, underwriting fees, and
accounting fees associated with forming a company.
GAAP requires that the costs of start-up activities be
expensed as incurred.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Are Intangible Assets Disclosed?
(Slide 1 of 2)
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At the end of each period when a company presents a balance
sheet, it should disclose the following:
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For intangible assets that are amortized—the total cost, accumulated
amortization, and estimated amortization expense for the next five
years
For intangible assets that are not amortized—the cost of each major
class of intangible asset
The total of all identifiable intangible assets as a separate line item
(asset) on the balance sheet
For any intangible asset impairment other than goodwill
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The facts leading to the impairment
The amount of the impairment loss
The method of determining the fair value of the intangible asset
Any impairment losses should be included in income from continuing
operations
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Are Intangible Assets Disclosed?
(Slide 2 of 2)
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At the end of each period when a company presents a
balance sheet, it should disclose the following:
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For goodwill—the amount of goodwill acquired and the amount of
any impairment losses recognized; any impairment loss should be
reported as a separate line item in income from continuing
operations, unless the impairment is related to a discontinued
operation
If intangible assets are acquired during the period, GAAP
requires a company to disclose:
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Cost of any intangible assets acquired
Residual value and the weighted-average amortization period for
intangible assets that are amortized
Cost of any research and development acquired and written off,
and where it is included on the income statement
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Identifiable Intangible Assets
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Identifiable intangible assets can be classified into
five basic categories related to:
 Marketing
 Customers
 Artistic
works
 Contracts
 Technology
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Marketing-Related Intangible Assets
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Marketing-related intangible assets are resources used to
market or promote a company’s products or services.
A trademark (or trade name) is a word, name, phrase, or
symbol that identifies the source of a product and distinguishes
it from the products or other companies.
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Registration of a trademark or trade name with the U.S. Patent and
Trademark Office establishes a right to exclusive use of the
trademark or trade name for ten years.
 The right is renewable indefinitely as long as the trademark
or trade name is used continuously.
Internet domain names are the names used to identify a
particular Internet address.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Customer-Related Intangible Assets
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Customer-related intangible assets arise from the
relationship between a company and its customers.
If these assets are developed internally, the cost of
developing them is expensed.
Customer-related intangible assets are generally
considered to have a finite life and are amortized
on a straight-line basis.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Artistic-Related Intangible Assets
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Artistic-related intangible assets represent the right to
reproduce, copy, or perform artistic works.
A copyright is a grant by the federal government that
gives the owner the exclusive right to publish, sell, or
otherwise control literary or artistic products for the life
of the author plus 70 years.
Under U.S. GAAP, increases in the market value of
intangible assets are not recognized in the financial
statements.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Contract-Based Intangible Assets
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Contract-based intangible assets represent the value of
rights arising from contractual agreements.
Included in this category are:
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Franchise agreements
Licensing and royalty agreements
Construction permits
Broadcast rights
Use rights
Franchises are contractual agreements in which, for a fee,
the franchisor gives the franchisee the right to perform
certain functions or sell certain products or services.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Technology-Based Intangible Assets
(Slide 1 of 2)
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Technology-based intangible assets are assets that
represent technological advancement and provide economic
benefits to companies through either legal or contractual
protection.
A patent:
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Is an exclusive right granted by the federal government.
Gives the owner control of the manufacture, sale, or other use of
the invention.
Is granted for 20 years from the date of the filing.
Is an intangible asset that cannot be renewed because it has a
finite life.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Technology-Based Intangible Assets
(Slide 2 of 2)
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Software development costs for software that is to be sold,
licensed, or leased to third parties include:
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The costs of designing the software.
The costs of coding the software.
The cost of testing the software.
GAAP requires that these costs be treated as R&D expense
until the technological feasibility of the product is
established.
Technological feasibility is established the date the
company completes a detailed program design or, in its
absence, when it completes a working model of a product.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounting for Software Development Costs
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The costs that are incurred in the preliminary stage of
developing internal-use computer software are expensed as
incurred.
Once the preliminary stage is completed and management
agrees to fund the development of the software, the company
capitalizes the software costs.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internally Developed Goodwill
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Goodwill is an unidentifiable intangible asset with an indefinite
life that is only recognized when one company purchases another
company.
Goodwill is the excess of the purchase price over the fair value
of the acquired company’s identifiable net assets.
Internally developed goodwill is distinguished from other
identifiable intangible assets by two characteristics:
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It is not separable from the other assets of a company.
Measuring the value of internally developed goodwill would be difficult
and less representationally faithful than measuring the value of
identifiable intangible assets.
The costs associated with internally developed assets are
expensed as incurred.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Purchased Goodwill
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Purchased goodwill is the difference between the purchase
price of the acquired company and the fair value of the
identifiable net assets.
Four factors can account for the difference between the
value of the company as a whole and the book value of the
net assets:
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Many assets are listed on the balance sheet at amounts different
from their fair market value.
Identifiable intangible assets may be unrecorded or undervalued.
Unidentifiable intangible assets may exist but not be recognized
on the target company’s balance sheet.
The acquirer may simply pay too much.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Impairment of Goodwill
(Slide 1 of 3)
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Goodwill is considered to have an indefinite life.
Examples of circumstances that would indicate an impairment
exists include:
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Macroeconomic situations such as a deterioration in general
economic conditions
Industry and market considerations such as a deterioration in the
business environment or increased competition
Cost factors such as increases in raw materials, labor, or other
costs
A decline in financial performance of the company
Changes in management, key personnel, strategy, or customers
An expectation that a reporting unit may be sold
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Impairment of Goodwill
(Slide 2 of 3)
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Because goodwill is an unidentifiable intangible asset
that cannot be separated from the company itself, the
goodwill must be assigned to a reporting unit within
the company.
A reporting unit is an operating segment or
component of a company for which discrete financial
information is available that is regularly reviewed by
management.
Goodwill is tested for impairment within the
context of its reporting unit.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Impairment of Goodwill
(Slide 3 of 3)
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If a qualitative assessment indicates that it is more likely
than not that the fair value of the reporting unit is less than
its carrying value, a company must perform a two-step
quantitative impairment test.
Step 1. Determine if an impairment has occurred by comparing the
fair value of the reporting unit with its book value,
including goodwill.
Step 2. Measure and recognize an impairment loss for the amount
by which the implied fair value of the goodwill is less than
its carrying value.
If the fair value of the reporting unit is less than its book value, the
second step of the impairment test must be performed to measure
the amount of the impairment loss, if any.
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Bargain Purchase
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It is possible that the cash paid for the company is less
than the fair value of the identifiable net assets acquired.
While such a situation is not common, it may occur if there
is a forced liquidation or distressed sale.
If such a bargain purchase occurs, negative goodwill is not
recorded.
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The acquiring company recognizes a gain on the bargain purchase:
Gain on Bargain
=
Purchase
Fair Value of
Identifiable Net
Assets
‒
Purchase Price
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.