INTANGIBLE
12
ASSETS
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
12-1
Intangible
Intangible Asset
Asset Issues
Issues
Characteristics
Two Main Characteristics:
(1) They lack physical existence.
(2) They are not financial instruments.
Normally classified as long-term asset.
Common types of intangibles:
Patents
Copyrights
Goodwill
Franchises or licenses
Chapter
12-2
Intangible
Intangible Asset
Asset Issues
Issues
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.
Intangible
Intangible Asset
Asset Issues
Issues
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Chapter
12-4
Intangible
Intangible Asset
Asset Issues
Issues
Accounting for Intangibles
Illustration 12-1
Chapter
12-5
Types
Types of
of Intangibles
Intangibles
Six Major Categories:
(1) Marketing-related.
(2) Customer-related.
(3) Artistic-related.
(4) Contract-related.
(5) Technology-related.
(6) Goodwill.
Chapter
12-6
Types
Types of
of Intangibles
Intangibles
Marketing-Related Intangible Assets
Examples are:
trademarks or trade names, newspaper
Types
Types of
of Intangibles
Intangibles
Customer-Related Intangible Assets
Examples are:
customer lists, order or production backlogs, and
Chapter
12-8
Types
Types of
of Intangibles
Intangibles
Illustration: Assume that Green Market Inc. acquires the
customer list of a large newspaper for $6,000,000 on
January 1, 2010. Green Market expects to benefit
from the information evenly over a three-year period.
Record the purchase of the customer list and the
amortization of the customer list at the end of each
year.
Jan. 1
Customer List
6,000,000
Cash
Dec. 31
2010
2011
2012
Chapter
12-9
6,000,000
2,000,000
2,000,000
Types
Types of
of Intangibles
Intangibles
Artistic-Related Intangible Assets
Examples are:
plays, literary works, musical works, pictures,
Chapter
12-10
Types
Types of
of Intangibles
Intangibles
Contract-Related Intangible Assets
Examples are:
franchise and licensing agreements, construction
Chapter
12-11
Types
Types of
of Intangibles
Intangibles
Technology-Related Intangible Assets
Examples are:
patented technology and trade secrets granted
Types
Types of
of Intangibles
Intangibles
Illustration: Harcott Co. incurs $180,000 in legal costs on
January 1, 2010, to successfully defend a patent. The
patents useful life is 20 years, amortized on a straightline basis. Harcott records the legal fees and the
amortization at the end of 2010 as follows.
Jan. 1
Patent
180,000
Cash
Dec. 31
Chapter
12-13
180,000
9,000
9,000
Types
Types of
of Intangibles
Intangibles
Goodwill
Only recorded when an entire business is purchased
because goodwill cannot be separated from the
business as a whole.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable
net assets acquired.
Internally created goodwill should not be capitalized.
Chapter
12-14
Recording
Recording Goodwill
Goodwill
Illustration: Multi-Diversified, Inc. decides that it needs a
parts division to supplement its existing tractor
distributorship. The president of Multi-Diversified is
interested in buying Tractorling Company, a small concern in
Chicago. Illustration 12-3 presents the balance sheet of
Tractorling Company.
Illustration 12-3
Chapter
12-15
Recording
Recording Goodwill
Goodwill
Illustration: Multi-Diversified investigates Tractorlings
underlying assets to determine their fair values.
Illustration 12-4
Recording
Recording Goodwill
Goodwill
Illustration: Determination of Goodwill.
Illustration 12-5
Chapter
12-17
Recording
Recording Goodwill
Goodwill
Illustration: Multi-Diversified records this transaction as
follows.
Chapter
12-18
Recording
Recording Goodwill
Goodwill
Example: Global Corporation purchased the net assets of Local
Cost
Cash
Receivables
Inventories
Equipment
Total
FMV
15,000
10,000
50,000
80,000
$ 155,000
15,000
10,000
70,000
130,000
$ 225,000
25,000
25,000
25,000
100,000
30,000
$ 155,000
FMV of
Net Assets
= $200,000
Recording
Recording Goodwill
Goodwill
Example: Global Corporation purchased the net assets of Local
Revaluation
$70,000
Goodwill
$100,000
Recording
Recording Goodwill
Goodwill
Example: Global Corporation purchased the net assets of Local
Chapter
12-21
Recording
Recording Goodwill
Goodwill
Example: Global Corporation purchased the net assets of Local
Company for $300,000 on December 31, 2010. Prepare the
journal entry to record the purchase of the net assets of Local.
15,000
10,000
70,000
130,000
100,000
25,000
300,000
Goodwill
Goodwill
Goodwill Write-off
Goodwill considered to have an indefinite life.
Should not be amortized.
Only adjust carrying value when goodwill is
impaired.
Chapter
12-23
Goodwill
Goodwill
Bargain Purchase
Purchase price less than the fair value of net
assets acquired.
Amount is recorded as a gain by the purchaser.
Chapter
12-24
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Impairment of Limited-Life Intangibles
Same as impairment for long-lived assets in Chapter 11.
1. If the sum of the expected future net cash flows is less
than the carrying amount of the asset, an impairment
has occurred (recoverability test).
2. The impairment loss is the amount by which the carrying
amount of the asset exceeds the fair value of the asset
(fair value test).
The loss is reported as part of income from continuing
operations, Other expenses and losses section.
Chapter
12-25
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
E12-14: (Copyright Impairment) Presented below is information
related to copyrights owned by Botticelli Company at December
31, 2010.
Cost
$ 8,600,000
Carrying amount
4,300,000
4,000,000
Fair value
3,200,000
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Recoverability test: If the sum of the expected future net
cash flows is less than the carrying amount of the asset, an
impairment has occurred.
Expected future cash flow
Carrying value
4,000,000
4,300,000
(300,000)
Asset is Impaired
Chapter
12-27
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
(a) Prepare the journal entry (if any) to record the
impairment of the asset at December 31, 2010.
Loss on impairment
1,100,000
Copyrights
1,100,000
Fair value
Loss on impairment
Chapter
12-28
4,300,000
3,200,000
(1,100,000)
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
(b) Prepare the journal entry to record amortization expense
for 2011 related to the copyrights.
Amortization expense
320,000
Copyrights
320,000
Chapter
12-29
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Impairment of Indefinite-Life Intangibles
Other than Goodwill
Should be tested for impairment at least
annually.
Impairment test is a fair value test.
If the fair value of asset is less than the
carrying amount, an impairment loss is
recognized for the difference.
Recoverability test is not used.
Chapter
12-30
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Illustration: Arcon Radio purchased a broadcast license for
$2,000,000. Arcon Radio has renewed the license with the FCC
twice, at a minimal cost. Because it expects cash flows to last
indefinitely, Arcon reports the license as an indefinite-life
intangible asset. Recently the FCC decided to auction these
licenses to the highest bidder instead of renewing them. Arcon
Radio expects cash flows for the remaining two years of its
existing license. It performs an impairment test and determines
that the fair value of the intangible asset is $1,500,000.
Illustration 12-7
Chapter
12-31
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Impairment of Goodwill
Two Step Process:
Step 1: If fair value is less than the carrying amount of
the net assets (including goodwill), then perform
a second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill (implied
value of goodwill) and compare to carrying
amount.
Chapter
12-32
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
E12-15: (Goodwill Impairment) Presented below is net asset
Management estimated its future net cash flows from the division
to be $400 million. Management has also received an offer to
purchase the division for $335 million. All identifiable assets and
liabilities book and fair value amounts are the same.
Chapter
12-33
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
E12-15 Instructions
(a) Prepare the journal entry (if any) to record the
impairment at December 31, 2010.
Step 1: The fair
value of the
reporting unit is
below its carrying
value. Therefore, an
impairment has
occurred.
Step 2:
Loss on impairment
Goodwill
Chapter
12-34
335
160
175
200
(25)
25,000,000
25,000,000
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
E12-15 Instructions
(b) At December 31, 2011, it is estimated that the divisions
fair value increased to $345 million. Prepare the journal
entry (if any) to record this increase in fair value.
No entry necessary.
Adjusted carrying amount of the goodwill is its new
accounting basis.
Subsequent reversal of recognized impairment losses
is not permitted under SFAS No. 142.
Chapter
12-35
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Summary of Impairment Tests
Illustration 12-11
Chapter
12-36
Research
Research and
and Development
Development Costs
Costs
Frequently results in something that a company
patents or copyrights such as:
new product,
formula,
process,
composition, or
idea,
literary work.
Chapter
12-37
Research
Research and
and Development
Development Costs
Costs
Identifying R & D Activities
Research Activities
Planned
Planned search
search or
or critical
critical
investigation
investigation aimed
aimed at
at discovery
discovery
of
of new
new knowledge.
knowledge.
Development Activities
Translation of research findings
or other knowledge into a plan or
design for a new product or
process or for a significant
improvement to an existing
product or process whether
intended for sale or use.
Chapter
12-38
Illustration 12-13
Examples
Examples
Laboratory
Laboratory research
research aimed
aimed at
at
discovery
discovery of
of new
new knowledge;
knowledge; searching
searching
for
for applications
applications of
of new
new research
research
findings.
findings.
Examples
Conceptual formulation and design of
possible product or process
alternatives; construction of
prototypes and operation of pilot
plants.
Research
Research and
and Development
Development Costs
Costs
Accounting for R & D Activities
Costs Associated with R&D Activities:
Materials, Equipment, and Facilities
Personnel
Purchased Intangibles
Contract Services
Indirect Costs
Chapter
12-39
LO 9 Describe the accounting for research and development and similar costs.
Research
Research and
and Development
Development Costs
Costs
Example: Compute the amount to be reported as research and
development expense.
$280,000 / 5 = $56,000
R&D
Expense
$280,000
$56,000
59,000
59,000
100,000
100,000
128,000
128,000
50,000
50,000
34,000
$393,000
Chapter
12-40
LO 9 Describe the accounting for research and development and similar costs.
Presentations
Presentations of
of Intangibles
Intangibles and
and RR&&D
D
Balance sheet
Intangible assets shown as a separate item.
Contra accounts normally not shown.
Income statement
Report amortization expense and impairment
losses in continuing operations.
Total R&D costs charged to expense must be
disclosed.
Chapter
12-41
Presentations
Presentations of
of Intangibles
Intangibles
Illustration 12-15
Chapter
12-42
Presentations
Presentations of
of RR&&D
D Costs
Costs
Illustration 12-16
Chapter
12-43
Accounting
Accounting for
for Computer
Computer Software
Software Costs
Costs
Diversity in Practice
APPENDIX
12A
Accounting
Accounting for
for Computer
Computer Software
Software Costs
Costs
The Professions Position
FASB ASC 985-20-05 - Major recommendations of this
pronouncement are:
1. Until a company has established technological
feasibility for a software product, it should charge
to R&D expense the costs incurred in creating the
product.
2. Technological feasibility is established when the
company has completed a detailed program design or
a working model.
Chapter
12-45
Accounting
Accounting for
for Computer
Computer Software
Software Costs
Costs
Accounting for Capitalized Software Costs
If companies are to capitalize software costs, then they
must establish a proper amortization pattern.
As a basis for amortization, one of two amounts is used:
1.
Accounting
Accounting for
for Computer
Computer Software
Software Costs
Costs
Illustration: AT&T has capitalized software costs of $10
million, and current (first-year) revenues from sales of
this product of $4 million. AT&T anticipates earning $16
million in additional future revenues from this product; it
estimates that the product has an economic life of four
years. Under the two approaches, the calculations are as
follows for the first years amortization:
Percent-of-revenue approach
Chapter
12-47
Straight-line approach
Accounting
Accounting for
for Computer
Computer Software
Software Costs
Costs
Reporting Software Costs
Companies should report the following information relating
to software.
1. Unamortized software costs.
2. The total amount charged to expense and the
amounts, if any, written down to net realizable value.
Chapter
12-48
Copyright
Copyright
Copyright 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
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without the express written permission of the copyright owner
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assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Chapter
12-49