Chapter 12 - Intangible Assets

Product Patent

covers actual physical products

Valuation of Internally Created Intangibles

Companies capitalize only direct cost incurred, such as legal cost, and expense the rest.

Marketing - related intangibles assets

- used in the marketing or promotion of products - examples are trademarks/tradenames, newspaper masthead, Internet domain names, and non-competition agreements(company names) - If registered with the U.S. Patent and Trademark Office provides legal protection for an indefinite number of renewals for periods of 10 years each

Accounting Treatment/Rationale: Legal fees to obtain patent on new laser scanner.

Capitalize as patent and amortize to overhead as part of cost of goods manufactured. Direct cost of patent.

T/F: Impairment testing is performed in the same way for indefinite-life intangibles and limited-life intangibles.

False For indefinite-life intangibles, a company performs only the fair value test; for limited-life intangibles, a company performs a recoverability test and then a fair value test.

T/F: Intangible assets are normally classified as current assets.

False In most cases, intangible assets provide services over a period of years and are therefore classified as long-term assets.

Recording - Internally Created Goodwill

Generated Internally should not be capitalized in the account

Recording - Purchased Goodwill

Goodwill is only recorded when an entire business is purchased

Bargain Purchase

few cases, the purchaser in a business combination pays less than the fair value of the identifiable net assets. the excess amount is recorded as a gain

Contract - related intangible assets

represents the value of rights that arise from contractual arrangements examples are franchising and licensing, construction permits, broadcast rights, and service or supply contract

Physical Characteristics of Intangible Assets

1. They lack physical existence 2. They are not financial instruments

Accounting Treatment/Rationale: Purchase of materials for use on current and future R&D projects.

Inventory and allocate to R&D projects; expense as consumed. Has alternative future use.

Impairment of Limited- Life Intangibles

Similar to PPE. 1. Recoverability Test - the company's estimate the future cash flow expected from the use of the asset and its eventual disposal. If the sum of the expected future net cash flow (discounted) is less than the carrying amount of the assets, the company would measure and recognize a loss 2. Fair Value Test - measures the impairment loss by comparing the assets fair value with it's carrying amount *do have the option to perfome a qualative assesment

Production backlogs fall under which category of intangible assets?

Customer-related. Production backlogs are an example of customer-related, not technology-related, intangible assets.

Process Patent

which governs the process of making products

Indefinite Useful Life

There is no foreseeable limit on the period of time over which the intangible asset is expected to provide cash flow. Should be tested for impairment annually

The excess cost of the purchase over the fair market value of a company's identifiable net assets is sometimes referred to as a gap filler. a master valuation account. goodwill.

all of these answer choices are correct. Goodwill is measured as the excess of the cost of the purchase over the fair value of the identifiable net assets (assets - liabilities) purchased. Goodwill is therefore measured as a residual rather than measured directly. This is why goodwill is sometimes referred to as a plug, a gap filler, or a master valuation account.

Research Activities

planned searched or critical investigation aimed at discovery of new knowledge e.g. laboratory research or searching for applications of new research findings

Technology - related intangible assets

relates to the innovation or technological advances. examples are patented technology and trade secrets. This gives the holder exclusive rights to use, manufacture, and sell a product or process for a period of 20 years companies should amortize the cost of a patent over its legal life or its useful life, WHICHEVER IS SHORTER!

The controversy surrounding the policy to expense all research and development costs associated with internally created intangible assets results in

understating assets and overstating expenses Expensing all research and development costs associated with internally created intangible assets results in understating assets and overstating expenses.

On July 1, 2017, Adele Company bought a trademark from Robert, Inc. for $2,750,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Robert's books was $1,600,000. In Adele's 2017 income statement, what amount should be reported as amortization expense?

$137,500 Straight-line amortization, $2,750,000 (cost) / 10 years (useful life) X 6/12 (July 1 - December 31, 2017) results in an amortization expense of $137,500.

Oscar Company acquired a patent on a manufacturing process on January 1, 2015 for $5,100,000. It was expected to have a 12 year life and no residual value. Oscar uses straight-line amortization for patents. On December 31, 2016, the expected future cash flows from the patent are $387,500 per year for the next ten years. The present value of these cash flows, discounted at Oscar's market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2016 balance sheet?

$3,050,000 The book value of the patent at December 31, 2016 is $4,250,000 (cost of $5,100,000 less 2 years amortization at $425,000 per year ($5,100,000 cost / 12 year useful life)). Since the sum of the undiscounted cash flows of $3,875,000 is less than the carrying value, the company must measure and recognize an impairment loss. The patent should be carried on the balance sheet at the present value of the $387,500 expected annual cash flows for the next 10 years, $3,050,000.

Lumberyard Inc. incurred the following costs during the year ended December 31, 2017: Laboratory research aimed at discovery of new knowledge $ 4,295,000 Costs of testing prototype and design modifications 712,500 Quality control during commercial production, including routine testing of products 485,000 On December 31, 2017, purchase of research facilities having an estimated useful life of 20 years with alternative future use in other research & development projects 7,360,000 The total amount to be classified and expensed as research and development in 2017 is

$5,007,500 Laboratory research aimed at discovery of new knowledge of $4,295,000 plus costs of testing prototype and design modifications of $712,500 totals $5,007,500. Quality control during commercial production, including routine testing of products is not an R&D activity and the purchase of research facilities having an estimated useful life of 20 years with alternative future use in other R&D projects would be capitalized. The company won't account for depreciation expense as R&D in 2017.

Kern Corporation began operating as a business in 2017. During January 2017, the company paid $300,000 in design costs to develop its trademark and $250,000 in legal and registration fees to secure the trademark. During October 2017, the company successfully defended its trademark, paying an additional $150,000 in legal fees during the process. At what amount should Kern Corporation report its trademark on its December 31, 2017 balance sheet?

$700,000 When a company develops a trademark, it capitalizes the costs related to securing it including legal fees, registration fees, design costs, and successful defense costs. In the case, $300,000 + $250,000 + $150,000 = $700,000.

On January 1, 2017, Bumper Corp. acquires a customer list for $400,000. Bumper estimates that this customer list will generate value for at least 5 years. At the end of 3 years, Bumper plans to sell the customer list to another company for $62,500. On Bumper's income statement for the year ended December 31, 2017, how much amortization expense should it report?

$80,000 Customer lists should be amortized over their useful life (lesser of useful life or legal/economic life): Annual Amortization Expense = Cost less residual value / useful life: ($400,000 - 62,500)/ 3 years = $112,500 annual amortization expense.

The presentation of intangible assets in the financial statements (LO 5) (a)Includes reporting R&D costs as an expense in the income statement. (b)Involves crediting amortization directly to the intangible asset account. (c)Includes the disclosure of the amortization expense for the next 5 years. (d)All of these answer choices are correct.

(d)All of these answer choices are correct. The presentation of intangibles in the financial statement includes reporting R&D expense in the income statement, crediting amortization directly to the intangible asset account, and disclosing amortization expense for the next 5 years.

Which of the following research and development costs may be capitalized? (LO 5) (a)Contract services. (b)Personnel. (c)Indirect costs. (d)Research and development equipment to be used on current and future projects.

(d)Research and development equipment to be used on current and future projects. R&D equipment to be used on current and future projects is to be capitalized and depreciated over its useful life.

Artistic - related intangible assets

- This involves ownership rights to plays, literary work, musical work, pictures, photographs, and video/audiovisual material. Copyright protects these ownerships

Copyright

- a federally granted right that all authors, painters, musicians, sculptors, and other artist have in their creation and expressions. Is granted for the life of the creator plus 70 years (are not renewable = indeinite life) - capitalize the cost of acquiring and defending the copyright

Customer - related intangible assets

- results from interactions with outside parties - Customer lists, order or production backlogs, and both contractual or non-contractual relationships COMPANIES SHOULD ASSUME A ZERO RESIDUAL VALUE UNLESS THE ASSET'S USEFUL LIFE IS LESS THAN THE ECONOMIC LIFE AND RELIABLE EVIDENCE IS AVAILABLE CONCERNING THE RESIDUAL VALUE.

Impairment of Indefinite - Life Intangibles OTHER THAN GOODWILL

1. Fair Value Test - measures the impairment loss by comparing the assets fair value with it's carrying amount

6 Types of Intangible Assets

1. Marketing - related intangibles assets 2. Customer - related intangible assets 3. Artistic - related intangible assets 4. Contract - related intangible assets 5. Technology - related intangible assets 6. Goodwill

Accounting for R&D Activities

1. Material, equipment, and facilities - expense Unless the item has alternative future use ( carry to inventory or allocate as consumed or capitalizes and depreciate as usual) 2. Personel - expense as incurred (salaries, wages, and other related) 3. Purchased Intangibles (recognize and measure at fair value the detemine, if necessary, to amortize) 4. Contract services- expense 5. Indirect cost- reasonable allocation (except general and admin if related to r&D)

Valuation of Purchased Intangibles

1. Recorded at cost from purchase from another party 2. In exchange for stock or another asset, fair value of the consideration given or the fair value of the intangible asset received, whichever is clearly more evident

Cost Similar to R&D

1. Start up cost for a new operation -includes organization cost(legal and states fees ) expense as incurred 2. Initial Operating Losses - should not be capitalized, (the accounting and reporting standards should be no different for an enterprise trying to establish a new business that they are for another enterprise) 3. Advertising Cost - must expense cost as the incurred or the first time advertising takes place 3. Computer Software Cost - report as selling or administrative expense

Accounting Treatment/Rationale : Construction of long-range research facility for use in current and future projects (three-story, 400,000-square-foot building).

Capitalize and depreciate as R&D expense. Has alternative future use.

Accounting Treatment/Rationale: Acquisition of machinery for use on current and future R&D projects.

Capitalize and depreciate as R&D expense. Has alternative future use.

Accounting Treatment/Rationale: Costs of successfully defending patent on laser scanner.

Capitalize as patent and amortize to overhead as part of cost of goods manufactured. Direct cost of patent.

Which of the following costs should be excluded from research and development expense? (LO 5) (a) Modification of the design of a product. (b)Acquisition of R&D equipment for use on a current project only. (c)Cost of marketing research for a new product. (d)Engineering activity required to advance the design of a product to the manufacturing stage.

Cost of marketing research for a new product. The cost of marketing research for a new product should be excluded from research and development expenses (operating expense).

Which of the following is considered a research activity? All of these answer choices are correct. Operation of a pilot plant. Construction of a prototype. Critical investigation aimed at discovery of new knowledge.

Critical investigation aimed at discovery of new knowledge. Only critical investigation aimed at discovery of new knowledge is considered a research activity. There is only one correct answer.

Amortize Journal Entry

Debit charge as expense Credit either the asset account or the accumulated amortization account

Accounting Treatment/Rationale: Executive salaries.

Expense as operating expense. Not R&D cost (general and administrative expense).

Accounting Treatment/Rationale: Commissions to sales staff marketing new laser scanner.

Expense as operating expense. Not R&D cost (selling expense).

Accounting Treatment/Rationale: Cost of marketing research to promote new laser scanner.

Expense as operating expense. Not R&D cost (selling expense).

Accounting Treatment/Rationale: Costs of testing prototype and design modifications.

Expense immediately as R&D. Development cost.

Accounting Treatment/Rationale: Engineering costs incurred to advance the laser scanner to full production stage.

Expense immediately as R&D. Development cost.

Accounting Treatment/Rationale: Material, labor, and overhead costs of prototype laser scanner.

Expense immediately as R&D. Development cost.

Accounting Treatment/Rationale: Acquisition of R&D equipment for use on current project only.

Expense immediately as R&D. Research cost.

Accounting Treatment/Rationale: Salaries of research staff designing new laser bone scanner.

Expense immediately as R&D. Research cost.

T/F: If a company buys several intangible assets in a "basket purchase," the company should allocate the cost on the basis of the book values of the purchased intangible assets.

False If a company buys several intangible assets in a "basket purchase," the company should allocate the cost on the basis of the fair values, not book values, of the purchased intangible assets.

Which of the following is not one of the major categories of intangibles?

Financing-related. There is no category of financing-related intangibles.

What is the difference between the purchase price and the fair value of net assets

Goodwill, procedure is a master valuation approach - Notified on the balance sheet as the excess of cost over the fair value

IFRS permits revaluation of

IFRS permits revaluation of limited-life intangible assets; however, revaluations are not permitted for goodwill or indefinite-life intangible assets.

Which of the following costs of goodwill should be amortized over their estimated useful lives? Costs of goodwill from a business combination accounted for as a purchase Costs of developing goodwill internally

NO NO Neither goodwill purchased or developed internally is amortized.

Amortize Goodwill

NO, INDEFINITE LIFE COMPANYS CAN ADJUST ITS CARRYING VALUE WHEN IMPAIRED

Accounting Treatment/Rationale: Research costs incurred under contract with New Horizon, Inc., and billable monthly.

Record as a receivable. Not R&D cost (reimbursable expense).

Which of the following research and development costs may be capitalized?

Research & development equipment with alternative future uses in other research & development projects or otherwise can be capitalized.

Companies must expense

Research and development cost

Amoritzation

The allocation of the cost of intangible assets in a systematic way. Limited (Finite) Useful life - are amortize (e.g. copyrights to movies/ licenses to brand) Indefinite Useful life does not amortize (e.g., trademark/domain name)

The impairment rule for goodwill involves how many steps?

The impairment rule for goodwill is a two-step process.

T/F: The residual value of an intangible asset should be assumed to be zero unless, at the end of its useful life, the intangible asset has value to another company.

The residual value of an intangible asset should be assumed to be zero unless, at the end of its useful life, the intangible asset has value to another company.

Which of the following would not be amortized?

Trade names have legal protection for an indefinite number of renewals for 10 years each; therefore, a company that uses an established trade name may properly consider it to have an indefinite life and does not amortize its cost.

Development Activities

Translation of research findings or other knowledge into a plan or design for a new product or process of for a significant improvement to an existing product or process whether intended for sales or use. e.g. conceptual formulation and design of possible product or process alternative, construction of prototypes and operation of pilot plants

Impairment of Goodwill

Two-Step Process 1. Compare the Fair Value of the reporting unit to its carrying amount (net assets). If fair value is less than the carrying amount then do step 2 to determine impairment loss 2. Compare carrying amount of goodwill to the implied value (Fair Value of the reporting unit less net identifiable assets/ excluding goodwill).

All of the following statements regarding IFRS accounting treatments for intangibles are true except: Under IFRS, costs in the development phase of Research & Development costs are expensed once technological feasibility is achieved. IFRS permits some capitalization of internally generated intangible assets. IFRS permits revaluation on limited-life intangible assets. IFRS allows reversal of impairment losses when there has been a change in economic conditions.

Under IFRS, costs in the development phase of Research & Development costs are expensed once technological feasibility is achieved. This statement is true, IFRS does permit some capitalization of internally generated intangible assets if it's probable there will be a future benefit and the amount can be reliably measured.

Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of

faithful representation winning out over relevance. Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of faithful representation winning out over relevance.

Write off

impairment

Goodwill

is the excess of the cost of the purchase over the fair value of the identifiable assets(assets-liabilities) purchased referred as plug, a gap filler, or a master valuation account.

A purchased limited-life intangible asset ______ amortized and is impairment tested using _______________

is; the recoverability test and then the fair value test A purchased limited-life intangible asset is amortized and is impairment tested using the recoverability test and then the fair value test