Chapter 12- Intangible Assets
Research and development costs that result in patents may be capitalized to the extent of the fair value of the patent
F
The same recoverability test that is used for impairments of plant, property, and equipment is used for impairments of indefinite-life intangibles
F
Intangible assets derive their value from the right (claim) to receive cash in the future.
F -is not a right
The cost of purchased patents should be amortized over the remaining legal life of the patent
F -not legal life, the useful life
Internally created intangible assets are recorded at cost
F -not recorded
Limited-life intangibles are reported at their a. replacement cost b. carrying amount unless impaired c. acquisition cost d. liquidation value
b. carrying amount unless impaired
LIMITED-LIFE INTANGIBLES ARE AMORTIZED BY SYSTEMATIC CHARGES TO EXPENSE OVER THEIR USEFUL LIFE
T
Some intangible assets are not required to be amortized.
T
The cost of acquiring a customer list from another company is recorded as an intangible asset
T
Internally generated intangible assets are initially recorded at fair value.
F
Internally created goodwill should not be capitalized in the accounts
T
Periodic alterations to existing products are an example of research and development costs
F
Goodwill write-off
-goodwill considered to have an indefinite life -should not be amortized -only adjust carrying value when goodwill is impaired
Columbia Sportswear Company acquired a trademark that is helpful in distinguishing one of its new products. The trademark is renewable every 10 years at minimal cost. All evidence indicates that this trademarked product will generate cash flows for an indefinite period of time. How should this trademark be amortized?
you don't because it is indefinite
Contract-related intangible assets
-franchise and licensing agreements, construction permits, broadcast rights, and service or supply contacts -franchise (license) with a limited life should be amortized to expense over the life of the franchise -franchise with an indefinite life should be carried at cost and not amortized
Romo Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented, all in the year 2020. How should these costs be accounted for in 2020?
-$190,000 research and development expense -$91,000 selling and marketing/promotion expense -$45,000 capitalized and used over the useful life
Presentation of Intangible assets- income statement
-Report amortization expense and impairment losses other than goodwill in continuing operations -Goodwill impairment losses should be presented as a separate line item in the continuing operations section, unless goodwill impairment is associated with a discontinued operation
Amortization of Intangible Assets of limited-life intangibles
-amortize to expense over useful life -credit asset account or accumulated depreciation -useful life should reflect the periods over which the asset will contribute to cash flows -amortization should be cost less residual value -companies should evaluate the limited-life intangibles for impairment
Customer-related intangible assets
-customer lists, order or production backlogs, and both contractual and non-contractual customer relationships -capitalize acquisition costs -amortized to expense over its useful life
Goodwill is the...
-excess of cost of the purchase over the fair value of the identifiable net assets (assets less liabilities) purchased -internally created goodwill should not be capitalized
Why is it important to differentiate between R&D expense and operating expense?
-important in determining both the amount of capital on a firm's books and how its profitability is measured -seasonal or period updates go into operating expense
Intangibles have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?
-limited-life intangibles are amortized by a systematic charges to expense over their useful life -indefinite life intangibles is not amortized
Amortization of Intangibles of Indefinite-life intangibles
-no foreseeable limit on time the asset is expected to provide cash flows -must test indefinite-life intangibles for impairment at least annually -no amortization
Should goodwill be amortized?
-no, it should be tested for impairment and then written off completely
Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in order to conform with generally accepted accounting principles?
-only when it is acquired by purchased
technology-related intangible assets
-patented technology and trade secrets granted but the U.S. Patent and Trademark Office -patent gives holder exclusive use for 20 years -capitalize costs of purchasing a patent -expense any R&D costs in developing a patent -amortize over legal life or useful life, whichever is shorter
Common types of intangibles
-patents -copyrights -franchise or licenses -trademarks or trade names -good will
Artistic-related intangible assets
-plays, literacy works, musical works, pictures, photographs, and video and audiovisual material -copyright granted for the life of the creator plus 70 years -capitalize costs of acquiring and defending -amortized to expense over useful life
What is included in the cost of intangible assets?
-purchase price -legal fees -incidental expenses
Bargain purchase
-purchase price less than the fair value of net assets acquired -amount is recorded as a gain by the purchaser
bargain purchase definition
-purchase price less than the fair value of net assets required -Don't record negative goodwill, its then a bargained purchase
intangible assets are...
-recorded at cost -generally expensed -only capitalized direct costs incurred in developing intangible, such as legal costs
Purchased intangibles are...
-recorded at cost -includes all costs necessary to make the intangible asset ready for its intended use typical costs include: -purchase price -legal fees -other incidental expenses
Presentation of Intangible assets- Balance Sheet
-reporting is similar to reporting of property, plant, and equipment -contra accounts are not normally shown for intangibles -companies should report as a separate item all intangible assets other than goodwill
Impairment of Indefinite-life intangibles other than goodwill
-should be tested for impairment at least annually -impairments test is a fair value test -if fair value of asset is less than carrying amount, an impairment loss is recognized for the difference -recoverability test is not used
Costs similar to R&D costs
-start-up costs for a new operation -initial operating losses -advertising costs -computer software costs
What should be the pattern of amortization for a limited-life intangible?
-the amount of amortization expensed should be based on how the asset is used up -if the usage cannot be determined, use straight line
If intangibles are acquired for stock, how is the cost of the intangible determined?
-the cost of the intangibles is the fair value of the consideration given or the fair value of the consideration received, whichever is more clearly evident
marketing-related intangible assets
-trademarks or trade names, newspaper mastheads, internet domain names, and non-competition agreements -in the USA trademarks or trade names have legal protection for indefinite number of 10 year renewal periods -capitalize acquisition costs -no amortization
Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?
-you can only record goodwill on the balance sheet when it is bought
Impairment of Limted-life intangibles
1. 1.If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset, an impairment has occurred (recoverability test). 2. 1.The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (fair value test).
What are the 2 characteristics of intangible assets?
1. lack physical existence 2. not financial instruments
Impairment of Goodwill
2 step process 1.If fair value is less than the carrying amount of the reporting unit (including goodwill), then perform a second step to determine possible impairment. 2.Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.
Izzy Inc. purchased a patent for $350,000 which has an estimated useful life of 10 years. Its pattern of use or consumption cannot be reliably determined. Prepare the entry to record the amortization of the patent in its first year of use.
Amortization expense 35,000 Patent 35,000
Amortization of limited-life intangible assets should not be affected by expected residual values
F
Contra asset accounts must be reported for intangible assets in a manner similar to accumulated depreciation and property, plant, and equipment
F
If market value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period
F
Internally created goodwill associated with a business may be recorded as an asset when a firm offers to purchase that business unit has been received
F
All intangibles are subject to a periodic consideration of impairment with corresponding potential write-downs
T
If a new patent is acquired through modificati9on of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent
T
If the fair value of an unlimited life intangible other than goodwill is less than its book value, an impairment loss must be recognized
T
In a business combination, a company assigns the cost, when possible, to the identifiable tangible and intangible assets, with the remainder recorded as goodwill.
T
Which of the following activities should be expensed currently as R&D costs?
a. Testing in search for or evaluation of product or process alternatives. -research and development expense b. Engineering follow-through in an early phase of commercial production. -research and development expense c. Legal work in connection with patent applications or litigation, and the sale or licensing of patents. -capitalize it
Research and development costs
are not in themselves intangible assets -companies must expense all research and development costs when incurred -frequently results in something that a company patents or copyright such as: -new product -process -idea -formulation -composition -literacy work
Negative goodwill arises when the __________________ of the net assets acquired is higher than the purchase price of the assets. a. useful life b. carrying value c. fair market value d. excess earnings
c. fair market value
Accounting for R&D activities
costs associated with R&D activities -materials, equipment, and facilities -personnel -purchased intangibles -contract services -indirect costs
A patent should be amortized over a. 20 years b. its useful life c. its useful life or 20 years, whichever is longer d. its useful life or 20 years, whichever is shorter
d. its useful life or 20 years, whichever is shorter -patents have a legal life of 20 years
Copyrights should be amortized over a. their legal life b. the life of the creator plus 20 years c. twenty years d. their useful life or legal life, whichever is shorter
d. their useful life or legal life, whichever is shorter -generally the useful life is shorter than the legal life
Goodwill definition
excess of acquisition cost of assets and the fair value of the assets (assets less liabilities)
legal life definition (copyrights)
life of the creator + 70 years
Intangible assets are normally classified as...
long-term assets
