Chapter 12 Intangible Assets

Describe the characteristics of intangible assets:

Intangible assets have two main characteristics: (1) they lack physical existence, and (2) they are not financial instruments. In most cases, they provide services over a period of years and normally classified as long-term assets.

Identify the costs to include in the initial valuation of intangible assets.

Intangibles are recorded at cost. Cost include all acquisition costs and expenditures needed to make the asset ready for its intended use. If intangibles are acquired in exchange for stock or other assets, the cost is fair market value of the consideration given or the fair market value of the intangible received, which ever is more clearly evident. A "basket purchase" should allocate the cost on the basis of fair values.

Explain the procedure for amortizing intangible assets.

Intangibles have either a limited useful liife or an indefinite useful life. Companies amortize limited-life intangibles. They do not amortize indefinite-life intangibles. Limited-life intangibles should be amortized by systematic charges to expense over their useful life. The useful life should reflect the period over which these assts will contribute cash flows. The amount to report for amortization expense should reflect the pattern in which a company consumes or uses up the asset, if it can reliably determine that pattern. Otherwise, use a straight-line approach.

Amortization

The allocation of the cost of intangible assets in a systematic way.

Recoverability Test

The company estimates the future cash flows expected from use of the assets and its eventual disposal. If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset, the company would measure and recognize an impairment loss.

Explain the accounting issues related to intangible-asset impairments.

Impairment occurs when the carrying amount of the intangible asset is not recoverable. Companies use a recoverability test and a fair value test to determine impairments for limited-life intangibles. They use only a fair value test for indefinite-life intangibles. Goodwill impairments require a two step process: First, test the fair value of reporting unit, then do the fair value test o implied goodwill (Updated Topic 350 2011-08) Simplified.

Describe the types of intangible assets.

Major types are: (1) marketing-related intangibles, used in the marketing or promotion of products and serices; (2) customer-related, resulting from interactions with outside parties; (3) artistic-related, giving ownership rights to such items as plays and literary works; (4) contract-related, representing the value that arise from contractual arrangements, (5) technology-related, relating to innovations or technological advances; and (6) goodwill, arising from business combinations.

Describe the accounting for research and development and similar costs.

Many costs have characteristics similar to R&D costs. Examples are start-up costs, initial operating losses, and advertising costs. For the most part, these costs are expensed as incurred, similar to the accounting for R&D costs.

Indicate the presentation of intangible assets and related items.

On the balance sheet, companies should report all intangible assets other than goodwill as a separate item. Contra accounts are not normally shown. If goodwill is present, it too should be reported as a separate item. On the income statement, companies should report amortization expense and impairment losses in Continuing operations. The notes to the financial statements have additional detailed information. Financial statements must disclose the total R&D costs charged to expense each period for which an income statement is presented.

Identify the conceptual issues related to research and development costs.

R&D costs are not in themselves intangible assets, but R&D activities frequently result in the development of something a company patents or copyrights. The difficulties in accounting for R&D expenditures are: (1) identifying the costs associated with particular activities, projects, or achievements, and (2) determining the magnitude of the future benefits and length of time over which a company may realize such benefits. Because of these latter uncertainties, companies are required to expense all research and development costs when incurred.

Fair Value Test

This test measures the impairment loss by comparing the asset's fair value with its carrying amount. The impairment loss is the carrying amount of the asset less the fair value of the impaired asset.

Describe the accounting procedures for recording goodwill.

To record goodwill, a company compares the fair value of the net tangible and identifiable intangible assets with the purchase price of the acquired business. The difference is considered goodwill. Goodwill is residual. Goodwill is often identified on the balance sheet as the excess of cost over the fair value of the net assets acquired.

Explain the conceptual issues related to goodwill.

Unlike receivable, inventory, and patents that a company can sell or exchange individually in the marketplace, goodwill can be identified only with the company as a whole. Goodwill is a "going concern" valuation and is recorded only when an entire business is purchased. A company should not capitalize goodwill generated internally. The future benefits of goodwill may have no relationship to the costs incurred in the development of that goodwill. Goodwill may exist even in the absence of specific costs to develop.