Chapter 12: Intangibles

Purchased Identifiable Intangible Assets.

Companies account for purchased identifiable intangible assets, such as a patent or trademark, in a similar manner to that of tangible assets

GAAP

However, __________ requires that the costs of start-up activities be expensed as incurred.

Testing for impairment of intangible assets with a finite life consists of two steps:

Step 1: 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 company must recognize an impairment loss because the book value of the asset is not recoverable. Step 2: Measurement of the Loss. The impairment loss is measured as the difference between the asset's fair value and its book value.

amortization

The allocation of the cost of intangible assets in a systematic and rational manner over the asset's useful life

Internally Developed Identifiable Intangible Assets

When a company internally develops an intangible asset, such as a patent, it can capitalize only certain costs. For example, the capitalized costs of an internally developed patent include the legal and related costs of establishing and successfully defending the rights associated with the patent but not the costs leading to the development of the product or process being patented. A company includes those latter costs in research and development expenses as incurred

GAAP requires that

a company expense all its research and development costs as incurred.

impairment

an intangible asset occurs when the fair value of the asset is less than its carrying value.

Start-up costs

are broadly defined as the costs incurred for one-time activities related to: -opening a new facility or commencing a new operation

Franchises

are contractual agreements in which, for a royalty percentage of sales, the franchisor gives the franchisee the right to perform certain functions or sell certain products or services.

Identifiable intangible assets

are intangible assets that can be separated from the company and sold, transferred, licensed, rented, or exchanged.

Software development costs

are the costs of designing, coding, and testing software to be sold, licensed, or leased to third parties, as well as preparing related documentation and training materials.

Unidentifiable intangible assets

cannot be separated from the entity and sold, transferred, licensed, rented, or exchanged.

Intangible Assets

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.

If the fair value of the reporting unit is less than its book value, an impairment loss is computed as:

goodwill impairment loss = fair value of reporting unit - book value of reporting unit.

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.

trademark (or trade name)

is a word, name, phrase, or symbol that identifies the source of a product and distinguishes it from the products of other companies.

patent

is an exclusive right granted by the federal government that gives the owner control of the manufacture, sale, or other use of an invention for 20 years from the date of filing.

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 defined and measured as the excess of the purchase price over the fair value of the acquired company's identifiable net assets.

Technological feasibility

is established either on the date the company completes a detailed program design or, in its absence, when it completes a working model of the product.

in-process R&D (IPR&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

purchased goodwill

is the difference between the purchase price of the acquired company and the fair value of its identifiable net assets.

Research

is the planned search or critical investigation aimed at discovering new knowledge with the hope that such knowledge will be useful in developing a new product or process or in significantly improving an existing product or process.

cash-generating unit

is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

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.

Internet domain name

is used to identify a particular Internet address.

Purchased Unidentifiable Intangible Assets

A company capitalizes the cost of a purchased unidentifiable intangible asset, which is called goodwill. Goodwill can be acquired only through the purchase of another company.

Internally Developed Unidentifiable Intangible Assets

A company expenses the costs of internally developed unidentifiable intangible assets as incurred, even though they may be expected to have benefits extending beyond the current period. Examples of these costs include advertising, employee training, and customer relationships.

Goodwill

the costs associated with internally developed ______________ are expensed as incurred.

Intangible and tangible noncurrent assets do have characteristics in common, as both:

-are held for use in the ordinary course of business and not for investment—although they are "used" in very different ways -have a useful life of more than one year -derive their value from their ability to generate economic benefits -are expensed by a company in the periods in which the assets are used in operations (if the assets have finite lives)