ACCT 3021 - Test 1 - Ch 12

intangible assets have 2 main characteristics

1 they lack physical existence 2 they are not financial instruments

The value of a marketing-related intangible can be substantial. Consider Internet ___

domain names

The franchisee acquires the right to exploit the franchisor's idea or product by signing a franchise agreement.

franchisee

Assets that lack physical substance and that are not financial instruments. Intangible assets derive their value from the rights and privileges granted to the company using them. -They are normally classified as long-term assets. -Companies write off (amortize) limited-life intangible assets over their useful lives and they periodically assess indefinite-life intangibles for impairment.

intangible assets

Intangibles have either a ___ or ____.

limited (finite) useful life or an indefinite useful life

Examples are trademarks or trade names, newspaper mastheads, Internet domain names, and noncompetition agreements.

marketing related intangible assets

intangible assets have 2 main characteristics: Assets such as bank deposits, accounts receivable, and long-term investments in bonds and stocks also lack physical substance. However, financial instruments derive their value from the right (claim) to receive cash or cash equivalents in the future. Financial instruments are not classified as intangibles.

they are not financial instruments

intangible assets have 2 main characteristics: Tangible assets such as property, plant, and equipment have physical form. Intangible assets, in contrast, derive their value from the rights and privileges granted to the company using them.

they lack physical existence

-marketing-related intangible asset. -Under common law, the right to use a ___ or ___ rests exclusively with the original user as long as the original user continues to use it. Registration with the U.S. Patent and Trademark Office provides legal protection for an indefinite number of renewals for periods of 10 years each.

trade mark or trade name

like Kleenex, Pepsi-Cola, Buick, Excedrin, Wheaties, and Sunkist create immediate product identification in our minds, thereby enhancing marketability.

trade name

Changing demand, new inventions superseding old ones, inadequacy, and other factors often limit the ___ of a patent to less than the legal life.

useful life

What if a company buys several intangibles, or a combination of intangibles and tangibles? In such a "___," the company should allocate the cost on the basis of fair values. -Essentially, the accounting treatment for purchased intangibles closely parallels that for purchased tangible assets.

"basket purchase"

The value of all favorable attributes that relate to a company over and above the cost (purchase price) of the company's identifiable tangible and intangible net assets.

goodwill

Companies should test indefinite-life intangibles for ___ at least annually.

impairment

means that there is no foreseeable limit on the period of time over which the intangible asset is expected to provide cash flows.

indefinite life

Another type of franchise, granted by a governmental body, permits the business to use public property in performing its services.

licenses or permits

may be for a definite period of time, for an indefinite period of time, or perpetual.

Franchises and licenses

A company does not ___ an intangible asset with an indefinite life.

amortize

Companies ___ the cost of a license or permit with a limited life to operating expense over the life of the agreement, and they also treat as operating ___ any annual payments made under the agreement.

amortize expenses

involve ownership rights to plays, literary works, musical works, pictures, photographs, and video and audiovisual material. Copyrights protect these ownership rights.

artistic related intangible assets

A license or permit is a ____

contract related intangible asset

represent the value of rights that arise from contractual arrangements.

contract related intangible assets

Alternatively, if a patent becomes impaired because demand drops for the product, the asset should be written down or written off immediately to ___

expense

often referred to as the most intangible of intangible assets; the only way to sell it is to sell the business.

goodwill

An agreement by which governmental units or agencies grant rights to a privately owned company to use public property in performing its services.

license or permit

In most cases, intangible assets provide benefits over a period of years. Therefore, companies normally classify them as ___

long-term assets

An exclusive right, granted by the U.S. Patent and Trademark Office, to use, manufacture, and sell a product or process for a period of 20 years without interference or infringement by others.

patent

A word, phrase, or symbol that distinguishes or identifies a particular company or product.

trademark (trade name)

Thus, a company that uses an established ____ or ___ may properly consider it to have an indefinite life and do not amortize its cost.

trademark or trade name

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

amortization

They ____ any capitalized costs over the useful life of the copyright if less than its legal life (life of the creator plus 70 years).

amortize

Companies ___ the cost of a franchise with a limited life as operating expense over the life of the franchise, and they also treat as operating ___any annual payments made under the franchise agreement.

amortize expenses

A copyright is an ____

artistic related tangible asset

To illustrate, assume that Portofino Company decides to purchase Aquinas Company. In this situation, Portofino measures the assets acquired and the liabilities assumed at fair value. In measuring these assets and liabilities, Portofino must identify all the assets and liabilities of Aquinas. As a result, Portofino may recognize some assets or liabilities not previously recognized by Aquinas. For example, Portofino may recognize intangible assets such as a brand name, patent, or customer list that were not recorded by Aquinas. In this case, Aquinas may not have recognized these assets because they were developed internally and charged to expense.

business combination

If a company ___ a trademark or trade name, it capitalizes the purchase price as the cost of the asset.

buys

companies may ___ the costs of acquiring and defending a copyright.

capitalize

____ also identify qualities and characteristics that companies work hard and spend much to develop.

company names

Examples are franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.

contract related intangible assets

A federally granted right that all authors, painters, musicians, sculptors, and other artists have in their creations and expressions.

copyright

Granted for the life of the creator plus 70 years, it gives the owner, or heirs, the exclusive right to reproduce and sell an artistic or published work.

copyright

If a company ___ a trademark or trade name, it capitalizes costs related to securing it, such as attorney fees, registration fees, design costs, consulting fees, and successful legal defense costs. However, it excludes research and development costs.

develops

As a result, companies capitalize only ___ incurred in developing the intangible, such as legal costs, and expense the rest.

direct costs

For example, Really Useful Group should allocate the costs of its copyrights to the years in which it expects to receive the benefits. The difficulty of determining the number of years over which it will receive benefits typically encourages a company like Really Useful Group to write off these costs over a fairly short period of time. Companies must ____ the research and development costs that lead to a copyright as those costs are incurred.

expense

Sometimes a company may incur substantial *R&D* costs to create an intangible. For example, Google expensed the R&D costs incurred to develop its valuable search engine. Costs incurred internally to create intangibles are generally ___

expensed

When the total cost of a trademark or trade name is insignificant, a company simply ___ it

expenses

Only the ____ is performed for indefinite-life intangibles; there is no recoverability test for these intangibles. The reason? Indefinite-life intangible assets might never fail the undiscounted cash flows recoverability test because cash flows could extend indefinitely into the future.

fair value test

A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products or services, to use certain trademarks or trade names, or to perform certain functions, usually within a designated geographical area.

franchise

having developed a unique concept or product, protects its concept or product through a patent, copyright, or trademark or trade name.

franchisor

Annual payments made under a franchise agreement should be entered as operating expenses in the period in which they are incurred. These payments do not represent an asset since they do not relate to ___ to use the property.

future rights

Conceptually, ___represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized.

goodwill

In many business combinations, the purchasing company records ___ -measured as the excess of the cost of the purchase over the fair value of the identifiable net assets (assets less liabilities) purchased. (same)

goodwill

____ is therefore measured as a residual rather than measured directly. -That is why ___ is sometimes referred to as a *plug*, a *gap filler*, or a *master valuation account.* (same)

goodwill

What happens if the life of a limited-life intangible asset changes? In that case, the remaining carrying amount should be amortized over the revised remaining useful life. Companies should, on a regular basis, evaluate the limited-life intangibles for ___.

impairment

Similar to the accounting for property, plant, and equipment, an ___ should be recognized if the carrying amount of the intangible is not recoverable and its carrying amount exceeds its fair value.

impairment loss

As we will discuss in more detail later in the chapter, the ___ for indefinite-life intangibles differs from the one for limited-life intangibles.

impairment test

If no factors (legal, regulatory, contractual, competitive, or other) limit the useful life of an intangible asset, a company considers its useful life ___

indefinite

Companies do not amortize goodwill because it is considered to have an ___

indefinite life

Intangible assets for which there is no foreseeable limit on the period of time over which they are expected to provide cash flows. A company does not amortize an indefinite-life intangible asset but instead assesses it for impairment at least annually.

indefinite-life intangibles

The company securing the franchise or license carries an ___ (entitled Franchises or Licenses) on its books, only when it can identify costs with the acquisition of the operating right. (Such costs might be legal fees or an advance lump-sum payment, for example.)

intangible asset account

____ Goodwill should not be capitalized in the accounts. The reason? -Measuring the components of goodwill is simply too complex, and associating any costs with future benefits is too difficult. -The future benefits of goodwill may have no relationship to the costs incurred in the development of that goodwill. To add to the mystery, goodwill may even exist in the absence of specific costs to develop it. -Finally, because no objective transaction with outside parties takes place, a great deal of subjectivity—even misrepresentation—may occur.

internally created goodwill

Examples are the use of public waterways for a ferry service, the use of public land for telephone or electric lines, and the use of the airwaves for radio or TV broadcasting.

license or permit

Examples are the use of city streets for a bus line or taxi service; the use of public land for telephone, electric, and cable television lines; and the use of airwaves for radio or TV broadcasting. Such operating rights are referred to as ___ or ___

licenses or permits

The amount of amortization expense for a ___ should reflect the pattern in which the company consumes or uses up the asset, if the company can reliably determine that pattern.

limited life intangible asset

Companies amortize their ____ by systematic charges to expense over their useful life. The useful life should reflect the periods over which these assets will contribute to cash flows.

limited-life intangibles

Intangible assets judged to have a limited useful life, which reflects the periods over which these assets will contribute to cash flows. Companies amortize limited-life intangibles by systematic charges to expense over their useful lives.

limited-life intangibles

Companies primarily use ___ in the marketing or promotion of products or services.

marketing-related intangible assets

A transaction in which the purchaser gains control of one or more businesses.

business combination

Although companies may capitalize certain costs incurred in developing specifically identifiable assets such as patents and copyrights, the amounts capitalized are generally insignificant. But companies do record material amounts of intangible assets when purchasing them, particularly in situations involving a ____ (the purchase of another business).

business combination

Disney, for example, considers these factors in determining useful life: (limited life intangibles) (6)

1. *The expected use of the asset by the company.* 2. *The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate* (such as lease rights to a studio lot). 3. *Any legal, regulatory, or contractual provisions that may limit the useful life.* 4. *Any provisions* (legal, regulatory, or contractual) *that enable renewal or extension of the asset's legal or contractual life without substantial cost.* This factor assumes that there is evidence to support renewal or extension. Disney also must be able to accomplish renewal or extension without material modifications of the existing terms and conditions. 5. *The effects of obsolescence, demand, competition, and other economic factors.* Examples include the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels. 6. *The level of maintenance expenditure required to obtain the expected future cash flows from the asset.* For example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life.

As indicated, the accounting for intangible assets depends on whether the intangible has a limited or an indefinite life. There are many different types of intangibles, often classified into the following six major categories. (6)

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

A franchise is a ____

contract related intangible asset

Companies *record at ___* intangibles purchased from another party.

cost

The amount of an intangible asset to be amortized should be its ___.

cost less its residual value

___ includes all acquisition costs plus expenditures to make the intangible asset ready for its intended use. -Typical ___ include purchase price, legal fees, and other incidental expenses. (same)

cost(s)

result from interactions with outside parties. Examples include customer lists, order or production backlogs, and both contractual and noncontractual customer relationships.

customer related intangible assets

The two principal kinds are ___, which cover actual physical products, and ____, which govern the process of making products.

product patents process patents

*goodwill is recorded only when an entire business is purchased.* -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 the residual—the excess of cost over fair value of the identifiable net assets acquired.*

purchased goodwill

The ___ is assumed to be zero unless at the end of its useful life the intangible asset has value to another company.

residual value

Sometimes companies acquire intangibles in exchange for ___ or ___. In such cases, *the cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.*

stock or other assets

A patent is a ___

technology related intangible asset

relate to innovations or technological advances. Examples are patented technology and trade secrets granted by the U.S. Patent and Trademark Office.

technology related intangible assets