Chapter 12 Terms

Frachise (671)

A franchise is 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.

Patent (672)

A patent gives the holder exclusive rights to use, manufacturem and sell a product or process for a period of 20 years without interference or infringement by others.

Development activities (681)

Translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. Examples: Conceptual formulation and design of possible product or process alternatives; construction of prototypes and operation of pilot plants.

Recoverability test (677)

(used in the case of Impairment of limited-life intangibles) step 1 The company estimates the future cash flows expected from use of the assets and its eventual disposal. If the sum of the expected future cash flows (undiscounted) is less than the carrying amount of the asset, the company would measure anpairment loss.

Business combination (666)

Transaction in which the purchacer obtains control of one or more businesses.

Fair value test (677)

(used in the case of Impairment of limited-life intangibles) step 2 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. As with other impairments, the loss on the limited-life intangible is reported as part of income from continuing operations. The entry generally appears in the "Other expenses and losses" section.

Start-up costs (683)

Are incurred for one-time activities to start new operation. Examples include opening a new plant, introducing a new product or service, or conducting business in a new territory. Start-up costs include organizational costs. (Start-up costs are expensed as incurred)

Research and development costs (680)

Are not in themselves intangible assets. However, we present the accounting for R&D costs here because R&D activities frequently result in the development of patents or copyrights (such as a new product, process, idea, formula, composition, or literary work) that may provide future value. (Companies must expense all R&D costs when incurred)

Limited-life intangibles (667)

Companies amortice their limited-life intangibles 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.

Master valuation approach (676)

Goodwill is viewed as one or a group of unidentifiable values (intangible assets), the cost of which "is measured by the difference between the cost of the group of assets or enterprise acquired and the sum of the assigned costs of individual tangible and identifiable intangible assets acquired less liabilities assumed." This procedure for valuation is called a (master valuation approach). It assumes goodwill covers all the values that cannot be specifically identified with any identifiable tangible or intangible asset.

Intangible assets (666)

Have two main characteristics. 1) They lack physical existence. (Tangible assets such as property, plant. and equipment have physical form. Intangible assets, in contrast, derive their value from the rights and privilages granted to the company using them). 2) They are not finanacial instruments. (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).

Indefinite-life intangibles (667)

If no factors (legal, regulatory, contractual, competitive, or other) limit the useful life of an intangible asset, a company considers its useful life indefinite. An indefinite life means that there is no freseeable limit on the period of time over which the intangible asset is expected to provide cash flows. (a company does not amortize an intangible asset with an indefinite life).

Bargain purchase (677)

In a few cases, the purchaser in a business combination pays less than the fair value of the identifiable net assets. Such a situation is referred to as a (bargain purchase). A bargain purchase results from a market imperfection: That is, the seller would have been better off to sell the assets individually than in total. However, situations do occur in which the purchase price is less than the value of the net identifiable assets. (This excess amount is recorded as a gain by the purchaser)

License (permit) (671)

In another type of franchise arrangement, a municipality (other governmental body) allows a privately owned company to use public property in performing its services. Examples: the use of public waterways for a ferry servicem use of public land for telephone or electric lines, use of phone lines for cable TV, use of city streets for a bus line, or use of the airwaves for radio or TV broadcasting. (Such operating rights, obtained through agreements with governmental units or agencies are frequently referred to as licenses or permits. Franchises and licenses may be for a definite period of time, for an indefinite peeriod of time, or perpetual. (A company should amortize the cost of a franchice or License with a limited life as operating expense over the life of the franchise or license.

Goodwill (674)

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

Organizational costs (683)

Include costs such as legal and state fees incurred to organize a new business entity.

Copyright (670)

Is a federally grandted right that all authors, painters, musicians, sculptors, and other artists have in their creations and expressions. A copyright is 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. Copyrights are not renewable.

Research activities (681)

Planned search or critical investigation aimed at discovery of new knowledge. Examples: Laboratory research aimed at discovery of new knowledge; searching for applications of new research findings.

Amortization (667)

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

Trademark, trade name (669)

is a word, phrase, or symbol that distinguishes or identifies a particular company or product. Trade names like Kleenex, Pepsi-Cola, Buick, Excedrin, Wheaties, and Sunkist create immediate product identification in our minds, thereby enhancing marketability. Under common law, the right to use a trademark or trade name, whether registered or not, rests exclusively with the original user as long as the original user continues to use it. Rigistration with U.S. Patent and Trademark Office provides legal protection for an (Indefinite number of renewals for periods of 10 years each). Therefore, a company that uses an established trademark or trade name may properly consider it to have an indefinite life and does not amortize its cost.