INTERMEDIATE

ACCOUNTING
Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER,
YOUNG, WIECEK

Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College

CHAPTER

13
Intangible Assets

Learning Objectives
1. Describe the characteristics of intangible
assets.
2. Discuss the recognition and measurement
issues of acquiring intangibles.
3. Explain how specifically identifiable
intangibles are valued subsequent to
acquisition.
4. Identify the types of specifically
identifiable intangible assets.

Learning Objectives
6. Describe the accounting procedures for
recording goodwill at acquisition and
subsequently.
7. Differentiate between research and
development expenditures and describe
and explain the rationale for the
accounting for each.
8. Identify other examples of deferred charges
and the accounting requirements for them.
9. Identify the disclosure requirements for

Intangible Assets
Intangible
Asset Issues

Specifically Goodwill
Identifiable
Intangibles

Characteristics Patents
Current
standards
Recognition
and
measurement
at acquisition
Valuation after
acquisition

IntellectualDeferred
Capital
Charges and
Long-term
Prepayments

Recognition

Copyrights Negative
Goodwill
Trademarks
Valuation
Leaseholds
after
Franchises acquisition
Impairment

Financial
Statement
Disclosure
and
Presentation

Balance
Research and
Sheet
development
costs
Income
Pre-operating
Statement
costs
Illustrative
Initial operating disclosures
losses
Organization
costs
Advertising
costs

Intangibles:
Characteristics

CICA Handbook, Section 3062, broadly

defines intangible assets as:

lacking physical existence

non-financial assets

Characteristics include:
1. identifiability
2. manner of acquisition
3. expected period of benefit
4. separability from an entire enterprise

Recognition and
Measurement
Purchased Intangibles
Measured at cost fair value at acquisition
Cost follows same definition as with tangible capital assets
Purchase of identifiable intangibles is generally
straightforward
Value is more easily determined

Business combinations leads to goodwill

Goodwill: (as an example)
does not generate easily identifiable cash flows
is not readily separable from the business entity
control does not lead to contractual or legal rights

Value (cost) of goodwill becomes a residual amount

Recognition and
Measurement
Goodwill should be accounted for
and reported separately from other
intangibles
Identifiable intangibles with similar
characteristics should be grouped
and reported together
Subsequent costs (betterments)
are capitalized

Valuation of Intangible
Assets
Intangibles
InternallyCreated

Purchased

Specifically GoodwillIdentifiable type assets

Capitalize

Capitalize

Deferred
Charges

Specifically
Identifiable

Capitalize
Restricted
Amounts

Expense,
except direct
costs

Goodwill
type assets
Expense

Valuation after
Acquisition
Intangibles are written-off over their useful

lives, where the assets have determinable

useful lives, not exceeding 40 years
Where the intangibles have indeterminable
useful lives, they must be written-off over a
period not exceeding 40 years
If the intangibles have an indefinite infinite
life, the asset remains in the accounts unless
it becomes impaired or its life becomes finite
Intangibles are considered to have no
residual (salvage) value

Valuation after
Acquisition

Factors to consider when determining

economic useful life of an intangible:
1. Expected future usage
2. Effects of technological or commercial
obsolescence
3. Level of maintenance expenditures required to
obtain future benefits

Method of amortization should be chosen

to match the benefits received, otherwise,
straight-line amortization is used

Specific Intangibles:
Types

Patents

Copyrights

relating to creations of authors, painters,

musicians and artists

Trademarks and Trade Names

Leaseholds

product patents and process patents

Lease Prepayments, Leasehold Improvements and

Capital Leases

Franchises and Licenses

Patents
A patent gives an exclusive right to the

holder for 20 years

Costs of purchasing patents are capitalized
Costs to research and develop patents are
expensed as incurred
Patents are amortized over the shorter of the
legal life (20 years) or their useful lives
Normally amortized over 17 years
First 3 years required to process a patent

application

Copyrights
Copyrights are granted for life of the
creator, plus 50 years
Copyrights can be sold or assigned, but
can not be renewed
Copyrights are amortized over their useful
life (not to exceed 40 years)
Costs of acquiring copyrights are
capitalized
Research and development costs involved
are expenses as incurred

Trademarks and
Trade Names
Trademarks and trade names are
renewable indefinitely by the original
user in periods of 20 years each
For accounting purposes, trademarks and
trade names are amortized over periods
not exceeding 40 years
Costs of acquired trademarks or trade
names are capitalized
If trademarks or trade names are
developed by the business, all direct costs
(except R&D costs) are capitalized

Leaseholds
A leasehold is a contractual agreement
Details:
agreement between the lessor (owner) and
the lessee (renter)
gives the lessee the right to use the
property
valid for a specific period of time
in return for stipulated, periodic cash
payments

Leaseholds and Leasehold

Improvements
Lease prepayments are to be shown as prepaid

expenses, not as intangible assets

Leasehold improvements (made by the lessee)

revert to the lessor at end of lease term

Leasehold improvements are amortized over the

shorter of the remaining term of the lease or

useful life of the improvements

Leasehold improvements are generally shown in

the (tangible) property, plant, and equipment

section

Leases (Capital Leases)

If the lease agreement transfers all
benefits and risks, the lease is
classified as a capital lease
The lease is shown as a tangible
asset (at the capitalizable cost),
rather than as an intangible asset

Franchises and Licenses

A franchise is a contractual
agreement under which the
franchisor grants the franchisee the
right to:
sell certain products or services
use certain trademarks or trade names
perform certain functions within a
certain geographical area

Franchises and Licenses

A franchise may exist for a limited time or for
an indefinite time period
The cost of a franchise (for a limited time), is
amortized over the franchise term
A franchise (for an unlimited time), is
amortized over a period not exceeding 40
years
If a franchise is deemed worthless, the cost
must be written-off immediately
Annual payments for a franchise are expensed

Goodwill
Goodwill: the excess of the cost

(purchase price) over the amounts

(price) assigned to tangible and
intangible net assets

Goodwill is the most intangible of

all assets
Goodwill can be sold only with the
business

Acquired Goodwill:
Valuation
Given:

Purchase price (cash):

Book value of assets:

Liabilities: $ 55,000

Market value of assets:

Determine goodwill.

$ 400,000
$ 255,000
$ 350,000

Acquired Goodwill:
Calculation
Goodwill = Purchase Price - Fair value of net
assets
$400,000 less 350,000 = $50,000
Entry in the books of the Purchaser:

Assets (various)
405,000
Goodwill
50,000 Liabilities 55,000
Cash400,000

Negative Goodwill
Badwill or bargain purchase
Fair value of acquired assets is greater than the
purchase price

CICA Handbook, Section 1581

Excess is used to reduce the amounts assigned to
the other acquired assets, except for:

financial assets (other than equity method investments)

assets to be sold
future tax assets
prepaid assets that relate to employee future benefit
plans

If any excess remains after such assignment,

remainder treated as an extraordinary gain

Intellectual Capital
Also known as knowledge assets
Include (among others), the following:

Value of key personnel

Organization adaptability
Customer retention
Strategic direction

Conceptually cannot be reported as assets

as the company does not have control
They do, however, create long-term value
(and benefit) to the company

Deferred Charges and

Long-term Prepayments
Research and Development Costs (R&D)
Pre-operating and start-up costs
Organization costs
CICA Handbook, Section 3070 requires
separate disclosure of deferred charges
and their amortization amounts

Research and
Development (R&D) Costs
R&D costs not in themselves intangible assets
They are generally material in amount, and lead to
something that will be patented or copyrighted
They therefore warrant special consideration
Challenges in R&D accounting:
Determining the costs associated with a particular activity or
project
Determining the size of future benefits, and for how long those
benefits may be realized

CICA Handbook, Section 3450 governs the accounting

of R&D costs
All research costs charged to expense when incurred
Development costs are charged to expense except in certain
defined circumstances

Research and
Development (R&D) Costs
Research activities:
involve planned search or critical investigation
aimed at discovery of new knowledge
may or may not be directed towards a specific
project

Development activities include:

translation of research findings or other
knowledge into a plan or design for a new
product or process
significant improvement to an existing product
or process

Research and
Development (R&D) Costs

R&D costs include the following:

1. Direct materials and direct labour
2. Amortization of tangible and intangible assets
used/related to R&D activities
3. Reasonable overhead allocation

R&D costs are expensed

Development costs are capitalized when
all five of the following conditions are met
and future benefits are reasonably certain

Research and
Development (R&D) Costs
Development cost capitalization criteria:
1. Product/process clearly defined, and costs
can be identified
2. Technical feasibility has been established
3. Management intent to produce and market
or use the product/process
4. If the intent is to sell, a market is clearly
defined. If the intent is to use, there is a
definable use/need
5. Resources exist to complete the project

Pre-operating Costs

Costs incurred prior to formal operations

beginning

EIC-27 allows for the deferral of preoperating costs if three conditions are met:
1. The expenditure relates directly to the business
2. It would not have been incurred if not for the
business
3. The amount is likely to be recovered from future
operations

Financial Statement
Disclosure and
Presentation

Balance Sheet

Goodwill must be reported as a

separate line item

Income Statement
Amortization methods and rates are
disclosed
Goodwill impairment loss is reported
separately

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