Intangible Assets

Chapter 12

Chapter 12-1
 Intangible Assets
 Characteristics
 No physical substance;
 Not financial instruments.

 Generally long-term assets.

Acct 3311, Ch 12, Slide 2, © Richard S. Mark

 Intangible Asset - Types
 Life;
 Unlimited;
 No foreseeable lack of use; or
 Limited time but indefinite renewals;

 Trademarkts, tradenames, etc.

 No amortization.
 Limited
 Amortize over useful life on some rational basis
 Revenue;
 Use.
 Production or consumption.
 Acquired vs Self-Created.

Acct 3311, Ch 12, Slide 3, © Richard S. Mark

 Intangible Assets – Types
 Market-based
 Customer lists;
 trademarks or trade names,
 newspaper mastheads,
 Internet domain names, and
 Non-compete agreements
 Artistic
 Copyrights;
 Life of creator + 70 years.
 Contract rights
 Licenses;
 Permits;
 Franchises
 Right to use name and/or products.
 Technology
 Patents;
 Holder has exclusive rights over process/product for 20 years.
 Trade secrets.
Acct 3311, Ch 12, Slide 4, © Richard S. Mark
 Intangible Assets - Initial
 Purchased intangibles are treated like any
other assets
 Booked at cost
 Includes costs necessary to make the intangible
asset ready for its intended use.
 Self-created (internally-generated) intangibles
are generally
 Expensed as incurred;
 If recognized as a separate asset, capitalize direct

costs to develop or protect the asset (Napster)

 Legal.

Acct 3311, Ch 12, Slide 5, © Richard S. Mark

 Intangible Assets – Amortization
 Limited life
 Dr. expense
 Cr. Either

 Accum. Amortization account; or

 Asset account.

 Impair when Carrying Value (CV) is greater than

Fair Value (FV)
 No reversal.

Acct 3311, Ch 12, Slide 6, © Richard S. Mark

 Limited Life Intangibles - Amortization
Green Market Inc. acquires the customer list of a large
newspaper for $6,000,000 on January 1, 2010. Green Market
expects to benefit from the information evenly over a three-
year period.

Jan. 1 Customer List ________

Cash _________

Dec. 31
2010 Customer list expense ________
2011 Customer list _________
2012

Acct 3311, Ch 12, Slide 7, © Richard S. Mark

 Limited Life Intangibles – Amortization
 Patents
 Remaining exclusive life (max 20 years).
 Costs can include
 Purchase;
 Costs to defend or maintain;

 Direct costs to develop or enhance.

 Copyrights – same as patents

 useful life is creator’s life + 70 years.
 Contract-related – over contract life (with
renewals)
 Franchises, licenses, permits.
 Customer-related – over useful life.
 Market-based – no amortization if renewal

costs are immaterial.

Acct 3311, Ch 12, Slide 8, © Richard S. Mark
 Limited Life Intangible - Example
Harcott Co. incurs $180,000 in legal costs on January 1,
2010, to successfully defend a patent. The patent’s useful
life is 20 years, amortized on a straight-line basis.
Harcott records the legal fees and the amortization at
the end of 2010 as follows.

Jan. 1 Patent _______

Cash ________

Dec. 31 Patent amortization expense _______

Patent ________

Acct 3311, Ch 12, Slide 9, © Richard S. Mark

 Purchased Goodwill
 Initial measure occurs when and if
 The purchase price > FV (identifiable net assets)
record as asset;
 Includes evaluation of the FV of both assets AND
liabilities.
 If purchase price < FV (net assets) no goodwill.
 Record a gain.
 Identifiable net assets can include other
unrecorded intangibles
 Trademarks;
 Customer lists.

 Impairment – no amortization.

Acct 3311, Ch 12, Slide 10, © Richard S. Mark

 Goodwill Example
Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2010. The balance sheet of Local
Company just prior to acquisition is:
Assets Cost FMV
Cash $ 15,000 $ 15,000
Receivables 10,000 10,000
Inventories 50,000 70,000
Equipment 80,000 130,000
Total $ 155,000 $ 225,000 FMV of
Net Assets
Liabilities and Equities
= $_______
Accounts payable $ 25,000 $ 25,000
Common stock 100,000
Retained earnings 30,000
Total $ 155,000 $ 25,000

Acct 3311, Ch 12, Slide 11, © Richard S. Mark

 Goodwill Example
Example: Global Corporation purchased the net assets of Local
Company for $300,000 on December 31, 2010. The value assigned
to goodwill is determined as follows:

Book Value = $130,000

Revaluation
$_______
Fair Value = $200,000
Goodwill
$______
Purchase Price = $300,000

Acct 3311, Ch 12, Slide 12, © Richard S. Mark

 Goodwill Example
Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2010. The value assigned to goodwill
is determined as follows:

Calculation of Goodwill:
Cash $ 15,000
Receivables 10,000
Inventories 70,000
Equipment 130,000
Accounts payable (25,000)
FMV of identifiable net assets 200,000
Purchase price 300,000
Goodwill $ 100,000

Acct 3311, Ch 12, Slide 13, © Richard S. Mark

 Goodwill Example – Journal Entry

Journal entry recorded by Global:

Cash ______
Receivables ______
Inventory ______
Equipment ______
Goodwill ______
Accounts payable _______
Cash _______

Acct 3311, Ch 12, Slide 14, © Richard S. Mark

 Limited Life Intangibles – Impairment
 Same as for other long-lived asset
 Compare undiscounted future net cash flows
to CV
 If CF<CV an impairment has occurred
(recoverability test).
 The impairment loss is the amount by which
the carrying amount of the asset exceeds the
fair value of the asset (fair value test).
 The loss is reported as part of income from
continuing operations, “Other expenses and
losses” section.

Acct 3311, Ch 12, Slide 15, © Richard S. Mark

 Unlimited Life Intangibles – Impairment
 At least annual evaluation for impairment.
 NO recoverability test.

 Impairment occurs when FV < CV.

 Applies to all unlimited life assets OTHER

THAN GOODWILL.

Acct 3311, Ch 12, Slide 16, © Richard S. Mark

 Impairment Example
E12-14: (Copyright Impairment) Presented below is information
related to copyrights owned by Botticelli Company at December
31, 2010.
Cost $ 8,600,000
Carrying amount 4,300,000
Expected future net cash flows 4,000,000
Fair value 3,200,000

The copyright has a remaining useful life of 10 years.

(a) Prepare the journal entry (if any) to record the impairment of
the asset at December 31, 2010.
(b) Prepare the journal entry to record amortization expense for
2011 related to the copyrights.

Acct 3311, Ch 12, Slide 17, © Richard S. Mark

 Impairment Example(2) - Recoverability
Compare expected future net cash flows to the carrying
amount of the asset.

Expected future cash flow $ 4,000,000

Carrying value 4,300,000
$ (300,000)

Asset _______________

Acct 3311, Ch 12, Slide 18, © Richard S. Mark

 Impairment Example(3) – FV Analysis

Fair value test:

Carrying amount $ 4,300,000
Fair value 3,200,000
Loss on impairment $ (1,100,000)

Loss on impairment ________

Copyrights ________

Acct 3311, Ch 12, Slide 19, © Richard S. Mark

 Impairment Example - Amortization

Carrying amount $ 3,200,000

Useful life ____ years
÷

Amortization per year

Amortization expense _______

Copyrights _______

Acct 3311, Ch 12, Slide 20, © Richard S. Mark

 Goodwill Impairment
 Two part test
 Compare CV and FV of the reporting unit
(including goodwill).
If FV > CV  No Impairment

If FV < CV  Next Step

 Step 2: Calculate the implied goodwill value by

comparing the FV (net assets) with FV (reporting
unit).
 NO reversals.

Acct 3311, Ch 12, Slide 21, © Richard S. Mark

 Goodwill Impairment Example
E12-15: Information related to the Mischa Division of Santana,
Inc. as of December 31, 2010 (in millions):
Cash $ 60
Receivables 200
Property, plant, and equipment, net 2,600
Goodwill 200
Less: Notes payable (2,700)
Net assets $ 360
Carrying Amount net of Goodwill 160

Management estimated its future net cash flows from the division
to be $400 million. Management has also received an offer to
purchase the division for $335 million. All identifiable assets’ and
liabilities’ book and fair value amounts are the same.

Acct 3311, Ch 12, Slide 22, © Richard S. Mark

 Goodwill Impairment Example
Step 1: The fair value of the reporting unit ($355 Million) is below
its carrying value ($360 Million). Therefore, an impairment has
occurred.
Step 2: (in millions)
Fair value $ 335
Carrying amount, net of goodwill 160
Implied goodwill 175
Carrying value of goodwill 200
Loss on impairment $ (25)

Loss on impairment __________

Goodwill _________

Acct 3311, Ch 12, Slide 23, © Richard S. Mark

 Research and Development
 Distinguish between
 Research – activities associated with acquiring
new knowledge; and
 Development – converting the research to

practical and profitable results for the business

through
 Improved
 processes;
 Products.
 New products;
 Improved efficiencies in production process.

 All are expensed as incurred.

Acct 3311, Ch 12, Slide 24, © Richard S. Mark

 R&D Costs
 Materials, Equipment, and Facilities
 unless the R&D equipment or facility has future
alternative uses-
 if so capitalize and apply depreciation to R&D.
 Personnel;
 Purchased Intangibles used only for R&D;

 Contract Services for specific R&D activity;

 Reasonable allocation of indirect costs.

Acct 3311, Ch 12, Slide 25, © Richard S. Mark

 Other Intangible Costs
 Start-up costs for a new operation.
 Expense in period incurred
 Include organization costs
 Legal & filing fees to incorporate
 Advertising costs.
 Expense in period incurred
 Computer software costs.
 Expense before technological feasibility
established

Acct 3311, Ch 12, Slide 26, © Richard S. Mark