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Chapter12-1

C H A P T E RC H A P T E R 1212

I N T A N G I B L E A S S E T SI N T A N G I B L E A S S E T S

Intermediate Accounting

13th EditionKieso, Weygandt, and Warfield

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Chapter12-2

Intangible Asset IssuesIntangible Asset Issues


LO 1 Describe the characteristics of intangible assets.LO 1 Describe the characteristics of intangible assets.

Two Main Characteristics:

Characteristics

(1) They lack physical existence.

(2) They are not financial instruments.

Normally classified as lon!term asset.

Common types of intani"les:

#atentsCopyrihts

$ranchises or licenses

Trademarks or trade names%oodwill

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Chapter12-3



LO 2 Identify the costs to include in the initial valuation of intangible assets.LO 2 Identify the costs to include in the initial valuation of intangible assets.

Purchased &ntani"les:

'ecorded at cost.

&ncludes all costs necessary to make the intani"leasset ready for its intended use.

Valuation

Internally Created&ntani"les:

%enerally expensed.nly capitalie direct costs incurred in de*elopin theintani"le+ such as leal costs.

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Chapter12-4



LO 3 !"lain the "rocedure for a#orti$ing intangible assets.LO 3 !"lain the "rocedure for a#orti$ing intangible assets.

A#orti$ation of IntangiblesLi#ited%Life&ntani"les:

,mortie to expense.

Credit asset account or accumulated amortiation.

Indefinite%Life&ntani"les:

No foreseea"le limit on time the asset is expected to

pro*ide cash flows.No amortiation.

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Chapter12-5



LO 3 !"lain the "rocedure for a#orti$ing intangible assets.LO 3 !"lain the "rocedure for a#orti$ing intangible assets.

Accounting for IntangiblesIllustratio 12-1

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Chapter12-!

&y"es of Intangibles&y"es of Intangibles

&y"es of Intangibles&y"es of Intangibles

LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.

(i! )a*or Categories+(1) Marketin!related.

(2) Customer!related.

(-) ,rtistic!related.

() Contract!related.

(/) Technoloy!related.

(0) %oodwill.

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Chapter12-"

&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles


)ar,eting%-elated Intangible Assetsxamplesare:

trademarks or trade names+ newspaper

mastheads+ &nternet domain names+ andnoncompetition areements.

Trademarkor trade namehas leal protection forindefinite num"er of 1 year renewal periods.

Capitalie ac3uisition costs.

No amortiation.

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Chapter12-$



Illustration+ ,ssume that %reen Market &nc. ac3uires thecustomer list of a lare newspaper for 40++ on5anuary 1+ 21. %reen Market expects to "enefitfrom the information e*enly o*er a three!year period.

'ecord the purchase of the customer list and theamortiation of the customer list at the end of eachyear.

Customer 6ist 0++5an. 1

Cash 0++

Customer list expense 2++7ec. -1

21211212

Customer list 2++

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Chapter12-1%



Artistic%-elated Intangible Assetsxamplesare:

plays+ literary works+ musical works+ pictures+

photoraphs+ and *ideo and audio*isual material.Copyrihtis ranted for the life of the creator plus8 years.

Capitalie ac3uisition costs.

,mortied to expense o*er useful life.

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Chapter12-11



Contract%-elated Intangible Assetsxamplesare:

franchise and licensin areements+ construction

permits+ "roadcast rihts+ and ser*ice or supplycontracts.

$ranchise(or license) with a limited life should "eamortied to expense o*er the life of the franchise.

$ranchise with an indefinite life should "e carried atcost and not amortied.

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Chapter12-12



&echnology%-elated Intangible Assetsxamplesare:

patented technoloy and trade secrets ranted

"y the 9.. #atent and Trademark ffice.#atenti*es the holder exclusi*e use for a period of2 years.

Capitalie costs of purchasin a patent.

xpense any ';7 costs in de*elopin a patent.

6eal fees incurred successfully defendin a patentare capitalied to #atent account.

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Chapter12-13



Illustration+ s useful life is 2 years+ amortied on a straiht!line "asis.

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Chapter12-14


LO !"lain the conce"tual issues related to good/ill.LO !"lain the conce"tual issues related to good/ill.

0ood/illnly recorded when an entire "usiness is purchased"ecause oodwill cannot "e separated from the"usiness as a whole.

%oodwill is recorded as the excess of ...

purchase price o*ero*erthe $M@ of the identifia"lenet assets ac3uired.

&nternally created oodwill should not "e capitalied.

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Chapter12-15

Illustration+ Multi!7i*ersified+ &nc. decides that it needs aparts di*ision to supplement its existin tractordistri"utorship. The president of Multi!7i*ersified isinterested in "uyin Tractorlin Company+ a small concern in

Chicao. &llustration 12!- presents the "alance sheet ofTractorlin Company.

-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill

LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.

Illustratio 12-3

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Chapter12-1!

Illustration+ Multi!7i*ersified in*estiates Tractorlin>sunderlyin assets to determine their fair *alues.



Illustratio 12-4

Tractorlin Company decides to accept Multi!7i*ersified>soffer of 4+. Ahat is the *alue of the oodwill+ if anyB

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Chapter12-1"

Illustration+ 7etermination of %oodwill.



Illustratio 12-5

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Chapter12-1#

Illustration+ Multi!7i*ersified records this transaction asfollows.



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Chapter12-1$

!a#"le+%lo"al Corporation purchased the net assets of 6ocalCompany for 4-+ on 7ecem"er -1+ 21. The "alance sheetof 6ocal Company ust prior to ac3uisition is:



Assets Cost )V

Cash 1.4445 1.4445

-eceivables 14444 14444Inventories .4444 64444

7ui"#ent 84444 134444

&otal 1..4445 22.4445

Liabilities and 7uitiesAccounts "ayable 2.4445 2.4445

Co##on stoc, 144444

-etained earnings 34444

&otal 1..4445 2.4445

)V of)V of9et Assets9et Assets

: 5244444: 5244444

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Chapter12-2% LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.

;oo, Value : 5134444

air Value : 5244444

Purchase Price : 5344444

-evaluation564444

0ood/ill5144444


!a#"le+%lo"al Corporation purchased the net assets of 6ocalCompany for 4-+ on 7ecem"er -1+ 21. The *alue assinedto oodwill is determined as follows:

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Chapter12-21

!a#"le+%lo"al Corporation purchased the net assets of 6ocalCompany for 4-+ on 7ecem"er -1+ 21. The *alue assinedto oodwill is determined as follows:



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Chapter12-23

0ood/ill0ood/ill0ood/ill0ood/ill

0ood/ill =rite%off%oodwill considered to ha*e an indefinite life.

hould not"e amortied.

nly adust carryin *alue when oodwill isimpaired.


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Chapter12-24

0ood/ill0ood/ill0ood/ill0ood/ill

;argain Purchase#urchase price less thanthe fair *alue of netassets ac3uired.

,mount is recorded as a gain"y the purchaser.


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Chapter12-25

I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets

I#"air#ent of Li#ited%Life Intangibles

LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.

ame as impairment for lon!li*ed assets in Chapter 11.

1. &f the sum of the expected future net cash flows is less

thanthe carryin amount of the asset+ an impairmenthas occurred (reco*era"ility test).

2. The impairment loss is the amount "y which the carryinamount of the asset exceeds the fair *alue of the asset

(fair *alue test).The loss is reported as part of income from continuinoperations+ Dther expenses and lossesE section.

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Chapter12-2!

12%1'+ (Copyriht &mpairment) #resented "elow is informationrelated to copyrihts owned "y Fotticelli Company at 7ecem"er-1+ 21.

Cost =+0+4

Carryin amount .+-+

1xpected future net cash flows .++$air *alue -+2+



The copyriht has a remainin useful life of 1 years.

(a) #repare the ournal entry (if any) to record the impairment ofthe asset at 7ecem"er -1+ 21.

(") #repare the ournal entry to record amortiation expense for211 related to the copyrihts.

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Chapter12-2#



(a) #repare the ournal entry (if any) to record theimpairment of the asset at 7ecem"er -1+ 21.

air value test+

Carryin amount .+-+4$air *alue -+2+

6oss on impairment (1+1+)4

6oss on impairment 1+1+

Copyrihts 1+1+

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Chapter12-2$



(") #repare the ournal entry to record amortiation expensefor 211 related to the copyrihts.

>>

,mortiation expense -2+

Copyrihts -2+

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Chapter

12-31

Illustratio 12-"

Illustration+ ,rcon 'adio purchased a "roadcast license for42++. ,rcon 'adio has renewed the license with the $CCtwice+ at a minimal cost. Fecause it expects cash flows to lastindefinitely+ ,rcon reports the license as an indefinite!lifeintani"le asset. 'ecently the $CC decided to auction these

licenses to the hihest "idder instead of renewin them. ,rcon'adio expects cash flows for the remainin two years of itsexistin license. &t performs an impairment test and determinesthat the fair *alue of the intani"le asset is 41+/+.



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Chapter

12-32


I#"air#ent of 0ood/ill


Two tep #rocess:

tep 1: &f fair *alue is less thanthe carryin amount of

the net assets (includin oodwill)+ then performa second step to determine possi"le impairment.

tep 2:7etermine the fair *alue of the oodwill (implied*alue of oodwill) and compare to carryin

amount.

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Chapter

12-33

12%1.+ (%oodwill &mpairment) #resented "elow is net assetinformation related to the Mischa 7i*ision of antana+ &nc. as of7ecem"er -1+ 21 (in millions):



Manaement estimated its future net cash flows from the di*isionto "e 4 million. Manaement has also recei*ed an offer topurchase the di*ision for 4--/ million. ,ll identifia"le assets> andlia"ilities> "ook and fair *alue amounts are the same.

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Chapter

12-34



12%1. Instructions(a) #repare the ournal entry (if any) to record the

impairment at 7ecem"er -1+ 21.

tep 1:The fair

*alue of thereportin unit is"elow its carryin*alue. Therefore+ animpairment has

occurred.

tep 2:

6oss on impairment 2/++

%oodwill 2/++

4 --/4 --/1010

18/18/

22

4 (2/)4 (2/)

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Chapter

12-35



12%1. Instructions(") ,t 7ecem"er -1+ 211+ it is estimated that the di*ision>s

fair *alue increased to 4-/ million. #repare the ournalentry (if any) to record this increase in fair *alue.

No entry necessary.

,dusted carryin amount of the oodwill is its newaccountin "asis.

u"se3uent re*ersal of reconied impairment lossesis not permitted under $, No. 12.

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Chapter

12-3!



(u##ary of I#"air#ent &ests

Illustratio 12-11

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Chapter

12-3"

-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs

LO 8 Identify the conce"tual issues related to research and develo"#ent costs.LO 8 Identify the conce"tual issues related to research and develo"#ent costs.

$re3uently results in somethin that a companypatents or copyrihts such as:

new product+

process+idea+

formula+

composition+ orliterary work.

Fecause of difficulties related to identifyin costs

with particular acti*ities and determinin the future"enefits+ all ' ; 7 costs are e!"ensed /hen incurred.

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Chapter

12-3#

Identifying - ? D Activities


LO 8 Identify the conce"tual issues related to research and develo"#ent costs.LO 8 Identify the conce"tual issues related to research and develo"#ent costs.

-esearch Activities

#lanned search or criticalin*estiation aimed at disco*eryof new knowlede.

-esearch Activities

#lanned search or criticalin*estiation aimed at disco*eryof new knowlede.

xamples6a"oratory research aimed atdisco*ery of new knowledeG searchinfor applications of new research

findins.

xamples6a"oratory research aimed atdisco*ery of new knowledeG searchinfor applications of new research

findins.

Develo"#ent Activities

Translation of research findinsor other knowlede into a plan or

desin for a new product orprocess or for a sinificantimpro*ement to an existinproduct or process whetherintended for sale or use.

xamples

Conceptual formulation and desin ofpossi"le product or process

alternati*esG construction ofprototypes and operation of pilotplants.

Illustratio 12-13

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Chapter

12-4%

Cost of e3uipment ac3uired that will ha*e alternati*e

uses in future ';7 proects o*er the next / years.Materials consumed in ';7 proects

Consultin fees paid to outsiders for ';7 proects

#ersonnel costs of persons in*ol*ed in ';7 proects&ndirect costs reasona"ly alloca"le to ';7 proects

Materials purchased for future ';7 proects

42=+/?+

1+

12=+/+

-+

4/0+/?+

1+

12=+/+

';7';7xpensexpense

4-?-+

42=+ H / I 4/0+42=+ H / I 4/0+


!a#"le+Compute the amount to "e reported as research andde*elopment expense.

LO @ Describe the accounting for research and develo"#ent and si#ilar costs.LO @ Describe the accounting for research and develo"#ent and si#ilar costs.

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Chapter

12-41

;alance sheet

&ntani"le assets shown as a separate item.

Contra accounts normally not shown.

Inco#e state#ent

'eport amortiation expense and impairmentlosses in continuin operations.

Total ';7 costs chared to expense must "edisclosed.

Presentations of Intangibles and -Presentations of Intangibles and -??DDPresentations of Intangibles and -Presentations of Intangibles and -??DD

LO 14 Indicate the "resentation of intangible assets and related ite#s.LO 14 Indicate the "resentation of intangible assets and related ite#s.

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Chapter

12-42

Presentations of IntangiblesPresentations of IntangiblesPresentations of IntangiblesPresentations of Intangibles


Illustratio 12-15

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Chapter

12-43

Presentations of -Presentations of -??D CostsD CostsPresentations of -Presentations of -??D CostsD Costs


Illustratio 12-1!

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Chapter

12-44

Accounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are Costs

LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.

APPEN&I'APPEN&I' 12A12ADiversity in Practice

Companies can either

"urchase computer software or

create it.

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Chapter

12-45



&he ProfessionBs Position

A(; A(C @8.%24%4.! Maor recommendations of thispronouncement are:

1. 9ntil a company has esta"lished technoloicalfeasi"ility for a software product+ it should chareto ';7 expense the costs incurred in creatin theproduct.

2. Technoloical feasi"ility is esta"lished when thecompany has completed a detailed proram desin ora workin model.

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Chapter

12-4!



Accounting for Ca"itali$ed (oft/are Costs&f companies are to capitalie software costs+ then theymust esta"lish a proper amortiation pattern.

,s a "asis for amortiation+ one of two amounts is used:1. the ratio of current re*enues to current and anticipated

re*enues (the percent!of!re*enue approach)+ or

2. the straiht!line method o*er the remainin useful life of

the asset (straiht!line approach).

Must use whiche*er of those amounts is reater.

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Chapter

12-4#



-e"orting (oft/are CostsCompanies should report the followin information relatinto software.

1. 9namortied software costs.2. The total amount chared to expense and the

amounts+ if any+ written down to net realia"le *alue.

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ch12 ready

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