Chapter 9: CAPITAL ASSETSChapter 9: CAPITAL ASSETS

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Intangible assets are capital assets, which are not tangible. Just like equipments, intangible assets also benefit future

periods or current period or both. Intangible assets involve rights, privileges and competitive

advantages which have no physical substance. Examples are patent, trademark, brand equity (Coke,

Tylenol, Nike) and R&D

INTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETS

There must be proof that an intangible asset exists. This proof can be a contract, license or other document. Intangibles may arise from the following sources:

Government grants such as patents, copyrights, trademarks and trade name

Purchase price includes a payment for goodwillContractual agreements such as franchise fee and lease

INTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETS

Accounting for Intangible AssetsAccounting for Intangible Assets

Costs which occur within the company (instead of hiring an external worker) to create intangible assets are generally expensed as they are incurred.

Intangible assets, which appear on a company’s balance sheet are usually purchased assets, which they bought from an external source.

Intangible assets with limited useful life are amortized whereas intangible assets with unlimited useful life are not amortized.

Amortizable intangible assets with defined lives: The calculation of amortization of the cost to expense over the shorter of

Useful (economic) lifeLegal life

Straight-line method of amortization usedIntangible assets rarely have salvage value, so

usually SV = 0. Intangible assets also sometimes experience

amortization revision just like equipments.

AMORTIZATION OF IAAMORTIZATION OF IA

If impairment is evident, then the intangible asset must be written down just like equipments.

AMORTIZATION OF IAAMORTIZATION OF IA

In general, accounting for intangible assets parallels the accounting for capital assets. Intangible assets are:

1. recorded at cost (including legal fee);

2. written off over useful life in a rational and systematic manner;

3. at disposal, net book value is eliminated and gain or loss, if any, is recorded.

ACCOUNTING FOR ACCOUNTING FOR INTANGIBLE ASSETSINTANGIBLE ASSETSACCOUNTING FOR ACCOUNTING FOR

INTANGIBLE ASSETSINTANGIBLE ASSETS

UNAMORTIZABLE INTANGIBLE UNAMORTIZABLE INTANGIBLE ASSETSASSETS

IA with Indefinite useful lives are not amortized.

Accountants should do impairment testing at least once a year.

TYPES OF INTANGIBLE ASSETSTYPES OF INTANGIBLE ASSETS

PatentsCopyrightsTrademarks and Trade NamesFranchises and LicensesGoodwillResearch and Development Costs

PATENTSPATENTS

Exclusive right to manufacture, sell or control granted for 20 years.

Legal costs of protecting a patent in an infringement suit are added to the Patent account and amortized over the remaining life of the patent

A patent can not be renewed, but legal life may be extended if the patent holder obtains new patents for improvements.

Amortization is shorter of:20 years or Its useful life

Copyrights are granted by the federal government giving the owner the exclusive right to reproduce and sell artistic or published work such as songs and books.

Copyrights extend for the life of the creator plus 50 years = 50 years after the death of the creator.

For amortization, we take shorter of its useful life or creator’s life + 50 years

COPYRIGHTSCOPYRIGHTS

Many companies spend billions of dolloars on R&D in order to come up with new product or new process.

R&D itself is not intangible asset. But they may lead to patents and copyrights, new

products or new process. Research costs–record as an expense when incurred Development costs–capitalize if associated with an

identifiable, feasible product. Otherwise, expense

RESEARCH AND DEVELOPMENT RESEARCH AND DEVELOPMENT COSTSCOSTS

TRADE MARKS/NAMESTRADE MARKS/NAMES

Word, phrase, jingle or symbol that distinguishes or identifies a particular enterprise or product

If indefinite life, do not amortize. Test for impairment

Trademarks / NamesTrademarks / Names

The creator of trademark can get an exclusive legal right to the trademark by registering it with the Canadian Intellectual Property Office.

This registration gives continuous protection. It may be renewed every 15 years, as long as the

trademark is still being used. If the trademark was purchased, the cost is the purchase

price. If the trademark was developed internally, then the cost

includes legal fee, registration fee, design costs etc.

LICENSESLICENSES

Operating rights permit the enterprise to use public property in performing its service

Example is the use of airwaves for radio or TV broadcasting

Example is a use of city streets for a bus line

Franchise and LICENSESFranchise and LICENSES

When costs can be identified with the acquisition of franchise (or license), an intangible asset account should be set up.

If the F or L has a limited useful life amortize it. If the F or L has a indefinite useful life do not amortize

it. Sometime franchise agreement requires annual payments

to the franchisor (Park), and these are often proportionate to sales.

These payments are called royalties and are recorded as operating expenses. For example, Subway requires 10% of your revenue as royalties.

P500 E9.11, E9.12P505 P9.10 (optional) Skip any questions which ask about goodwill.

We will learn this tomorrow.

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