Intangibles - 1

INTANGIBLE ASSETS

PatentPending

Intangibles - 2

INTANGIBLE ASSETS

Lack physicalsubstance.

Lack physicalsubstance.

Economic benefitslast beyond thecurrent period.

Economic benefitslast beyond thecurrent period.

Useful life isoften difficultto determine.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Usually acquired for operational

use.

Intangibleassets

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INTANGIBLE ASSETSAccounting

At acquisition:record at costcost.

At acquisition:record at costcost.

During use:use the matching principlematching principleto allocate cost to expense.

During use:use the matching principlematching principleto allocate cost to expense.

At disposition:use the revenue recognitionrevenue recognitionprinciple to record any gain or loss that might result.

At disposition:use the revenue recognitionrevenue recognitionprinciple to record any gain or loss that might result.

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Intangible AssetsDetermination of Cost

Record at current cash equivalent cost, including purchase price, transfer, and legal fees.

If the asset is acquired through a nonmonetary exchange, cost is– cash paid, plusplus– the current market value of the

noncash consideration given.

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If the asset is created internally, the cost may include– only the costs directly associateddirectly associated

with the creation of the intangible asset.

Costs classified as R&D must be expensedexpensed in the period incurred.– SFAS No. 2

Intangible AssetsDetermination of Cost

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INTANGIBLE ASSETSAmortization of Cost

Amortization systematically and rationally allocates the acquisition cost

of intangible assets to expense.

Cost

Allocation

AcquisitionCost

Expense

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Limited-life intangibles– Economic life (considering obsolescence)

– Legal, regulatory, or contractual provisions

– Amortization method• Consider the pattern of use

• Residual value is considered

• Also evaluated for impairment

Indefinite-life intangibles– Not amortized

– Tested annually for impairment (only fair value test)

INTANGIBLE ASSETS -AMORTIZATIONSFAS No. 142

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INTANGIBLE ASSETSPatents

An exclusive right recognized by law and registered with the US Patent Office.

The holder is allowed to use, manufacture, sell, and control the item, process, or activity without interference or infringement by others.

The legal life is 20 years. “Band-Aid”

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INTANGIBLE ASSETSCopyrights

A form of protection given by law to authors of literary, musical, artistic, and similar works

Copyright owners have exclusive rights to print, reprint, copy, sell or distribute, perform and record the work

Life of creator + 50 years– Economic life often less

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INTANGIBLE ASSETSTrademarks

A symbol, design, or logo associated with a business

– Granted for 10 years with indefinite renewals

If internally developed, trademarks often have no recorded asset cost

If purchased, a trademark is recorded at cost

Amortization depends on whether they are considered limited-life or indefinite – life

– Normally not amortized

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INTANGIBLE ASSETSFranchises

Right to sell products or provide services purchased by franchisee from franchiser (also referred to as licenses or permits)

Purchase price is intangible asset which is amortized over shorter of legal life or economic life

– Might be indefinite ??

– Annual payments are operating expenses

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INTANGIBLE ASSETSLeasehold Improvements

A lease grants property use rights from lessor to lessee.

Improvements to the leased property made by the lessee are called leasehold leasehold improvementsimprovements.

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The cost of leasehold improvements are amortized over . . .– the remaining term

of the lease, or

– the estimated useful life,

– whichever is shorter.

INTANGIBLE ASSETSLeasehold Improvements

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INTANGIBLE ASSETSGoodwill

Represents the value associated with favorable characteristics of a firm that result in earnings in excess of those expected from identifiable assets of the firm

For many large firms, goodwill is a major reported asset.

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INTANGIBLE ASSETSGoodwill

Goodwill is often present, but is only recorded when one company combines with another company.

Goodwill is the excess of the actual purchase price of an acquired firm over the fair market value (FMV) of the identifiable net assets acquired.– SFAS No. 141

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INTANGIBLE ASSETSGoodwill Example

Eddy Company paid $1,000,000 to purchase all of James Company’s

assets and assumed James Company liabilities of $200,000.

James Company’s assets were appraised at a fair value of

$900,000.

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What amount of goodwill should be recorded on Eddy Company books?

a. $100,000

b. $200,000

c. $300,000

d. $400,000

FMV of Assets 900,000$ Debt Assumed 200,000

FMV of Net Assets 700,000$ Purchase Price 1,000,000

Goodwill 300,000$

GoodwillGoodwillQuestionQuestion

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ACCOUNTING FOR GOODWILLSFAS No. 142

Goodwill is no longer amortized

– Considered an indefinite-life intangible

Goodwill is tested annually for impairment

– Test is done at the “component” level

Negative goodwill = extraordinary gain

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RESEARCH ANDDEVELOPMENT COSTS

Research– Planned search or critical

investigation aimed at discovery of new knowledge . . .

Development– The translation of research findings or

other knowledge into a plan or design . . .

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R&D costs are expensed expensed as incurred

Material R&D costs must be disclosed

Equipment, facilities, and purchased intangibles related to the research should be capitalized . . .

. . . if those items have alternative . . . if those items have alternative future usesfuture uses

RESEARCH ANDDEVELOPMENT COSTS

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COMPUTER SOFTWARE COSTSFAS No. 86

All costs incurred to establish the technological technological feasibilityfeasibility of a computer software product are to be treated as R&D and expensed as incurred.

Subsequent costs to obtain product mastersproduct masters are to be capitalized as an intangible asset.

““Accounting for the Costs of Computer Software Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”to be Sold, Leased, or Otherwise Marketed”

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COMPUTER SOFTWARE COSTAmortization

Amortization of capitalizedcapitalized computer software costs starts when the product begins to be marketed.

Two methods are allowed:– Revenue method– Straight-line methodCompany must use method giving the greater charge annually

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COMPUTER SOFTWARE COSTDisclosures

Balance Sheet– Unamortized computer software

product masterproduct master cost is an asset•Shown at LCM

Income Statement– Amortization expense associated

with computer software cost.– R&D expense associated with

computer software developmentdevelopment cost.

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““Accounting for the Costs of Computer Software Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”to be Sold, Leased, or Otherwise Marketed”

Initial development activities on software product

Costs of planning, design, coding, and testing PRIORto technological feasibility

Costs of coding, testing, debugging,and manual preparation up to

obtaining master copies

Expense immediately as Costs are incurred

ESTABLISH TECHNOLOGICAL

FEASIBILITY

Costs to produce software

BEGIN SALES OF PRODUCT

Customer support & maintenance costs

Capitalize as computersoftware costs

Capitalize as inventory

Expense as CGS

Match withrelated revenue

Amortize to expense usingGREATER OF

revenue method or straight-line method

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THE ENDTHIS CHAPTER HAS

BEEN A MOUNTAIN-TOP EXPERIENCE, BUT I’M GLAD IT IS FINISHED!