1. Gabriela H. Schneider, CMA; Grant MacEwan College
INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK
Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College 2

2. C H A P T E R 13
Intangible Assets

3. 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.
5. Explain the conceptual issues related to goodwill.

4. 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 intangibles, including deferred charges.

5. Intangible Assets Intangible Asset Issues Characteristics
Current standards
Recognition and measurement at acquisition
Valuation after acquisition
Specifically Identifiable Intangibles
Patents
Copyrights
Trademarks
Leaseholds
Franchises
Goodwill
Recognition
Negative Goodwill
Valuation after acquisition
Impairment
Intellectual Capital
Deferred Charges and Long-term Prepayments
Research and development costs
Pre-operating costs
Initial operating losses
Organization costs
Advertising costs
Conceptual questions
Financial Statement Disclosure and Presentation
Balance Sheet
Income Statement
Illustrative disclosures

6. Intangibles: Characteristics
CICA Handbook, Section 3062, broadly defines intangible assets as:
lacking physical existence
non-financial assets
Characteristics include:
identifiability
manner of acquisition
expected period of benefit
separability from an entire enterprise

7. 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

8. 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

9. Valuation of Intangible Assets
Intangibles
Purchased
Internally-
Created
Specifically
Identifiable
Goodwill-
type assets
Capitalize
Deferred
Charges
Restricted
Amounts
Specifically
Identifiable
Expense,
except direct
costs
Goodwill
type assets
Expense

10. 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

11. Valuation after Acquisition
Factors to consider when determining economic useful life of an intangible:
Expected future usage
Effects of technological or commercial obsolescence
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

12. Specific Intangibles: Types
Patents
product patents and process patents
Copyrights
relating to creations of authors, painters, musicians and artists
Trademarks and Trade Names
Leaseholds
Lease Prepayments, Leasehold Improvements and Capital Leases
Franchises and Licenses

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Acquired Goodwill: Valuation
Given:
Purchase price (cash): $ 400,000
Book value of assets: $ 255,000
Liabilities: $ 55,000
Market value of assets: $ 350,000
Determine goodwill.

23. 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, Liabilities ,000 Cash ,000

24. 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

25. 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

26. 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

27. 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

28. 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

29. Research and Development (R&D) Costs
R&D costs include the following:
Direct materials and direct labour
Amortization of tangible and intangible assets used/related to R&D activities
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

30. 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

31. Pre-operating Costs
Costs incurred prior to formal operations beginning
EIC-27 allows for the deferral of pre-operating 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

32. 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

33. COPYRIGHT
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