CHAPTER 12 Intangible Assets ……..…………………………………………………………... Valuation  Purchased – recorded as an asset at cost  Internally-created  most costs are expensed – valuation is too subjective to capitalize  legal costs to obtain the intangible may be capitalized

Amortization  Limited life intangibles  limited through legal or contractual provisions, obsolescence, competition  amortized  Indefinite life  not amortized  the “40-year “ rule has been dropped!

Types of Intangible Assets 1) Marketing-related intangibles: eg. Trademark  capitalize design and registration fees  indefinite life 2) Customer-related intangibles: eg. Customer list  capitalize acquisition costs 3) Artistic-related intangibles: eg. Copyright  capitalize costs to acquire and defend  amortize over useful life

4) Contract-related intangibles: eg. Franchise  initial cost amortized if life is limited  annual payments are not capitalized 5) Technology-related intangibles: eg. Patent  R&D related to the development of a product or process is not capitalized  patent costs are amortized over legal or useful life 6) Goodwill

Goodwill  Recognizing goodwill  when an entire business is purchased  excess of cost over fair value of identifiable assets  Write-off of goodwill  indefinite life: do not amortize  record decrease in value if goodwill becomes impaired  Negative goodwill  fair value of assets is greater than cost  recorded as an extraordinary gain

Exercise Investment in subsidiary 2. Timberland 3. Pre-manuf. engineering 4. Lease prepayment 5. Equipment 6. Search of research 7. Start-up costs 8. Oper. losses during start-up 9. Training during start-up 10. Cost of franchise

11. Goodwill made internally 12. Testing for new products 13. Goodwill: purch of business 14. Patent development 15. Patent purchase 16. Legal costs to acquire patent 17. Legal costs to defend patent 18. Product formulation 19. Copyright purchase 20. R&D costs 21. Long-term receivables 22. Trademark development

IMPAIRMENT OF INTANGIBLE ASSETS Limited-Life Intangibles  Rules for long-lived assets apply (Chapter 11) 1. Recoverability test for impairment future net cash flows (undiscounted) < carrying value 2. If impaired, calculate the amount of the loss. carrying value - fair value of the asset 3. Entry: Loss on Impairment150,000 Patents150,000

Indefinite-Life Intangibles Other than Goodwill  Test for impairment at least annually 1. Fair value test for impairment fair value of the asset < carrying value 2. If impaired, record the difference as a loss. (as with limited-life intangibles)

Goodwill  Test for impairment is a two-step process 1. Fair value test on the reporting unit fair value of the unit < carrying value CarryingFair ValueValue Cash & Receiv.$ 1,050 PP&E8,700 Goodwill2,100 Less: Notes Payable (950) Value of unit$10,900$10,000 Perhaps based on expected net cash flows.

2. Fair value test of goodwill fair value of goodwill < carrying value 3. Entry: Cash & Receiv.$ 1,050$ 1,050 PP&E8,7008,400 Less: Notes Payable (950) (950) Identifiable Assets$ 8,800$ 8,500 Goodwill 2,100 ? Value of Unit$10,900$10,000 CarryingFair ValueValue

R&D AND SIMILAR COSTS  R&D  R: search for new knowledge  D: translate into new or significantly improved product  does not include routine alternatives to existing products  Accounting for R&D  charge to expense when incurred  assets may be capitalized & depreciated if they have alternative future uses  R&D includes reasonable indirect costs

 Start-up costs  expensed as incurred  assets are capitalized  Initial operating losses  reported like any other operating losses  Advertising costs  expensed as incurred or the first time the advertising takes place  Computer software costs

PRESENTATION Balance Sheet Intangible assets (Note C)$3,840 Goodwill (Note D)2,575 Contra accounts not shown. Grouped into two categories Notes Detail on types of intangible assets. Estimated amortization for next 5 years. Changes in value of goodwill.

Income Statement Included in continuing operations: R&D expenses (disclosed separately) Amortization expense Intangible impairment losses Goodwill impairment losses (unless the operating unit is discontinued.)