Chang, O.H.1 Chapter 12 Intangible Assets ACCT373 Intermediate Accounting Otto Chang Professor of Accounting

Chang, O.H.2 Characteristics of Intangible Assets Intangible assets are characterized by lack of physical existence and high degree of uncertainty concerning the future benefits General rules of accounting: –Purchased: recorded at cost, amortized over economic life of legal life whichever is shorter (but no more than 40 years in any case) –Internally developed: all costs expensed unless future benefits are very much ascertained –Contra-asset account is not generally used

Chang, O.H.3 Specifically Identifiable Intangibles Patents –Economic life: 17 years or shorter –Capitalizable costs: purchase price, registration fee, attorney fee, cost of a successful legal suit to defend the patent. –Non-capitalizable: R&D expense Copyrights –legal life (author’s life plus 50 years) or 40 years

Chang, O.H.4 Trademarks and Trade Names –No definite legal life, so amortize over 40 years or less Leaseholds: the right to lease a property –rents are capitalized if prepaid or under a capital lease Leasehold Improvements –capitalize and amortize over the shorter of remaining lease term or economic life

Chang, O.H.5 Organization costs –Fees to underwriters of stocks or bonds, attorney fees, state fees, promoter’s salaries etc. –Generally amortize over 60 months Development stage enterprises –Should be treated the same as regular enterprises –Operating losses in the start-up of a business should not be capitalized

Chang, O.H.6 Goodwill The excess of purchase price over FMV of identifiable assets purchased Estimation of purchase price = Future annual earnings (adjusted for extraordinary items) / capitalization rate Estimation of goodwill = Excess earning* / capitalization rate * Excess earning = Future annual earning - normal annual earning** **Normal earning = FMV of assets x expected rate of return

Chang, O.H.7 Accounting for Goodwill Recording Goodwill Assets acquired (revised to FMV) Goodwill Liabilities acquired (revised to FMV) Cash Amortization of Goodwill over useful life –but no more than 40 years

Chang, O.H.8 Badwill Badwill = FMV of assets - purchase price should be allocated to reduce proportionately the values assigned for non- current assets. If the allocation reduces the non-current assets to zero, the remainder will be classified as deferred credit and amortized

Chang, O.H.9 Impairment of Intangible Assets Treatment similar to impairment of long- lived assets For specifically identifiable intangible assets (such as patents, copyrights etc.), write down the asset to its fair value For goodwill-type intangibles, reduce any goodwill (or if no goodwill, the long-lived assets) by the amount of loss recognized

Chang, O.H.10 Accounting for R &D Activities General rule: expensed unless the assets are can be used in other future projects (e.g., acquisition of research facilities or equipment) or capitalizable as cost of patents Reimbursed R&D expenses: Dr. A/R (= R&D costs) Cr. Cash or other credits

Chang, O.H.11 Accounting for Software Costs Developed for external sale: –Capitalize costs after technical feasibility has been established (upon completion of a detailed program design or working model) –Annual amortization = greater of S-L amortization or amortization in relation to % of revenues estimated for future years –Value at lower of cost or NRV on B/S Developed for internal usage: –Expensed (FASB) or capitalized if future benefit is clearly evident (IMA)

Chang, O.H.12 Other Assets Sometimes referred to as Deferred Charges A catch-all category for everything not belonging to other categories Examples: –Property held for sale –Prepaid pension costs –Deferred income taxes