Intangibles C hapter 12 An electronic presentation by Norman Sunderman Angelo State University An electronic presentation by Norman Sunderman Angelo State University COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Intermediate Accounting 10th edition Nikolai Bazley Jones

2 Characteristics that Distinguish Intangibles 1.There is generally a higher degree of uncertainty regarding the future benefits that may be derived. 2.Their value is subject to wider fluctuations because it may depend to a considerable extent on competitive conditions. 3.They may have value only to a particular company. 4.Goodwill and intangible assets with indefinite lives are not expensed.

3 Intangible Assets Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no physical existence. Patents Copyrights Franchises

4 Intangible Assets Intangible assets are those noncurrent economic resources that are used in the operations of the business but have no physical existence. Trademarks ® a registered trademark Computer software costs Goodwill

5 1. Purchased Identifiable Intangibles. A company may purchase an intangible asset from another company. The purchase is handled in the same manner as the acquisition of a single asset, in a group of assets, or in an exchange of similar or dissimilar assets. Accounting for the cost of intangibles is discussed in FASB Statement No. 142 as follows: ContinuedContinued Accounting for Intangibles

6 2. Purchased Unidentifiable Intangibles. A company capitalizes the cost of a purchased unidentifiable intangible asset. The principal example of an unidentifiable intangible is goodwill. ContinuedContinued Accounting for Intangibles Accounting for the cost of intangibles is discussed in FASB Statement No. 142 as follows:

7 3.Internally Developed Identifiable Intangibles. When a company internally develops an intangible assets, such as a patent, it can capitalize only certain costs. The costs of a patent the legal and related costs, but NOT the costs of developing the product or process being patented. ContinuedContinued Accounting for Intangibles Accounting for the cost of intangibles is discussed in FASB Statement No. 142 as follows:

8 4.Internally Developed Unidentifiable Intangibles. A company expenses the costs of internally developed unidentifiable intangibles as incurred even though they may be expected to have benefits extending beyond the current period. Accounting for Intangibles Accounting for the cost of intangibles is discussed in FASB Statement No. 142 as follows:

9 Effects on Income Intangible assets that are typically amortized 1.Patents 2.Copyrights 3.Franchises 4.Computer software costs 5.Leasehold improvements Intangible assets that are typically reviewed for impairment 1.Trademarks and tradenames 2.Licenses that may be renewed indefinitely 3.Goodwill

10 1.Legal, regulatory, or contractual provisions that place a limit on the maximum economic life. 2.Provisions for renewal or extension of rights or privileges covered by specific intangible assets. 3.Effects of obsolescence, customer demand, competition, rate of technological change, and other economic factors. Factors to consider when estimating the useful life of an intangible asset: ContinuedContinued Amortization of Intangibles

11 4.Possibility that the economic lives of intangibles may be related to life expectancies of certain groups of employees. 5.Expected actions of competitors, regulatory bodies, and others. Factors to consider when estimating the useful life of an intangible asset: Amortization of Intangibles

12 Intangible Assets With a Finite Life Are Amortized. The calculation of the amortization of intangible assets follows the same principles as the depreciation of tangible assets. Amortization of Intangibles

13 1.Select a method based on the pattern of benefits, if not determinable, use the straight line method. 2.Intangible assets do not have a residual value. Amortization of Intangibles

14 A company purchases a patent for $85,000. Patent85,000 Cash85,000 At year-end the patent is amortized over 10 years (no expected residual value). Amortization Expense (or Factory Overhead)8,500 Patent (or Accumulated Amortization: Patent)8,500 Amortization of Intangibles

15 Research and Development A company must expense all of its research and development as incurred. Even though R&D often benefit future periods, requiring all companies to expense these costs enhances comparability and eliminates the possibility of income manipulation.

16 Costs associated with activities excluded from R&D are either expensed or capitalized. Research and Development Costs

17 The company includes all these costs in R&D expenses, and records them as follows: Research and Development Expense215,000 Cash, Payables, etc.140,000 Inventory50,000 Accumulated Depreciation, Building25,000 Research and Development Costs

18 A patent is an exclusive right granted by the federal government giving the owner control… Patents

19 …of the manufacture, sale, or other use of an invention for 20 years from the date of filing. Patents

20 A company can capitalize the costs of successfully defending the legal validity of a patent. If the suit is lost, all legal costs are expensed. Patents

21 © Books Music Films Art Software A copyright is a grant by the federal government to publish, sell or otherwise control literary or artistic products for the life of the author plus 70 years. Copyrights

22 A franchise is an agreement entered into by two parties in which, for a fee, one party gives the other party the right to perform certain functions or sell certain products or services. Burger King McDonald’s Midas Muffler KFC Franchises

23 Technological Feasibility General Release R & D ExpenseCapitalize Expense Technological feasibility is established either on the date the company completes a detail program design or, in its absence, when it completes a working model of the product. Computer Software Costs

24 1. The preliminary stage is completed, 2. management authorizes and commits to funding a company software project, and 3. interest costs are incurred when developing the software. Internal-Use Software AICPA Statement of Position No specifies that the capitalization of costs begins when--- Computer Software Costs

25 Registration of a trademark or tradename  with the U.S. Patent Office establishes a right to exclusive use of a name, symbol, or other device used for product identification for 20 years. The right is renewable indefinitely as long as it is used continuously. Tradenames and Trademarks

26 Other Intangibles  Leases and leasehold improvements  Deferred charges (a catch-all category in which several individually immaterial items are accumulated)

27 AICPA Statement of Position (SOP) No now requires that the costs of start-up activities, including organization costs be expensed as incurred. Organization Costs

28 Purchased goodwill arises when a company is acquired. It is the difference between the purchase price of the acquired company as a whole and the fair value of the reported identifiable net assets. Purchased Goodwill

29 Individual assets and liabilities actually would be debited or credited. Sara Company purchases all the assets of Trevor Company for $790,000 cash and Trevor Company is dissolved. Trevor Company’s identifiable assets had a fair value of $920,000 and its liabilities totaled $200,000. Assets920,000 Goodwill70,000 Liabilities200,000 Cash790,000 Goodwill

30 A company must review its goodwill for impairment annually at the reporting unit level. Impairment of Goodwill

31 A company must also review its goodwill for impairment whenever events or changes in circumstances occur that would more-likely-than- not reduce the fair value of the goodwill below its carrying value. Impairment of Goodwill

32 FASB Statement No. 142 requires a company to disclose certain information about its intangible assets, in either the financial statement or its footnotes, including: 1.In the period a company acquires intangible assets: a. The cost of any intangible asset acquired, separated into categories. b.For assets subject to amortization, the residual value and the weighted-average amortization expense for the next five years. c.The cost of any R&D acquired and written off, and where it is included in the income statement. ContinuedContinued Disclosure of Intangibles

33 2.In each period for which the company presents a balance sheet: a.For intangible assets that are amortized, the total cost, the accumulated amortization, the amortization expense, and the estimated amortization expense for the next five years. b.For intangible assets that are not amortized, the total cost and the cost of each major intangible asset class. ContinuedContinued Disclosure of Intangibles FASB Statement No. 142 requires a company to disclose certain information about its intangible assets, in either the financial statement or its footnotes, including:

34 2.In each period for which a company presents a balance sheet: c.For goodwill, the amount of goodwill acquired, the amount of any impairment losses recognized, and the amount of goodwill included in the disposal of a reporting unit. d.For any intangible asset impairment, the facts and circumstances leading to the impairment, the amount of the loss, and the method used. Disclosure of Intangibles FASB Statement No. 142 requires a company to disclose certain information about its intangible assets, in either the financial statement or its footnotes, including:

35 C hapter 12 Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.