INTANGIBLE ASSETS Patent Pending

Lack physical substance. Useful life is often difficult to determine. INTANGIBLE ASSETS Lack physical substance. Useful life is often difficult to determine. Intangible assets Economic benefits last beyond the current period. Usually acquired for operational use.

INTANGIBLE ASSETS Accounting At acquisition: record at cost. During use: use the matching principle to allocate cost to expense. At disposition: use the revenue recognition principle to record any gain or loss that might result.

Intangible Assets Determination 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, plus the current market value of the noncash consideration given.

Intangible Assets Determination of Cost If the asset is created internally, the cost may include only the costs directly associated with the creation of the intangible asset. Costs classified as R&D must be expensed in the period incurred. SFAS No. 2

INTANGIBLE ASSETS Amortization of Cost Amortization systematically and rationally allocates the acquisition cost of intangible assets to expense. Cost Acquisition Cost Expense Allocation

INTANGIBLE ASSETS -AMORTIZATION SFAS No. 142 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 Patents 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”

INTANGIBLE ASSETS Copyrights 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

INTANGIBLE ASSETS Trademarks 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

INTANGIBLE ASSETS Franchises 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

INTANGIBLE ASSETS Leasehold Improvements A lease grants property use rights from lessor to lessee. Improvements to the leased property made by the lessee are called leasehold improvements.

INTANGIBLE ASSETS Leasehold Improvements The cost of leasehold improvements are amortized over . . . the remaining term of the lease, or the estimated useful life, whichever is shorter.

INTANGIBLE ASSETS Goodwill 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.

INTANGIBLE ASSETS Goodwill 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

INTANGIBLE ASSETS Goodwill 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.

What amount of goodwill should be recorded on Eddy Company books? Goodwill Question What amount of goodwill should be recorded on Eddy Company books? a. $100,000 b. $200,000 c. $300,000 d. $400,000

ACCOUNTING FOR GOODWILL SFAS 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

RESEARCH AND DEVELOPMENT COSTS 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 . . .

RESEARCH AND DEVELOPMENT COSTS R&D costs are 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 future uses

COMPUTER SOFTWARE COST SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” All costs incurred to establish the technological feasibility of a computer software product are to be treated as R&D and expensed as incurred. Subsequent costs to obtain product masters are to be capitalized as an intangible asset.

COMPUTER SOFTWARE COST Amortization Amortization of capitalized computer software costs starts when the product begins to be marketed. Two methods are allowed: Revenue method Straight-line method Company must use method giving the greater charge annually

COMPUTER SOFTWARE COST Disclosures Balance Sheet Unamortized computer software product master cost is an asset Shown at LCM Income Statement Amortization expense associated with computer software cost. R&D expense associated with computer software development cost.

“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” Initial development activities on software product Costs of planning, design, coding, and testing PRIOR to technological feasibility Expense immediately as Costs are incurred ESTABLISH TECHNOLOGICAL FEASIBILITY Capitalize as computer software costs Costs of coding, testing, debugging, and manual preparation up to obtaining master copies Capitalize as inventory Costs to produce software Amortize to expense using GREATER OF revenue method or straight-line method BEGIN SALES OF PRODUCT Expense as CGS Match with related revenue Customer support & maintenance costs

THE END THIS CHAPTER HAS BEEN A MOUNTAIN-TOP EXPERIENCE, BUT I’M GLAD IT IS FINISHED!