1. What is goodwill?
Goodwill is an intangible asset representing non-physical items that add to a company’s value but cannot be easily identified or valued. Goodwill is usually associated with a business acquisition.

2. Intermediate Accounting - Chapter 12
Intangible Assets (Goodwill)
9/14/2018
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

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

4. 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

5. 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

6. Intermediate Accounting - Chapter 12
9/14/2018
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

7. 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 Impairment 150,000
Patents 150,000

8. 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)

9. Goodwill Test for impairment is a two-step process
1. Fair value test on the reporting unit
fair value of the unit < carrying value
Carrying Fair
Value Value
Cash & Receiv. $ 1,050
PP&E 8,700
Goodwill 2,100
Less: Notes Payable (950)
Value of unit $10,900 $10,000
Perhaps based on expected net cash flows.

10. 2. Fair value test of goodwill
fair value of goodwill < carrying value
Carrying Fair
Value Value
Cash & Receiv. $ 1,050 $ 1,050
PP&E 8,700 8,400
Less: Notes Payable (950) (950)
Identifiable Assets $ 8,800 $ 8,500
Goodwill 2, ?
Value of Unit $10,900 $10,000
3. Entry:

11. 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

12. 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

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

14. 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.)