1. Intermediate Accounting, 10th Edition Kieso, Weygandt, and Warfield
Chapter 12: Intangible Assets
Prepared by
Krishnan Ranganathan, Angelo State University,
San Angelo, Texas
11/16/2018
Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

2. Part I: Intangible Assets - Characteristics, Valuation, and
Amortization
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

3. Intangibles: Characteristics
They lack physical existence
They represent entity’s rights and privileges
They are not financial instruments, such as deposits or bank accounts
They are long term in nature
They are subject to amortization
Examples are: patents and copyrights
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

4. Classification of Intangibles
Intangibles are either grouped or separately identified based on the following factors:
Are the assets developed internally, or acquired singly or in groups?
Is the expected benefit from the asset limited or indefinite?
Are the rights transferable or are they a substantial part of the business?
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

5. Valuation of Intangible Assets
Intangibles
Purchased
Internally-
Created
Specifically
Identifiable
Goodwill-
type assets
Specifically
Identifiable
Goodwill-
type assets
Capitalize
Expense,
except direct
costs
Expense
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

6. Amortization of Intangible Assets
Intangibles are written off over their useful lives, where the assets have determinable useful lives
Where the intangibles have indeterminable useful lives, they must be written off over a period not exceeding 40 years
Acquired intangibles should not be written off at acquisition
Intangibles are amortized on a straight-line basis for tax purposes
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

7. Specifically Identifiable Intangibles
Part 2:
Specifically Identifiable Intangibles
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

8. Specific Intangibles: Types
Patents (product patents and process patents)
Copyrights (relating to creations of authors, painters, musicians and artists)
Trademarks and Trade Names
Leaseholds (Lease Prepayments, Leasehold Improvements and Capital Leases)
Franchises and Licenses
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

9. Patents (product patents and process patents)
A patent gives an exclusive right to the holder for 20 years.
Costs of purchasing patents are capitalized
Costs to research and develop patents are expensed as incurred
Patents are amortized over the shorter of the legal life (20 years) or their useful lives
Legal fees incurred to defend patents are capitalized.
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

10. Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)
Copyrights
Copyrights are granted for life of the creator plus 50 years
Copyrights can be sold or assigned, but can not be renewed
Copyrights are amortized over their useful life (not to exceed 40 years)
Costs of acquiring copyrights are capitalized
Research and development costs involved are expenses as incurred
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

11. Trademarks and Trade Names
Trademarks and Trade names are renewable indefinitely by the original user in periods of 20 years each
For accounting purposes, trademarks and trade names are amortized over periods not exceeding 40 years
Costs of acquired trademarks or trade names are capitalized
If trademarks or trade names are developed by the business, all direct costs (except R&D costs) are capitalized.
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

12. Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)
Leaseholds
A leasehold is a contractual agreement between:
the lessor (owner) and the lessee (renter)
giving the lessee the right to use the property
for a specific period of time
in return for stipulated, periodic cash payments
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

13. Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)
Leaseholds
Lease prepayments are to be shown as prepaid expenses, not as intangible assets
Leasehold improvements (made by the lessee) revert to the lessor at end of lease term
Leasehold improvements are amortized over the shorter of the remaining term of the lease or useful life of the improvements
Leasehold improvements are generally shown in the (tangible) property, plant, and equipment section.
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

14. Leases (Capital Leases)
If the lease agreement transfers all benefits and risks, the lease is classified as a capital lease.
The lease is shown as a tangible asset (at the capitalizable cost) rather than as an intangible asset
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

15. Franchises and Licenses
A franchise is a contractual agreement under which:
the franchisor grants the franchisee
the right to sell certain products or services,
to use certain trademarks or trade names, or
to perform certain functions,
within a certain geographical area
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

16. Franchises and Licenses
A franchise may be for a limited time or for an indefinite time period
The cost of a franchise (for a limited time) is amortized over the franchise term
A franchise (for an unlimited time) is amortized over a period not exceeding 40 years
If a franchise is deemed worthless, the cost must be written off immediately
Annual payments for a franchise are expensed.
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

17. Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)
Part 3:
Goodwill
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

18. Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)
Goodwill
Goodwill is the most intangible of all assets
Goodwill can be sold only with the business
Goodwill is the excess of:
the cost (purchase price) over
the amounts (price) assigned to tangible and intangible net assets
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

19. Acquired Goodwill: Valuation
Given:
Purchase price (cash): $ 100,000
Book value of assets: $ 88,000
Liabilities: $ 20,000
Market value of assets: $ 102,000
Determine goodwill, if any
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

20. Acquired Goodwill - Computation
Goodwill = Purchase Price - Fair value of net assets
$100,000 less $82,000 = $18,000
Entry in the books of the Purchaser:
Assets $102, Goodwill $ 18, Liabilities $ 20,000 Cash $100,000
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

21. The Excess Earnings Approach
Capitalizes Excess Earnings of Seller
Steps:
Compute Excess Earnings:
Average Earnings less Industry Earnings
Exclude all extraordinary gains and losses
Capitalize excess earnings:
[excess earnings / DISCOUNT FACTOR %]
method is based on the assumption of perpetuity
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

22. The Excess Earnings Approach: Example
Given the following information regarding Tractor corporation, determine goodwill, if any:
Net Identifiable assets: $ 500,000
Normal rate of return: %
Earnings history ( ): : $ 100, : $ 130, : $ 120, : $ 140, : $ 150,000
Discount rate (proxies for risk): 15%
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

23. The Excess Earnings Approach: Example
Average earnings: $ 640,000 / 5 = $128,000
Normal return = $ 500,000 * 20% = $ 100,000
Excess earnings = $ 28,000
Goodwill = $ 28,000 / = $ 186,667
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

24. NEGATIVE Goodwill: Examples
B/V FMV
Current Assets , ,000
Land , ,000
Buildings , ,000
TOTAL , ,000
Liabilities , ,000
Net Assets , ,000
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

25. Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)
NEGATIVE GOODWILL
NA = Net Assets
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

26. Research and Development Costs
Research activities involve:
planned search or
critical investigation
aimed at discovery of new knowledge
Example:
Laboratory research aimed at discovery of new knowledge
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

27. Research and Development Costs
Development activities include:
translation of research findings or other knowledge
into a plan or design
for a new product or process, or
significant improvement
to an existing product or process
whether intended for sale or for use
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

28. Research and Development Costs
R & D costs involve searching for new products and processes
R & D costs are expensed unless the costs have alternative future uses: (examples)
Lab costs aimed at new knowledge
Conceptual formulation of possible product
Non R & D costs are expensed, if future benefits are uncertain
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Intermediate Accounting, 10th Edition, Ch. 12 (Kieso et al.)

29. Copyright
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