1. Outline Definition and common types of intangible assets
Valuation and costs of intangibles
Accounting for finite-life intangibles and intangibles with indefinite lives.
Accounting for patents, copyrights, franchise and licenses, trade names and trademarks, and start-up costs.
Accounting for R&D and computer software costs.
Accounting for goodwill
Intangible Assets

2. Definition Of Intangible Assets
a. with future economic benefits,
b. no physical substance,
c. with high degree of uncertainty concerning the future benefit.
Intangible Assets

3. Common Types of Intangibles
Patents, copyrights, franchises, start-up costs, trade names, trademarks, goodwill etc..
Intangible Assets

4. Valuation of Intangibles
Intangibles are recorded at cost and are also reported at cost at the end of an accounting period.
Intangibles with limited life are subject to amortization and possible impairment test.
Intangibles with indefinite life are only subject to impairment test at least annually.
Intangible Assets

5. Costs of Intangibles
Costs of Intangibles include acquisition costs plus any other expenditures necessary to make the intangibles ready for the intended uses (i.e., purchase price, legal fees, filing fees etc.; not including internal R&D).
Essentially, the accounting treatment of valuation for intangibles closely parallels that followed by tangible assets.
Intangible Assets

6. Examples 1. Issuance of stock to acquire intangibles.
2. Lump-sum purchase of intangibles.
Costs will be allocated in accordance with the fair market value of each individual intangible.
Intangible Assets

7. Intangibles Assets with Finite lives
Patents (20 years), copyrights (the life of the creator plus 70 years), franchise and license (the contractual life).
The costs are subjected to amortization (a process of cost allocation) over the shorter of the legal or useful life, not to exceed 40 years.
Intangible Assets

8. 1. Patents
Granted by the U.S. Patent and Trademark Office for a period of 20 years.
A patent gives the holder the exclusive right to produce, use and sell a product or process without interference or infringement from others.
Intangible Assets

9. Patents (contd.)
Cost of patent: If purchased from an inventor, the cost will include the purchase price plus any legal fees (to successfully protect the patent).
In addition, any legal fees occur after the acquisition of a patent which successfully defend the right of the patent should also be capitalized.
Intangible Assets

10. Patents (contd.)
The cost of a patent should be amortized over the legal life or the useful life, whichever is shorter.
Intangible Assets

11. 2. Copyrights
A federally granted right to authors, sculptors, painters, and other artists for their creations.
A copyright is granted for the life of the creator plus 70 years.
It gives the creator and heirs an exclusive right to reproduce and sell the artistic work or published work.
Intangible Assets

12. Copyrights (contd.)
If purchased, the cost includes the purchase price plus any legal fees.
If developed by the owner (the creator), no cost can be capitalized.
Amortization: Straight-line method or a unit-of-production method.
Impairment test needed only if events indicate that book value may not be recoverable.
Intangible Assets

13. 3. Franchise & License
A franchise is a contractual agreement under which the franchiser grants the franchisee the right to sell certain products or service or to use certain trade names or trademarks.
A license is a contractual agreement between a governmental body (i.e., city, state, etc.) and a private enterprise to use public property to provide services.
Intangible Assets

14. Franchise & License (contd.)
Costs: Franchise fees plus any legal fees should be capitalized.
Amortization: over the shorter of the contractual life or the useful life, not to exceed 40 years.
Impairment test is needed only if events indicate that the book value may not be recoverable.
Intangible Assets

15. 4. Trademarks & Trade Names
A word, a phrase, or a symbol that distinguishes a product or an enterprise from another (i.e., company names, XEROX,…)
Cost: Similar to that of copyrights.
Intangible Assets

16. Trademarks & Trade Names
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Trademarks & Trade Names
Life: register at the US Patent Office for 10 years life. The registration can be renewed every 10 years for unlimited times.
Amortization: no amortization necessary.
Intangible Assets

17. 5. Start-Up Costs (including Organization Costs)
Start-up costs: Any costs incurred for the preparation of introducing a new product or new service or start business in a new territory.
Org. Costs: Costs associated with the formation of a corporation including fees to underwriters (for stock issuance), legal fees, promotional expenditures, etc.
These costs should be expensed as incurred.
Intangible Assets

18. 6. Research and Development (R&D)
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6. Research and Development (R&D)
Prior to SFAS 2 (effective in 1974), the practice was to either expense or capitalize R&D related expenditures.
SFAS 2 requires to expense and disclose all R&D costs if the results of R&D are for internal use.
Intangible Assets

19. 6. Research and Development (R&D)
R&D costs include salaries of personnel involved in R&D, costs of materials used, equipments, facilities and intangibles used in R&D activities.
If equipment has an alternative usage, the equip. should be capitalized and only the depreciation expense will be included in the R&D expense.
Intangible Assets

20. R&D: An Example Cash expenditures related to the R&D are as follows:
R&D salaries and wages $100,000
R&D material &supplies used ,000
R&D equip. purchased* ,000
Payments to others for service
performed related to R&D ,000
Patent filing and legal fees
for completed project ,000
Intangible Assets

21. R&D: An Example (contd.)
*The equipment purchased will be used in other projects and the depreciation on the equipment in 2008 was $ 10,000.
R&D expenses include the followings:
R&D salary: $100,000; R&D material:$50,000; depre. Expense: $10,000; payments to others: $30,000 .
The following expenditures are capitalized:
Equipment: $120,000 ; Patent: $25,000.
Intangible Assets

22. 1/11/2019
R & D Contracts
Costs of R&D performed under contracts for others are capitalized as inventory or receivable.
Income from these contracts can be recognized based on percentage-of completion or complete contract method as discussed for the long-term construction contracts.
Intangible Assets

23. 1/11/2019
Purchased R&D
When acquiring another company, the purchase price is allocated to tangible assets, intangibles (developed technology) and in-process R&D.
The remaining will be the goodwill.
The in-process R&D is expensed prior to 2009.
Intangible Assets

24. Purchased R&D (Contd.)
The fair value of in-process R&D is capitalized as indefinite-life intangible asset for business acquisition made in fiscal years beginning on or after 12/15/2008 (SFAS 141 (revised)).
The capitalized in-process R&D should not be amortized but is subject to impairment test.
Intangible Assets

25. International Financial Reporting Standards – R&D (IAS 38)
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International Financial Reporting Standards – R&D (IAS 38)
Research expenditures are expenses as incurred.
Development expenditures meet certain criteria (i.e., development costs can be measured , the product is technically and commercially feasible and the economic benefits are probable) are capitalized as an intangible asset.
Intangible Assets

26. 7. Computer Software Costs
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7. Computer Software Costs
Computer software costs including planning, designing, coding, testing, documentation and preparation of training materials.
Expense most of the costs if the software is to be sold.
SFAS 86 requires these costs be expensed as R & D expenses prior to the establishment of technological feasibility of the software.
Intangible Assets

27. Costs Associated With a Software
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Costs Associated With a Software
Costs occurred after the establishment of technological feasibility but before the software is ready for general release are capitalized as an intangible asset.
Costs occurred after the software is ready for general release and production are recognized as produce costs (will be expensed as CGS later).
Intangible Assets

28. 8. Goodwill Cannot be separated from the business.
Can only be recognized if the whole business was purchased and the purchase price is greater than the market value of the net assets (i.e., market value of assets  market value of liabilities).
Intangible Assets

29. Factors Contribute to Goodwill
Superior management team.
Outstanding sales organization.
Favorable tax condition.
Effective advertising.
Good labor relations.
Outstanding credit rating.
Intangible Assets

30. Methods of Measuring Goodwill
Theoretically, estimate the value of each factor which contributes to the goodwill (not practical).
There are two alternatives used in measuring goodwill:
a. Master valuation approach.
b. Capitalization of excess earnings power.
Intangible Assets

31. a. Master Valuation Approach
Goodwill1 = Purchase price of a business - market value of net assets of the business.
Market value of net assets
= M.V. of assets - M.V. of liabilities.
1. Goodwill is measured as the excess of cost over the fair value of the identifiable net assets acquired.
Intangible Assets

32. b. Capitalization of Excess Earnings Power
Excess earnings power = the difference between what a firm earns and what is normally earned for a similar firm in the same industry.
Goodwill = Discounting the excess earnings over the estimated life of the excess earnings.
Intangible Assets

33. b. Capitalization of Excess Earnings Power (contd.)
Example
Excess earning = $10,000
Discount Rate = 10%
Estimated life = 10 years
Goodwill = $10,000 x = $61,450
annuity, 10 -period, 10%
Intangible Assets

34. b. Capitalization of Excess Earnings Power (contd.)
Excess Earnings = annual average earnings of a firm (excluding extraordinary items)  normal annual earnings of a similar firm in the industry.
Normal earnings = industry rate of return on assets  the market value of the acquired firm’s net assets.
Intangible Assets

35. Goodwill (contd.) Recording of Acquisition:
Assets (at market value) xxx
Goodwill xxx
Liability (at market value) xxx
Cash xxx
Intangible Assets

36. Goodwill (contd.)
Amortization of goodwill is abolished by SFAS No. 142, effective July 2002.
Goodwill is subject to impairment tests at least annually.
See the notes in chapter 11 for Assets Impairment for the goodwill impairment procedures.
Intangible Assets

37. Negative Goodwill Negative Goodwill: Cannot be recognized.
(in the case when price paid is less than the market value of the net assets)
The negative goodwill is used to reduce the costs assigned to the noncurrent assets acquired. The reduction is proportionately to the relative market value of the noncurrent assets.
Intangible Assets

38. Impairment of Intangible Assets (see Impairment Notes in Ch
Impairment of Intangible Assets (see Impairment Notes in Ch. 11 for Details)
All principles (SFAS 144) apply to impairments of long-lived assets also apply to intangible assets.
Thus, when changes in circumstances indicate that the book value of the intangibles may not be reconcilable (i.e., fair value of intangible < carrying amount), a write-down should be performed to recognize the loss.
Intangible Assets

39. Impairment of Intangible Assets (contd.)
Example:
Carrying amount of a copyright $1,200,000
Fair value ,000
Loss on Impairment $700,000
The journal entry to record the loss:
Loss on Impairment 700,000
Copyright 700,000
Intangible Assets

40. Summary of the Chapter Intangible Legal Life Amortization Patent 20
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Summary of the Chapter
Intangible
Legal Life
Amortization
Patent 20
The shorter of useful or legal life
Copyrights
Life of creator + 70 years
The shorter of useful or legal life not to exceed 40 years
Franchises or Licenses
Contractual agreements
The shorter of contractual Life or useful life
Trade Names & Trademarks
Unlimited (renewed every 10 years)
Impairment test only (at least annually)
In-Process R&D
Unlimited
Impairment test only
Goodwill
Intangible Assets