1. Chapter 12 Goodwill and Other Intangible Assets
Prepared by:
Patricia Zima, CA Mohawk College of Applied Arts and Technology

2. Goodwill and Other Intangible Assets
Definition, Recognition and Measurement
Characteristics
Recognition and measurement at acquisition
Measurement after acquisition
Types of Intangibles
Marketing- related
Customer- related
Artistic- related
Contract- based
Technology- based
Goodwill
Impairment of Intangible Assets
Limited-life intangibles
Indefinite- life intangibles other than goodwill
Goodwill
Other Internally Developed Intangibles
Research and development costs
Development stage costs
Organization costs
Advertising costs
Conceptual questions
Presentation, Analysis, and International Comparison
Presentation of intangible assets
Perspectives
Comparison of Canadian and International GAAP
Appendix 12A– Valuing Goodwill
Excess- earnings approach
Total- earnings approach
Other methods of valuation

3. Intangibles: Characteristics
CICA Handbook, Section 3062, broadly defines intangible assets as:
Assets that are lacking in physical substance, and
Assets that are not financial instruments
Examples of intangible assets: patents, copyrights, franchises, and trademarks

4. Recognition and Measurement at Acquisition
Purchased Intangibles
Measured at cost
Cost includes all expenditures that are necessary to get the intangible asset ready for its intended use (e.g., purchase price, legal fees)
If intangible assets are exchanged for non-monetary assets, the fair value of the item given up or the fair value of the intangible received is used to determine cost
For a “basket purchase” of intangibles, the cost is allocated based on fair values

5. Recognition and Measurement at Acquisition
Identifiable intangibles:
are recognized separately
must have at least one of the following characteristics:
1. Results from contractual or legal rights,
2. They can be separated from the entity and sold, rented, exchanged, transferred or licensed
Identifiable intangibles with similar characteristics should be grouped and reported together

6. Recognition and Measurement at Acquisition
Internally Developed Intangibles
Costs that a company incurs internally to create intangibles (such as patents and brand names) are generally expensed
Deferred Charges
Costs incurred that benefit future periods
It has become less acceptable to recognize deferred charges unless the costs meet the definition and recognition requirements of Section 1000

7. Accounting for the Acquisition Costs of Intangibles
Type
Manner Acquired
Purchased
Internally created
Identifiable
Capitalize
Generally expense
Goodwill-type
Expense
Other internally developed
Capitalize restricted amounts
for both

8. Measurement after Acquisition
An intangible asset with finite (or limited) useful life is amortized over its useful life
Intangibles assumed to have no residual value, unless:
There is a commitment to purchase, or
There is an observable market
An intangible asset with an indefinite useful life is not amortized and an impairment test is carried out at least annually

9. Valuation after Acquisition
Factors to consider when determining useful life of an intangible asset:
Expected future usage
Legal, regulatory, or contractual provisions that may limit useful life
Effects of technological or commercial obsolescence
Level of maintenance expenditures required to obtain future benefits
Method of amortization chosen should match benefits received, otherwise, straight-line amortization used

10. Types of Intangibles Six major categories for intangibles:
1. Marketing-related
2. Customer-related
3. Artistic-related
4. Contract-based
5. Technology-based
6. Goodwill

11. Marketing-Related Intangibles
Used in marketing and promotion
Include:
Trademarks or trade names
Newspaper mastheads
Internet domain names
Non-competition agreements

12. Trademarks and Trade Names
Trademarks and trade names are renewable indefinitely every 15 years, so the legal life may be unlimited; the useful life, however, may be limited
Costs of acquired trademarks or trade names are capitalized
If trademarks or trade names are developed by the business, all direct costs are capitalized
If the future benefits of a trademark (such as Coca- Cola) is determined to have an indefinite life, it is not amortized

13. Customer-Related Intangibles
Result from interactions with third parties
Include:
Customer lists
Order/production backlogs
Contractual and noncontractual customer relationships

14. Artistic-Related Intangibles
Ownership rights to artistic endeavours
Examples: literary works, musical works, pictures, photographs and audiovisual material
These ownership rights are protected by copyrights

15. Copyrights
Copyrights are granted for the life of the creator, plus 50 years
Copyrights can be sold or assigned, but cannot be renewed
Useful life is generally less than the legal life
Amortized over period in which benefits accrue
Costs of acquiring and defending copyrights are capitalized
Research costs associated with a copyright are expensed

16. Contract-Based Intangibles
Value of a right resulting from a contractual arrangement
Examples: licensing arrangement, leaseholds, construction permits, broadcast rights, service or supply contracts, franchises, and licenses
A franchise is a contractual agreement where franchisor grants the franchisee the rights to:
sell specified products or services
use certain trademarks or trade names
perform certain functions within a particular geographical area

17. Franchises and Licenses
A franchise may exist for a limited time or for an indefinite time period
The cost of a franchise (with a limited life) is amortized over the lesser of the legal or useful life
A franchise (with an unlimited life) is amortized over:
expected useful life if such life is deemed limited, or
it is not amortized
Annual operating payments for a franchise are expensed

18. Leaseholds
Agreement between the lessor (owner) and the lessee (renter)
Gives the lessee the right to use the property
Valid for a specific period of time
The lessee makes stipulated, periodic cash payments which are normally expensed
Capital Leases: if the lease agreement transfers all benefits and risks to the lessee
For capital leases, the PV of all future payments is recorded as a tangible asset and as a long- term liability

19. Leaseholds and Leasehold Improvements
Lease prepayments are reported as prepaid expenses, not as intangible assets
Leasehold improvements are improvements made by the lessee to the leased property
These leasehold improvements revert to the lessor at the end of lease term
They are generally shown in the property, plant, and equipment section of the balance sheet, rather than with intangible assets

20. Technology-Based Intangibles
Relate to innovations or technological advances
Include:
Product Patents
Physical (tangible) products
Process Patents
Process by which products are made
Computer Software Costs

21. Patents
A patent gives exclusive right to the holder for making, selling or using a product or process
Costs of purchasing patents are capitalized
Costs to research and most development costs are expensed as incurred
Patents are amortized over the shorter of the legal life (20 years) or their useful lives
Legal fees and other costs to successfully defend a patent are capitalized and amortized over the remaining useful life of the patent

22. Computer Software Costs
External Use
Designed for resale
Development costs treated as research and development costs
Internal Use
Designed for use within the organization
Purchase cost and all direct costs of the software may be capitalized
Any modifications to the software are capitalized if considered a betterment

23. Goodwill
Goodwill is the excess of the purchase price over the fair value of the identifiable tangible and intangible net assets acquired in a business combination
Goodwill can be acquired and sold only when a business combination occurs
Goodwill cannot be separated from the business
Internally-generated goodwill is not capitalized
Goodwill is the only intangible requiring separate disclosure on the balance sheet

24. Acquired Goodwill: Valuation
Given:
Purchase price (cash): $ 400,000
Book value of assets: $ 255,000
Book value of liabilities: $ 55,000
Fair value of assets: $ 350,000
To determine goodwill, see the following:

25. Acquired Goodwill: Calculation
Purchase price – Fair value of identifiable net assets
Goodwill = $400,000 less 350,000 = $50,000
Entry in the books of the Purchaser:
Assets (various) 405,000
Goodwill ,000
Liabilities ,000
Cash ,000

26. Negative Goodwill
“Negative goodwill” or a bargain purchase arises when fair value of acquired net assets is greater than the purchase price
The current standard requires that:
The excess is used to reduce the amounts assigned to other acquired assets that are generally non-financial in nature, and
Any excess remaining is treated as an extraordinary gain

27. Goodwill–Valuation after Acquisition
Three approaches have been suggested:
Charge immediately to expense
Results in consistent accounting for purchased goodwill and internally generated goodwill
One rationale is that difficult to identify the useful life
Amortize over useful life
Better matching of costs to benefits
Carry at cost indefinitely, unless value impaired
Method approved by Accounting Standards Board
Management is responsible for performing an impairment test

28. Intangible Asset Impairment –Limited-Life Intangibles
Impairment occurs when carrying value of an asset is greater than fair value of the asset
A recoverability test is necessary to determine whether the asset has been impaired
If expected future cash flows is less than the carrying amount of the asset, asset is impaired
If impairment, an impairment loss (carrying amount – fair value) is recognized in the period, usually as part of continuing operations
Same approach as for impairment of tangible assets

29. Limited-Life Intangibles Impairment
Example:
Carry amount of patent $6,000,000
Recoverable amount ,500,000
Fair value (discounted amount) 2,000,000
Recoverability test?
Indicates impairment
(since $3,500,00 < $6,000,000)
Impairment loss?
$6,000,000 – $2,000,000 = $4,000,000

30. Limited-Life Intangibles Impairment
Loss on Impairment 4,000,000
Accumulated Amortization, Patents 4,000,000
Remaining carrying amount amortized over expected useful life
Future increases in value of intangible are not recognized

31. Indefinite-Life Intangibles Other than Goodwill - Impairment
Impairment test should be done annually
Use fair value test only
Fair value of intangible compared to the carrying amount
When fair value is less than carrying amount, impairment has occurred and loss is recorded
The recoverability test is not used for indefinite-life intangible assets

32. Goodwill Impairment Two-step process
Fair value of the reporting unit compared to carrying amount of the reporting unit, including goodwill
When fair value greater than carrying amount, no impairment
When fair value less than carrying amount, then a second step is required
Determine if goodwill is impaired (see next slide)

33. Goodwill Impairment
Compare implied current fair value of goodwill with carrying amount of goodwill
Implied current fair value of goodwill:
Fair value of the whole reporting unit is compared to the fair value of the identifiable net assets
When the fair value is less than carrying amount, impairment is recognized
Goodwill impairment loss is reported separately in the income statement before extraordinary items and discontinued operations

34. Deferred Charges
Intangibles that may be recorded as deferred charges include: deferred development costs, pre-operating and start-up costs, and organization costs
CICA Handbook, Section 3070, Deferred Charges, removed from the handbook in 2005
“Deferred charges” are not as common as previously, as the costs must now meet the definition of an asset

35. Research and Development (R&D) Costs
R&D costs are not in themselves intangible assets
Generally material in amount and generally lead to something that will be patented or copyrighted
Challenges in R&D accounting:
Determining costs associated with a particular activity or project
Determining size of future benefits and for how long those benefits may be realized

36. Research and Development (R&D) Costs
CICA Handbook, Section 3450 governs the accounting for R&D costs:
All research costs are charged to expense when incurred
Development costs are charged to expense except in certain defined circumstances
An exception to the above, may be able to capitalize if a company purchases in-process R&D as part of a business combination

37. Research and Development (R&D) Costs
Research activities:
involve planned search or critical investigation aimed at discovery of new knowledge
may or may not be directed towards a specific project
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

38. Research and Development (R&D) Costs
R&D costs include the following:
Materials and services consumed
Direct personnel costs (e.g., salaries)
Amortization of equipment and facilities used in R&D activities
Amortization of intangibles related to R&D activities
Reasonable overhead allocation
Development costs are capitalized when all five of the following conditions are met and future benefits are reasonably certain

39. Research and Development (R&D) Costs
Development cost capitalization criteria:
Product/process clearly defined, and costs can be identified
Technical feasibility has been established
Management’s intent is to produce and market or use the product/process
If the intent is to sell, a market is clearly defined; if the intent is to use, there is a definable use/need
Resources exist to complete the project

40. Pre-Operating Costs Costs incurred prior to start of formal operations
EIC-27 allows for the deferral of pre-operating costs if three conditions are met:
The expenditure relates directly to placing the new business in service
It would not have been incurred if not for the new business
The amount is likely to be recovered from future operations of the new business
Amortized over maximum of 5 years

41. Other Deferred Charges
Organization Costs:
Costs incurred to form a corporation (e.g., underwriter fees, legal fees)
Usually recorded as an intangible asset
They are usually amortized over a relatively short period of time (perhaps up to 5 years)
Advertising Costs:
No Canadian standard
Usually expensed as difficult to measure future benefits

42. International Comparison
Canadian and international GAAP are substantially converged for intangible assets
Some differences still exist related to the treatment of “negative” goodwill, pre- operating costs, internally developed intangibles, and impairment models of goodwill and other intangibles

43. COPYRIGHT
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