1. INTANGIBLE ASSETS
Patent
Pending

2. 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.

3. 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.

4. 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.

5. 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

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

7. 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)

8. 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”

9. 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

10. 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

11. 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

12. 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.

13. 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.

14. 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.

15. 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

16. 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.

17. 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

18. 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

19. 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 . . .

20. 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

21. 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.

22. 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

23. 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.

24. “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

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