12 Intangible Assets

Intermediate Accounting 14th Edition

Kieso, Weygandt, and Warfield

12-1

Intangible Asset Issues

Characteristics
(1) Lack physical existence.
(2) Not financial instruments.

Normally classified as long-term asset.

Common types of intangibles:

Patents Copyrights

Trademarks or trade names Goodwill

Franchises or licenses

12-2

LO 1 Describe the characteristics of intangible assets.

Intangible Asset Issues

Amortization of Intangibles
Limited-Life Intangibles:

Capitalize, and amortize with a systematic charge to expense over the useful life (shorter of legal/contractual or economic life).
Credit the asset account, or accumulated amortization (a contraaccount).

Indefinite-Life Intangibles:

Capitalize, but do not amortize no foreseeable limit on useful life. Test indefinite-life intangibles for impairment at least annually.

12-3

LO 3 Explain the procedure for amortizing intangible assets.

Intangible Asset Issues

Amortization of Intangibles
Illustration 12-1 Accounting Treatment for Intangibles

12-4

LO 3 Explain the procedure for amortizing intangible assets.

Types of Intangibles
Marketing-Related Intangible Assets

Examples:

Trademarks or trade names, newspaper mastheads, Internet domain names, and noncompetition agreements.

In the United States trademark or trade name has legal protection for indefinite number of 10 year renewal periods. Capitalize acquisition costs. No amortization.
LO 4 Describe the types of intangible assets.

12-5

Types of Intangibles
Customer-Related Intangible Assets

Examples:

Customer lists, order or production backlogs, and both contractual and non-contractual customer relationships.

Capitalize acquisition costs. Amortized to expense over useful life.

12-6

LO 4 Describe the types of intangible assets.

Types of Intangibles
Artistic-Related Intangible Assets

Examples:

Plays, literary works, musical works, pictures, photographs, and video and audiovisual material.

Copyright granted for the life of the creator plus 70 years.

Capitalize costs of acquiring and defending.

Amortized to expense over useful life.

and

Mickey Mouse
LO 4

12-7

Types of Intangibles
Contract-Related Intangible Assets

Examples:

Franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.

Franchise (or license) with a limited life should be amortized to expense over the life of the franchise. Franchise with an indefinite life should be carried at cost and not amortized.

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LO 4

Types of Intangibles
Technology-Related Intangible Assets

Examples:

Patented technology and trade secrets granted by the U.S. Patent and Trademark Office.

Patent gives holder exclusive use for a period of 20 years. Capitalize costs of purchasing a patent.

Expense any R&D costs in developing a patent.

Amortize over the useful life.

12-9

LO 4 Describe the types of intangible assets.

Types of Intangibles
Goodwill
Results only when an entire business or business unit is purchased (i.e. internally created goodwill is not capitalized).
Determined as the excess of the purchase price over the Fair Value of the identifiable net assets acquired (i.e. assets minus liabilities). Is an indefinite life asset, and therefore is not amortized. Carrying value will change only if the business or business unit is subsequently sold, or as a consequence of annual impairment testing.
12-10

LO 5 Explain the conceptual issues related to goodwill.

Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. The balance sheet of Local Company just prior to acquisition is:
Assets Cash Receivables Inventories Equipment Total Liabilities and Equities Accounts payable Common stock Retained earnings Total
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Cost 15,000 10,000 50,000 80,000 155,000

FMV 15,000 10,000 70,000 130,000 225,000

25,000 100,000 30,000 155,000

25,000

FMV of Net Assets = $200,000

25,000

LO 6 Describe the accounting procedures for recording goodwill.

Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. The value assigned to goodwill is determined as follows:
Calculation of Goodwill: Cash Receivables Inventories Equipment Accounts payable FMV of identifiable net assets Purchase price Goodwill $ $ 15,000 10,000 70,000 130,000 (25,000) 200,000 300,000 100,000

12-12

LO 6 Describe the accounting procedures for recording goodwill.

Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2012. Prepare the journal entry to record the purchase of the net assets of Local.

Journal entry recorded by Global:

Cash Receivables Inventory Equipment Goodwill Accounts payable Cash
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15,000 10,000 70,000 130,000 100,000 25,000 300,000

LO 6 Describe the accounting procedures for recording goodwill.

Impairment of Intangible Assets

Impairment of Limited-Life Intangibles
Same as impairment for long-lived assets in Chapter 11.
1. If the sum of the expected future net cash flows is less than the carrying amount of the asset, an impairment has occurred (recoverability test). 2. The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (fair value test).

The loss is reported as part of income from continuing operations, Other expenses and losses section.
12-14

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

E12-14: (Copyright Impairment) Presented below is information
related to copyrights owned by Botticelli Company at December 31, 2012.

Cost Carrying amount Expected future net cash flows Fair value

8,600,000 4,300,000 4,000,000 3,200,000

The copyright has a remaining useful life of 10 years. (a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012. (b) Prepare the journal entry to record amortization expense for 2013 related to the copyrights.
12-15

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

Recoverability test: If the sum of the expected future net cash flows is less than the carrying amount of the asset, an impairment has occurred.

Expected future cash flow Carrying value

$ $

4,000,000 4,300,000 (300,000)

Asset is Impaired

12-16

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012. Loss on impairment Copyrights 1,100,000 1,100,000

Fair value test: Carrying amount Fair value Loss on impairment

$ $

4,300,000 3,200,000 (1,100,000)

12-17

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

(b) Prepare the journal entry to record amortization expense for 2013 related to the copyrights. Amortization expense Copyrights 320,000 320,000

Carrying amount Useful life Amortization per year

$ $

3,200,000

10 years 320,000

12-18

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

Impairment of Indefinite-Life Intangibles Other than Goodwill

Should be tested for impairment at least annually.

Impairment test is a fair value test.

If the fair value of asset is less than the carrying amount, an impairment loss is recognized for the difference. Recoverability test is not used.

12-19

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

Illustration: Arcon Radio purchased a broadcast license for $2,000,000. Arcon Radio has renewed the license with the FCC twice, at a minimal cost. Because it expects cash flows to last indefinitely, Arcon reports the license as an indefinite-life intangible asset. Recently the FCC decided to auction these licenses to the highest bidder instead of renewing them. Arcon Radio expects cash flows for the remaining two years of its existing license. It performs an impairment test and determines that the fair value of the intangible asset is $1,500,000.
Illustration 12-7

12-20

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

Impairment of Goodwill
Two Step Process:
Step 1: If fair value is less than the carrying amount of the net assets (including goodwill), then perform a

second step to determine possible impairment.

Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.

12-21

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

E12-15: (Goodwill Impairment) Presented below is net asset information related to the Mischa Division of Santana, Inc. as of December 31, 2012 (in millions):

Management estimated its future net cash flows from the division to be $400 million. Management has also received an offer to purchase the division for $335 million. All identifiable assets and liabilities book and fair value amounts are the same.
12-22

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

E12-15 Instructions

(a) Prepare the journal entry (if any) to record the impairment at December 31, 2012.
Step 1: The fair value of the reporting unit is below its carrying value. Therefore, an impairment has occurred.

Step 2:
Fair value Carrying amount, net of goodwill Implied goodwill Carrying value of goodwill Loss on impairment

(in millions) $ 335 160

175 200 (25)

Loss on impairment Goodwill

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25,000,000 25,000,000

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

E12-15 Instructions (b) At December 31, 2011, it is estimated that the divisions fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.

No entry necessary. Adjusted carrying amount of the goodwill is its new accounting basis. Subsequent reversal of recognized impairment losses is not permitted under SFAS No. 142.

12-24

LO 7 Explain the accounting issues related to intangible-asset impairments.

Impairment of Intangible Assets

Summary of Impairment Tests
Illustration 12-11

12-25

LO 7 Explain the accounting issues related to intangible-asset impairments.

Intangible Assets - Reporting

E12-1: Indicate how items on the list below would generally be
reported in the financial statements. Item
1. 2. 3. Investment in a subsidiary company. Timberland. Cost of engineering activity required to advance the design of a product to the manufacturing stage. Lease prepayment. Cost of equipment obtained. Cost of searching for applications of new research findings.
LO 9

Classification
1. 2. 3. 4. 5. 6. Long-term investments PP&E R&D expense Prepaid rent PP&E R&D expense

4. 5. 6.
12-26

Intangible Assets - Reporting

Item
7. 8. 9. Cost incurred in the formation of a corporation. Operating losses incurred in the start-up of a business. Training costs incurred in start-up of new operation. 7. 8.

Classification
Expense Operating loss

9.

Expense

10. Intangible 11. Not recorded 12. R&D expense

10. Purchase cost of a franchise.

11. Goodwill generated internally. 12. Cost of testing in search of product alternatives.

12-27

LO 9 Describe the accounting for research and development and similar costs.

Intangible Assets - Reporting

Item
13. Goodwill acquired in the purchase of a business. 14. Cost of developing a patent. 15. Cost of purchasing a patent from an inventor. 16. Legal costs incurred in securing a patent. 17. Unrecovered costs of a successful legal suit to protect the patent.

Classification
13. Intangible

14. R&D expense

15. Intangible 16. Intangible 17. Intangible

12-28

LO 9 Describe the accounting for research and development and similar costs.

Intangible Assets - Reporting

Item
18. Cost of conceptual formulation of possible product alternatives. 19. Cost of purchasing a copyright. 20. Research and development costs. 21. Long-term receivables. 22. Cost of developing a trademark. 23. Cost of purchasing a trademark.

Classification
18. R&D expense

19. Intangible
20. R&D expense 21. Long-term investment 22. Expense 23. Intangible

12-29

LO 9 Describe the accounting for research and development and similar costs.

RELEVANT FACTS

Intangible assets (1) lack physical substance and (2) are not financial instruments under both IFRS and GAAP. Research and Development Costs (R&D) Research costs are always expensed under both IFRS and GAAP. Under IFRS, development phase costs are capitalized once technological feasibility is achieved.

IFRS permits some capitalization of internally generated intangible assets if it is probable there will be a future benefit and the amount can be reliably measured. GAAP does not permit capitalization.
IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of limited-life intangibles. GAAP does not allow for reversals.

12-30