Accounting For Intangible Assets

ACCOUNTING FOR
INTANGIBLE ASSETS
Chapter
11-1
Learning Objectives
1. Describe the characteristics of intangible assets.
2. Identify the costs to include in the initial valuation of intangible
assets.
3. Explain the procedure for amortizing intangible assets.
4. Describe the types of intangible assets.
5. Explain the conceptual issues related to goodwill.
6. Describe the accounting procedures for recording goodwill.
7. Explain the accounting issues related to impairments.
8. Identify the conceptual issues related to research and
development costs.
9. Describe the accounting for research and development and
similar costs.
10. Indicate the presentation of intangible assets and related items.
Chapter
11-2
Intangible Assets
Research and Presentation of

Intangible Types of
Impairments Development Intangibles and
Asset Issues Intangibles
Costs Related Items
Characteristics Marketing- Property, plant, Identifying Intangible

Valuation related and equipment R&D assets
Amortization Customer- Limited-life Accounting R&D costs
related intangibles for R&D
Artistic- Indefinite-life Other costs
related intangibles Conceptual
Contract- other than questions
related goodwill
Technology- Goodwill
related Restoration of
Goodwill impairment
loss
Chapter Assets held for
11-3 disposal
Intangible Asset Issues
Characteristics
Two Main Characteristics:
(1) They lack physical existence.
(2) They are not financial instruments.
Normally classified as long-term asset.

Common types of intangibles:
Patents Trademarks or trade names
Copyrights Goodwill
Franchises or licenses
Chapter
11-4 LO 1 Describe the characteristics of intangible assets.
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible
asset ready for its intended use.
Internally Created Intangibles:

Generally expensed.
Only capitalize direct costs incurred in developing the
intangible, such as legal costs.
Chapter
11-5 LO 2 Identify the costs to include in the initial valuation of intangible assets.
Amortization of Intangibles
Limited-Life Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Chapter
11-6 LO 3 Explain the procedure for amortizing intangible assets.
Accounting for Intangibles

Illustration 11-1
Chapter
11-7 LO 3 Explain the procedure for amortizing intangible assets.
Types of Intangibles
Six Major Categories:

(1) Marketing-related.
(2) Customer-related.
(3) Artistic-related.
(4) Contract-related.
(5) Technology-related.
(6) Goodwill.
Chapter
11-8 LO 4 Describe the types of intangible assets.
Marketing-Related Intangible Assets

Examples are:
 Trademarks or trade names, newspaper
mastheads, Internet domain names, and
noncompetition agreements.
Trademark or trade name has legal protection for
indefinite number of 10 year renewal periods.
Capitalize acquisition costs.
No amortization.
Chapter
Customer-Related Intangible Assets

Examples are:
 Customer lists, order or production backlogs, and
both contractual and noncontractual customer
relationships.
Amortized to expense over useful life.
Chapter
Artistic-Related Intangible Assets

Examples are:
 Plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
Copyright is granted for the life of the creator plus
70 years.
Amortized to expense over useful life.
Chapter
Contract-Related Intangible Assets

Examples are:
 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.
Chapter
Technology-Related Intangible Assets

Examples are:
 Patented technology and trade secrets granted
by the Philippine Patent and Trademark Office.
Patent gives the holder exclusive use for a period of
20 years.
Capitalize costs of purchasing a patent.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent
are capitalized to Patent account.
Chapter
Goodwill
Only recorded when an entire business is purchased
because goodwill cannot be separated from the
business as a whole.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable
net assets acquired.
Internally created goodwill should not be capitalized.
Chapter
11-14 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, 2008. The balance sheet
of Local Company just prior to acquisition is:
Assets Cost FMV
Cash $ 15,000 $ 15,000
Receivables 10,000 10,000
Inventories 50,000 70,000
Equipment 80,000 130,000
Total $ 155,000 $ 225,000 FMV of
Net Assets
Liabilities and Equities
= $200,000
Accounts payable $ 25,000 $ 25,000
Common stock 100,000
Retained earnings 30,000
Total $ 155,000 $ 25,000
Chapter
11-15 LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill

Calculation of Goodwill:
Book value of net assets of Local:
Assets $ 155,000
Liabilities (25,000)
Book value of net assets 130,000
Under (Over) valued asset or liabilities:
Inventory 20,000
Equipment 50,000
FMV of net assets of Local 200,000
Price paid for Local 300,000
Goodwill $ 100,000
Chapter
Recording Goodwill

Book Value = $130,000

Revaluation
$70,000
Fair Value = $200,000
Goodwill
$100,000
Purchase Price = $300,000
Chapter
Recording Goodwill

Journal entry recorded by Global:

Cash 15,000
Receivables 10,000
Inventory 70,000
Equipment 130,000
Goodwill 100,000
Accounts Payable
25,000
Cash
Chapter 300,000
Goodwill
Goodwill Write-off
Goodwill considered to have an indefinite life.
Should not be amortized.
Only adjust carrying value when goodwill is
impaired.
Chapter
Goodwill
Negative Goodwill – Bargain Purchase

Purchase price less than the fair value of net
assets acquired (bargain purchase).
Results in a credit, referred to as negative
goodwill.
 Negative goodwill must be allocated against long-
term assets acquired, any remaining is accounted
for as an extraordinary gain.
Chapter
Impairments
When the carrying amount of an asset is not

recoverable, a company records a write-off referred
to as an impairment.
Illustration 11-6
Chapter
11-21 LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairments
Impairment of Property, Plant, and Equipment

1. Review events for possible impairment.
2. If the review indicates impairment, apply the
recoverability test. If the sum of the expected future
net cash flows from the long-lived asset is less than the
carrying amount of the asset, an impairment has
occurred.
3. Assuming an impairment, the impairment loss is the
amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value is
the market value or the present value of expected
future net cash flows.
Chapter
Impairments
Exercise: Presented below is information related to

equipment owned by Suarez Company at December 31, 2008.
Assume that Suarez will continue to use this asset in the
future. As of December 31, 2008, the equipment has a
remaining useful life of 4 years.
Cost $ 9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash flows 7,000,000
Fair value 4,800,000
Instructions:
Prepare the journal entry (if any) to record the impairment
of the asset at December 31, 2008.
Chapter
Impairments
Cost $9,000,000
Accumulated depreciation 1,000,000
Carrying amount 8,000,000
Loss on impairment $3,200,000
12/31/08
Loss on Impairment 3,200,000

Accumulated Depreciation
3,200,000
Chapter
Impairments
Impairment of Limited-Life Intangibles

Same as impairment for property, plant, and equipment.
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.
Chapter
Impairments
Exercise: (Copyright Impairment) Presented below is

information related to copyrights owned by Walter de la
Mare Company at December 31, 2008.
Cost $ 8,600,000
Carrying amount 4,300,000
Expected future net cash flows 4,000,000
The copyright has a remaining useful life of 10 years.

Prepare the journal entry (if any) to record the impairment of
the asset at December 31, 2008.
Chapter
Impairments
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 $ 4,000,000

Carrying value 4,300,000
$ (300,000)
Asset is Impaired
Chapter
Impairments
Prepare the journal entry (if any) to record the impairment of

the asset at December 31, 2008.

Copyrights
1,100,000
Fair value test:

Carrying amount $ 4,300,000
Loss on impairment $ (1,100,000)
Chapter
Impairments
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.
Chapter
Impairments
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.
Chapter
Impairments
Exercise: (Goodwill Impairment) Presented below is net asset

information related to the Carlos Division of Santana, Inc. as of
December 31, 2008 (in millions):
Cash $ 50
Receivables 200
Property, plant, and equipment, net 2,600
Goodwill 200
Less: Notes payable (2,700)
Net assets $ 350
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.
Chapter
Impairments
Exercise Instructions:
(a) Prepare the journal entry (if any) to record the
impairment at December 31, 2008.
Step 1: The fair Step 2: (in millions)

value of the Fair value $ 335
reporting unit is Carrying amount, net of goodwill 150
below its carrying Implied goodwill 185
value. Therefore, an Carrying value of goodwill 200
impairment has Loss on impairment $ (15)
occurred.

Goodwill
Chapter 15,000,000
Impairments
Exercise Instructions
(b) At December 31, 2008, it is estimated that the division’s
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.
Chapter
Impairments
Accounting for
Impairments
Chapter
Research and Development Costs
Frequently results in something that a company

patents or copyrights such as:
New product, Formula,

Process, Composition, or
Idea, Literary work.
Because of difficulties related to identifying costs

with particular activities and determining the future
benefits, all R & D costs are expensed when incurred.
Chapter
11-35 LO 8 Identify the conceptual issues related to research and development costs.
Identifying R & D Activities Illustration 11-14
Chapter
11-36 LO 8 Identify the conceptual issues related to research and development costs.
Accounting for R & D Activities

Costs Associated with R&D Activities:
Materials, equipment, and facilities
Personnel
Purchased intangibles
Contract services
Indirect costs
Chapter
11-37 LO 9 Describe the accounting for research and development and similar costs.
Exercise: Indicate how items on the list below would generally be

reported in the financial statements.
Item Classification
1. Investment in a subsidiary company 1. Long-term investments

2. Timberland 2. PP&E
3. Cost of engineering activity 3. R & D expense
required to advance the design of a
product to the manufacturing stage.
4. Lease prepayment 4. Prepaid rent
5. Cost of equipment obtained under a 5. PP&E
capital lease.
6. Cost of searching for applications 6. R & D expense
of new research findings.
Chapter

Item Classification
7. Cost incurred in the formation of a 7. Expense

corporation.
8. Operating losses incurred in the 8. Operating loss
start-up of a business.
9. Training costs incurred in start-up 9. Expense
of new operation.
10. Purchase cost of a franchise. 10. Intangible
11. Goodwill generated internally. 11. Not recorded
12. Cost of testing in search of product 12. R & D expense
alternatives.
Chapter

Item Classification
13. Goodwill acquired in the purchase 13. Intangible

of a business.
14. Cost of developing a patent. 14. R & D Expense
15. Cost of purchasing a patent from 15. Intangible
an inventor.
16. Legal costs incurred in securing a 16. Intangible
patent.
17. Unrecovered costs of a successful 17. Intangible
legal suit to protect the
patent.
Chapter

Item Classification
18. Cost of conceptual formulation of 18. R & D Expense

possible product
alternatives. 19. Intangible
19. Cost of purchasing a copyright. 20. R & D Expense
20. Research and development costs. 21. Expensed
21. Cost of developing a trademark.
22. Intangible
22. Cost of purchasing a trademark.
Chapter
Other Costs Similar to R & D Costs

Start-up costs for a new operation.
Initial operating losses.
Advertising costs.
Chapter
Exercise: Compute the amount to be reported as research and

development expense.
$280,000 / 5 = $56,000
R&D
Expense
Cost of equipment acquired that will have alternative uses
in future R&D projects over the next 5 years. $280,000 $56,000
Materials consumed in R&D projects 59,000 59,000
Consulting fees paid to outsiders for R&D projects 100,000 100,000
Personnel costs of persons involved in R&D projects 128,000 128,000

Indirect costs reasonably allocable to R&D projects 50,000 50,000
Materials purchased for future R&D projects 34,000 0
$393,000
Chapter
Presentations of Intangibles
Balance Sheet
Intangible assets shown as a separate item.
Contra accounts normally not shown.
Income Statement
Report amortization expense and impairment
losses in continuing operations.
Total R&D costs charged to expense must be
disclosed.
Chapter
11-44 LO 10 Indicate the presentation of intangible assets and related items.
PROBLEM SOLVING
Victory Company reported the following data at year-end:
Franchise 1,000,000
Computer software 1,500,000
Deferred charges 100,000
Patent 2,500,000
Customer list purchased 500,000
Copyright 700,000
Deposit with advertising agency to promote
goodwill 400,000
Bond sinking fund 1,300,000
Goodwill 4,000,000
Trademark 900,000
Research and Development Cost 2,000,000
What total amount should be reported as intangible assets?
Chapter
11-45
PROBLEM SOLVING
Gideon Company developed a new machine for manufacturing baseballs.
Because the machine is considered very valuable, the entity had it patented.
The following expenditures were incurred in developing and patenting the
machine:
Purchase of special equipment to be used solely for
Development of the new machine 1,800,000
Research salaries and fringe benefits for engineers
and scientists 200,000
Cost of testing prototype 250,000
Legal cost for filing of patent 150,000
Fees paid to government patent office 50,000
Drawings required by patent office to be filed with
Patent application 40,000
What amount should be capitalized as cost of patent?
What amount of research and development cost should be expensed in
the current year?
Chapter
11-46
PROBLEM SOLVING
Hope Company acquired a patent for a drug with a remaining legal and useful
life of six years on January 1, 2017 for P5,400,000. On January 1, 2019, a new
patent is received for an improved version of the same drug. The new patent
has a legal and useful life of twenty years.
What amount should be recorded as amortization expense for 2019?
Chapter
11-47

Accounting For Intangible Assets

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ACCOUNTING FOR

Research and Presentation of

Characteristics Marketing- Property, plant, Identifying Intangible

Normally classified as long-term asset.

Internally Created Intangibles:

Accounting for Intangibles

Six Major Categories:

Marketing-Related Intangible Assets

Customer-Related Intangible Assets

Artistic-Related Intangible Assets

Contract-Related Intangible Assets

Technology-Related Intangible Assets

Internally created goodwill should not be capitalized.

Example: Global Corporation purchased the net assets of Local

Example: Global Corporation purchased the net assets of Local

Example: Global Corporation purchased the net assets of Local

Book Value = $130,000

Example: Global Corporation purchased the net assets of Local

Journal entry recorded by Global:

Negative Goodwill – Bargain Purchase

When the carrying amount of an asset is not

Impairment of Property, Plant, and Equipment

Exercise: Presented below is information related to

Loss on Impairment 3,200,000

Impairment of Limited-Life Intangibles

Exercise: (Copyright Impairment) Presented below is

The copyright has a remaining useful life of 10 years.

Recoverability test: If the sum of the expected future net

Expected future cash flow $ 4,000,000

Prepare the journal entry (if any) to record the impairment of

Loss on Impairment 1,100,000

Fair value test:

Impairment of Indefinite-Life Intangibles

Exercise: (Goodwill Impairment) Presented below is net asset

Step 1: The fair Step 2: (in millions)

Loss on Impairment 15,000,000

Adjusted carrying amount of the goodwill is its new

Subsequent reversal of recognized impairment losses

Frequently results in something that a company

New product, Formula,

Because of difficulties related to identifying costs

Identifying R & D Activities Illustration 11-14

Accounting for R & D Activities

Exercise: Indicate how items on the list below would generally be

1. Investment in a subsidiary company 1. Long-term investments

Exercise: Indicate how items on the list below would generally be

7. Cost incurred in the formation of a 7. Expense

Exercise: Indicate how items on the list below would generally be

13. Goodwill acquired in the purchase 13. Intangible

Exercise: Indicate how items on the list below would generally be

18. Cost of conceptual formulation of 18. R & D Expense

Other Costs Similar to R & D Costs

Exercise: Compute the amount to be reported as research and

Materials consumed in R&D projects 59,000 59,000

Consulting fees paid to outsiders for R&D projects 100,000 100,000

Personnel costs of persons involved in R&D projects 128,000 128,000

What amount should be recorded as amortization expense for 2019?

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