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FINANCIAL ACCOUNTING 1
Lecture 10: Intangible assets
Intermediate Accounting IFRS Ed
3 rd^ Edition, Chapter 12
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- Discuss the characteristics, valuation, and amortization of intangible assets.
- Describe the accounting for various types of intangible assets.
- Explain the accounting issues for recording goodwill.
LEARNING OBJECTIVES
- Identify impairment procedures and presentation requirements for intangible assets.
- Describe the accounting and presentation for research and development and similar costs. After studying this chapter, you should be able to:
Intangible Assets
CHAPTER 12
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PREVIEW OF CHAPTER 12
Intermediate Accounting IFRS 3rd Edition Kieso ā Weygandt ā Warfield (^) 12-
Characteristics
ļµ Identifiable.
ļµ Lack physical existence.
ļµ Not monetary assets.
Normally classified as non-current asset.
Common types of intangibles:
Intangible Asset Issues
Christian Diorās (FRA) most important asset is its brand image, not its store fixtures. LEARNING OBJECTIVE 1 Discuss the characteristics, valuation, and amortization of intangible assets.
1. Marketing-related.
2. Customer-related.
3. Artistic-related.
4. Contract-related.
5. Technology-related.
6. Goodwill.
LO 1
12-5 LO 1
Purchased Intangibles
ļµ Recorded at cost.
ļµ Includes all acquisition costs plus expenditures to make
the intangible asset ready for its intended use.
ļµ Typical costs include:
āŗ Purchase price.
āŗ Legal fees.
āŗ Other incidental expenses.
Valuation Intangible Asset Issues 12-
Internally Created Intangibles
ļµ Might include patents, computer software, copyrights,
and trademarks.
ļµ Companies expense all research phase costs and some
development phase costs.
ļµ Certain development costs are capitalized once
economic viability criteria are met.
ļµ IFRS identifies several specific criteria that must be met
before development costs are capitalized.
LO 1 Valuation ILLUSTRATION 12.1 Research and Development Stages Intangible Asset Issues
Internally Created Intangibles
Amortization of Intangibles
Limited-Life Intangibles
ļµ Amortize by systematic charge to expense over useful life.
ļµ Amortization expense should reflect the pattern in which
the company consumes or uses up the asset.
ļµ Credit asset account or accumulated amortization.
ļµ Amortization should be cost less residual value.
ļµ Companies must evaluate the limited-life intangibles
annually for impairment.
Intangible Asset Issues
12- Customer-Related Intangible Assets
ļµ Examples:
āŗ Customer lists, order or production backlogs, and both
contractual and non-contractual customer
relationships.
ļµ Capitalize acquisition costs.
ļµ Amortized to expense over useful life.
LO 2 Types of Intangible Assets 12- Illustration: Green Market AG acquires the customer list of a large newspaper for ā¬6,000,000 on January 1, 2019. Green Market expects to benefit from the information evenly over a three-year period. Record the purchase of the customer list and the amortization of the customer list for each year on the straight-line basis. Jan. 1 Customer List 6,000, (^2019) Cash 6,000, Dec. 31 Amortization Expense 2,000, 2019 2020 2021 Customer List * 2,000,
- or Accumulated Amortization LO 2 Types of Intangible Assets Artistic-Related Intangible Assets
ļµ Examples:
āŗ Plays, literary works, musical works, pictures, photographs, and video and audiovisual material.
ļµ Copyright granted for the life of the creator plus 70 years.
ļµ Capitalize costs of acquiring and defending.
ļµ Amortized to expense over useful life if less than the legal
life.
Mickey and Mouse Types of Intangible Assets Contract-Related Intangible Assets
ļµ Examples:
āŗ Franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.
ļµ Franchise (or license) with a limited life should be amortized
as operating expense over the life of the franchise.
ļµ Franchise with an indefinite life should be carried at cost and
not amortized.
Types of Intangible Assets
12- Technology-Related Intangible Assets
ļµ Examples:
āŗ Patented technology and trade secrets granted by a government body.
ļµ Patent gives holder exclusive use for a period of 20 years.
ļµ Capitalize costs of purchasing a patent.
ļµ Expense all R&D costs and any development costs incurred
before achieving economic viability.
ļµ Amortize over legal life or useful life, whichever is shorter.
LO 2 Types of Intangible Assets 12- Illustration: Harcott Co. incurs $180,000 in legal costs on January 1, 2019, to successfully defend a patent. The patentās useful life is 10 years, amortized on a straight-line basis. Harcott records the legal fees and the amortization at the end of 2019 as follows. Jan. 1 Patents 180, Cash 180, Dec. 31 Patent Amortization Expense 18, Patents (or Accumulated Amortization) 18, LO 2 Patent Amortization Expense = ($180,000 Ć· 10) = $18, Types of Intangible Assets Goodwill
Conceptually, represents the future economic benefits arising
from the other assets acquired in a business combination that are
not individually identified and separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the ...
excess of cost over the fair value of the identifiable net assets
(assets less liabilities) acquired.
Internally created goodwill should not be capitalized. Types of Intangible Assets LEARNING OBJECTIVE 3 Explain the accounting issues for recording goodwill. Illustration: Feng, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Feng is interested in buying Tractorling SA. The illustration presents the statement of financial position of Tractorling SA. Recording Goodwill ILLUSTRATION 12.4 Tractorling Statement of Financial Position
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An intangible asset is impaired when a company is not able
to recover the assetās carrying amount either through using it
or by selling it.
The specific procedures for recording impairments depend
on the type of intangible assetā
1. limited-life or
2. indefinite-life (including goodwill).
Impairment of Intangible Assets LO 4 LEARNING OBJECTIVE 4 Identify impairment procedures and presentation requirements for intangible assets. 12-
The rules that apply to impairments of property, plant, and
equipment also apply to limited-life intangibles.
The impairment loss is the carrying amount of the asset less
the recoverable amount of the impaired asset.
Impairment of Limited-Life Intangibles LO 4
Fair value less costs to sell means what the asset could be sold
for after deducting costs of disposal. Value-in-use is the present
value of cash flows expected from the future use and eventual
sale of the asset at the end of its useful life.
Impairment of Limited-Life Intangibles Illustration: Lerch SE has a patent on how to extract oil from shale rock, with a carrying value of ā¬5,000,000 at the end of 2018. Unfortunately, several recent non-shale-oil discoveries adversely affected the demand for shale-oil technology, indicating that the patent is impaired. Lerch determines the recoverable amount for the patent, based on value-in-use (because there is no active market for the patent). Lerch estimates the patentās value-in-use at ā¬2,000,000, based on the discounted expected net future cash flows at its market rate of interest. Impairment of Limited-Life Intangibles
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Unknown ā¬2,000, ā¬3,000,000 Impairment Loss
Calculate the impairment loss (based on value-in-use).
LO 4 Impairment of Limited-Life Intangibles 12-
Unknown $2,000, ā¬3,000,000 Impairment Loss
Calculate the impairment loss (based on value-in-use).
LO 4
Loss on Impairment 3,000,
Patents 3,000,
Lerch makes the following entry to record the impairment.
Impairment of Limited-Life Intangibles
Illustration: The carrying value of the patent after impairment is
ā¬2,000,000. Lerchās amortization is ā¬400,000 (ā¬2000,000 Ć· 5) over
the remaining five years of the patentās life. The amortization
expense and carrying amount after the impairment is shown below:
Reversal of Impairment Loss ILLUSTRATION 12.8 Post-Impairment Carrying Value of Patent Impairment of Limited-Life Intangibles
Early in 2020, based on improving conditions in the market for
shale-oil technology, Lerch remeasures the recoverable amount of
the patent to be ā¬1,750,000. In this case, Lerch reverses a portion
of the recognized impairment loss.
Reversal of Impairment Loss
Patents (ā¬1,750,000 - ā¬1,600,000) 150,
Recovery of Impairment Loss 150,
Impairment of Limited-Life Intangibles
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Unknown ā¬2,800, Kohlbuy determines the recoverable amount for the Pritt Division to be ā¬2,800,000, based on a value-in-use estimate.
No
Impairment
LO 4 Impairment of Goodwill 12-
Unknown ā¬1,900, Assume that the recoverable amount for the Pritt Division is ā¬1,900,000 instead of ā¬2,800,000. LO 5 ā¬500,000 Impairment Loss LO 4 Impairment of Goodwill 12- Unknown $1,900,
LO 5 ā¬500,000 Impairment Loss
Loss on Impairment 500,
Goodwill 500,
LO 4
Kohlbuy makes the following entry to record the impairment.
Assume that the recoverable amount for the Pritt Division is ā¬1,900,000 instead of ā¬2,800,000. Impairment of Goodwill 12-
Statement of Financial Position
ļµ Companies should report as a separate item all
intangible assets other than goodwill.
ļµ Reporting is similar to the reporting of property, plant,
and equipment.
ļµ Contra accounts are not normally shown for
intangibles.
LO 4 Presentation of Intangible Assets
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Income Statement
Companies should report
ļµ amortization expense and
ļµ impairment losses and reversals
for intangible assets other than goodwill separately in net income
(usually in the operating section).
Notes to the financial statements should include the amortization
expense for each type of asset.
LO 4 Presentation of Intangible Assets 12- Unknown $1,900, LO 5 LO 4 The reporting of intangible assets is similar to the reporting of property, plant, and equipment. Presentation of Intangible Assets ILLUSTRATION 12.12 NestlĆ©ās Intangible Asset Disclosures
Frequently results in the development of patents or copyrights
such as new
ļµ product,
ļµ process,
ļµ idea,
ļµ formula,
ļµ composition, or
ļµ literary work.
Research and development (R&D) costs are not in themselves
intangible assets.
Research and Development Costs LEARNING OBJECTIVE 5 Describe the accounting and presentation for research and development and similar costs.
Companies spend considerable sums on research and
development.
ILLUSTRATION 12.13 R&D Outlays, as a Percentage of Sales Research and Development Costs
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- Purchase of materials for use on current and future R&D projects.
- Salaries of research staff designing new laser bone scanner.
- Research costs incurred under contract with New Horizon, Inc., and billable monthly.
- Material, labor, and overhead costs of prototype laser scanner (economic viability not achieved). 4. Inventory and allocate to R&D projects; expense as consumed. 5. Expense immediately as R&D. 6. Record as a receivable. 7. Expense immediately as R&D. Type of Expenditure Accounting Treatment LO 5 Accounting for R & D Activities 12-
- Costs of testing prototype and design modifications (economic viability not achieved).
- Legal fees to obtain patent on new laser scanner.
- Executive salaries.
- Cost of marketing research to promote new laser scanner.
- Expense immediately as R&D.
- Capitalize as patent and amortize to overhead as part of cost of goods manufactured.
- Expense as operating expense.
- Expense as operating expense. Type of Expenditure Accounting Treatment LO 5 Accounting for R & D Activities
- Engineering costs incurred to advance the laser scanner to full production stage (economic viability achieved).
- Costs of successfully defending patent on laser scanner.
- Commissions to sales staff marketing new laser scanner.
- Expense as operating expense. Capitalize as R&D.
- Capitalize as patent and amortize to overhead as part of cost of goods manufactured.
- Expense as operating expense. Type of Expenditure Accounting Treatment Accounting for R & D Activities Costs Similar to R & D Costs
ļµ Start-up costs for a new operation.
ļµ Initial operating losses.
ļµ Advertising costs.
These costs are expensed as incurred, similar to the
accounting for R&D costs.
Research and Development Costs
R&D
Expense $403,
E12.17: Compute the amount to be reported as research and
development expense.
Research and Development Costs Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years (uses straight-line depreciation) Materials consumed in R&D projects Consulting fees paid to outsiders for R&D projects Personnel costs involved in R&D projects Indirect costs reasonably allocable to R&D projects Materials purchased for future R&D projects
Presentation of R&D Costs
Companies should disclose the total R&D costs charged to
expense each period.
ILLUSTRATION 12. R&D Reporting
