Assets
Intangible Intangible Assets
Chapter
Chapter
12
12
IntermediateAccounting
12thEdition
Kieso,Weygandt,andWarfield
Chapter
12-1
PreparedbyCobyHarmon,UniversityofCalifornia,SantaBarbara
Learning Objectives
Learning Objectives
1.
Describethecharacteristicsofintangibleassets.
2.
Identifythecoststoincludeintheinitialvaluationofintangibleassets.
3.
Explaintheprocedureforamortizingintangibleassets.
4.
Describethetypesofintangibleassets.
5.
Explaintheconceptualissuesrelatedtogoodwill.
6.
Describetheaccountingproceduresforrecordinggoodwill.
7.
Explaintheaccountingissuesrelatedtointangibleassetimpairments.
8.
Identifytheconceptualissuesrelatedtoresearchanddevelopmentcosts.
9.
Describetheaccountingforresearchanddevelopmentandsimilarcosts.
10. Indicatethepresentationofintangibleassetsandrelateditems.
Chapter
12-2
Intangible Assets
Intangible Assets
Intangible
Intangible
Asset Issues
Asset
Types of
Types
Intangibles
Intangibles
Characteristic
s
Valuation
Marketingrelated
Customerrelated
Artisticrelated
Contractrelated
Technologyrelated
Goodwill
Amortization
Chapter
12-3
Impairment of
Impairment
Intangibles
Intangibles
Limited-life
Limited-life
intangibles
intangibles
Indefinite-life
Indefinite-life
intangibles
other than
goodwill
goodwill
Goodwill
Research and
Research
Development
Costs
Costs
Identifying
Identifying
R&D
R&D
Accounting
Accounting
for R&D
for
Other similar
Other
costs
costs
Conceptual
Conceptual
questions
questions
Presentation of
Presentation
Intangibles and
Related Items
Related
Intangible
Intangible
assets
assets
R&D costs
Intangible Asset Issues
Intangible Asset Issues
Characteristics
TwoMainCharacteristics:
(1)
Theylackphysicalexistence.
(2)
Theyarenotfinancialinstruments.
Normallyclassifiedaslongtermasset.
Commontypesofintangibles:
Patents
Trademarksortradenames
Copyrights
Goodwill
Franchisesorlicenses
Chapter
12-4
LO 1 Describe the characteristics of intangible assets.
Intangible Asset Issues
Intangible Asset Issues
Valuation
Purchased Intangibles:
Recordedatcost.
Includesallcostsnecessarytomaketheintangibleassetreadyforits
intendeduse.
Internally CreatedIntangibles:
Generallyexpensed.
Onlycapitalizedirectcostsincurredindevelopingtheintangible,suchas
legalcosts.
Chapter
12-5
LO 2 Identify the costs to include in the initial valuation of intangible assets.
Intangible Asset Issues
Intangible Asset Issues
Amortization of Intangibles
Limited-Life Intangibles:
Amortizetoexpense.
Creditassetaccountoraccumulatedamortization.
Indefinite-Life Intangibles:
Noforeseeablelimitontimetheassetisexpectedtoprovidecashflows.
Noamortization.
Chapter
12-6
LO 3 Explain the procedure for amortizing intangible assets.
Intangible Asset Issues
Intangible Asset Issues
Accounting for Intangibles
Illustration121
Chapter
12-7
LO 3 Explain the procedure for amortizing intangible assets.
Types of Intangibles
Types of Intangibles
Six Major Categories:
(1) Marketingrelated.
(2) Customerrelated.
(3) Artisticrelated.
(4) Contractrelated.
(5) Technologyrelated.
(6) Goodwill.
Chapter
12-8
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Marketing-Related Intangible Assets
Examplesare:
trademarksortradenames,newspapermastheads,Internet
domainnames,andnoncompetitionagreements.
Trademarkortradenamehaslegalprotectionforindefinitenumberof
10yearrenewalperiods.
Capitalizeacquisitioncosts.
Noamortization.
Chapter
12-9
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Customer-Related Intangible Assets
Examplesare:
customerlists,orderorproductionbacklogs,andbothcontractual
andnoncontractualcustomerrelationships.
Capitalizeacquisitioncosts.
Amortizedtoexpenseoverusefullife.
Chapter
12-10
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Artistic-Related Intangible Assets
Examplesare:
plays,literaryworks,musicalworks,pictures,photographs,and
videoandaudiovisualmaterial.
Copyrightisgrantedforthelifeofthecreatorplus70years.
Capitalizeacquisitioncosts.
Amortizedtoexpenseoverusefullife.
Chapter
12-11
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Contract-Related Intangible Assets
Examplesare:
franchiseandlicensingagreements,constructionpermits,
broadcastrights,andserviceorsupplycontracts.
Franchise(orlicense)withalimitedlifeshouldbeamortizedtoexpense
overthelifeofthefranchise.
Franchisewithanindefinitelifeshouldbecarriedatcostandnot
amortized.
Chapter
12-12
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Technology-Related Intangible Assets
Examplesare:
patentedtechnologyandtradesecretsgrantedbytheU.S.Patent
andTrademarkOffice.
Patentgivestheholderexclusiveuseforaperiodof20years.
Capitalizecostsofpurchasingapatent.
ExpenseanyR&Dcostsindevelopingapatent.
Legalfeesincurredsuccessfullydefendingapatentarecapitalizedto
Patentaccount.
Chapter
12-13
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Goodwill
Onlyrecordedwhenanentirebusinessispurchasedbecausegoodwill
cannotbeseparatedfromthebusinessasawhole.
Goodwillisrecordedastheexcessof...
purchasepriceovertheFMVoftheidentifiablenetassets
acquired.
Internallycreatedgoodwillshouldnotbecapitalized.
Chapter
12-14
LO 5 Explain the conceptual issues related to goodwill.
Recording Goodwill
Recording Goodwill
Example: GlobalCorporationpurchasedthenetassetsofLocalCompanyfor
$300,000onDecember31,2007.ThebalancesheetofLocalCompanyjustpriorto
acquisitionis:
Asset s
Cost
Cash
Receivables
I nvent ories
Equipment
T ot al
$
FMV
15, 000
10, 000
50, 000
80, 000
$ 155, 000
$
1 5, 000
1 0, 000
7 0, 000
1 30, 000
$ 2 25, 000
$
$
2 5, 000
$
2 5, 000
Liabilit ies and Equit ies
Account s payable
Common st ock
Ret ained earnings
T ot al
Chapter
12-15
25, 000
100, 000
30, 000
$ 155, 000
FMV of Net
Assets =
$200,000
$200,000
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: GlobalCorporationpurchasedthenetassetsofLocalCompanyfor
$300,000onDecember31,2007.ThebalancesheetofLocalCompanyjustpriorto
acquisitionis:
Calculat ion of Goodwill:
Book value of net asset s of Local:
Asset s
Liabilit ies
Book value of net asset s
Under (Over) valued asset or liabilit ies:
I nvent ory
Equipment
FMV of net asset s of Local
Price paid f or Local
Goodwill
Chapter
12-16
$ 155, 000
(25, 000)
130, 000
20, 000
50, 000
200, 000
300, 000
$ 100, 000
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: GlobalCorporationpurchasedthenetassetsofLocalCompanyfor
$300,000onDecember31,2007.ThebalancesheetofLocalCompanyjustpriorto
acquisitionis:
Book Value = $130,000
Revaluation
$70,000
Fair Value = $200,000
Goodwill
$100,000
Purchase Price = $300,000
Chapter
12-17
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: GlobalCorporationpurchasedthenetassetsofLocalCompanyfor
$300,000onDecember31,2007.ThebalancesheetofLocalCompanyjustpriorto
acquisitionis:
Journal entry recorded by Global:
Cash
Receivables
Inventory
Equipment
Goodwill
Accountspayable
Cash
Chapter
12-18
15,000
10,000
70,000
130,000
100,000
25,000
300,000
LO 6 Describe the accounting procedures for recording goodwill.
Goodwill
Goodwill
Goodwill Write-off
Goodwillconsideredtohaveanindefinitelife.
Shouldnotbeamortized.
Onlyadjustcarryingvaluewhengoodwillisimpaired.
Chapter
12-19
LO 6 Describe the accounting procedures for recording goodwill.
Goodwill
Goodwill
Negative Goodwill Bargain Purchase
Purchasepricelessthanthefairvalueofnetassetsacquired
(bargainpurchase).
Resultsinacredit,referredtoasnegativegoodwill.
Negativegoodwillmustbeallocatedagainstlongtermassets
acquired,anyremainingisaccountedforasanextraordinarygain.
Chapter
12-20
LO 6 Describe the accounting procedures for recording goodwill.
Impairment of Intangible Assets
Impairment of Intangible Assets
Impairment of Limited-Life Intangibles
SameasimpairmentforlonglivedassetsinChapter11.
1. Ifthesumoftheexpectedfuturenetcashflowsisless thanthe
carryingamountoftheasset,animpairmenthasoccurred(recoverability
test).
2. Theimpairmentlossistheamountbywhichthecarryingamountofthe
assetexceedsthefairvalueoftheasset(fairvaluetest).
Thelossisreportedaspartofincomefromcontinuingoperations,Other
expensesandlossessection.
Chapter
12-21
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
E12-14(CopyrightImpairment)Presentedbelowisinformationrelatedtocopyrights
ownedbyWalterdelaMareCompanyatDecember31,2007.
Co s t
$ 8 ,6 0 0 ,0 0 0
Car r y ing am o unt
4 ,3 0 0 ,0 0 0
Ex pe c t e d f ut ur e ne t c as h f lo ws
4 ,0 0 0 ,0 0 0
Fair value
3 ,2 0 0 ,0 0 0
Thecopyrighthasaremainingusefullifeof10years.
(a) Preparethejournalentry(ifany)torecordtheimpairmentoftheassetatDecember
31,2007.
(b) Preparethejournalentrytorecordamortizationexpensefor2008relatedtothe
copyrights.
Chapter
12-22
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
Recoverability test:Ifthesumoftheexpectedfuturenetcashflowsis
less thanthecarryingamountoftheasset,animpairmenthasoccurred.
Ex p e c t e d f ut ur e c as h f lo w
$ 4 ,0 0 0 ,0 0 0
Car r y ing value
4 ,3 0 0 ,0 0 0
$ ( 3 0 0 ,0 0 0 )
Asset is Impaired
Chapter
12-23
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Assets
(a) Intangible Preparethejournalentry(ifany)torecordtheimpairmentoftheassetat
December31,2007.
Lossonimpairment
Copyrights
1,100,000
1,100,000
Fair value t est :
Car r y ing am o unt
Fair value
3 ,2 0 0 ,0 0 0
Lo s s o nim p air m e nt
Chapter
12-24
$ 4 ,3 0 0 ,0 0 0
$ ( 1,10 0 ,0 0 0 )
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
(b) Preparethejournalentrytorecordamortizationexpensefor2008relatedto
thecopyrights.
Car r y ing a m o unt
Us e f ullif e
A m o r t iz at io npe r y e ar
Chapter
12-25
320,000
320,000
$ 3 ,2 0 0 ,0 0 0
Amortizationexpense
Copyrights
10 y e ar s
$ 3 2 0 ,0 0 0
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
Impairment of Indefinite-Life Intangibles Other
than Goodwill
Shouldbetestedforimpairmentatleastannually.
Impairmenttestisafair value test.
Ifthefairvalueofassetislessthanthecarryingamount,
animpairmentlossisrecognizedforthedifference.
Recoverabilitytestisnotused.
Chapter
12-26
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
Impairment of Goodwill
TwoStepProcess:
Step1:
Iffairvalueislessthanthecarryingamountofthenetassets
(includinggoodwill),thenperformasecondsteptodetermine
possibleimpairment.
Step2:
Determinethefairvalueofthegoodwill(impliedvalueof
goodwill)andcomparetocarryingamount.
Chapter
12-27
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
E12-15(GoodwillImpairment)Presentedbelowisnetassetinformationrelatedto
theCarlosDivisionofSantana,Inc.asofDecember31,2007(inmillions):
Ca s h
$ 5 0
Re c e iva b le s
2 0 0
Pr o p e r t y ,p lant ,a nd e q uip m e nt ,ne t
2 ,6 0 0
Go o d will
2 0 0
Le s s :No t e s p a y ab le
( 2 ,7 0 0 )
Ne t a s s e t s
$ 3 5 0
Managementestimateditsfuturenetcashflowsfromthedivisiontobe$400million.
Managementhasalsoreceivedanoffertopurchasethedivisionfor$335million.All
identifiableassetsandliabilitiesbookandfairvalueamountsarethesame.
Chapter
12-28
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
E12-15 Instructions
(a) Preparethejournalentry(ifany)torecordtheimpairmentatDecember31,
2007.
Step1:Thefairvalueof
thereportingunitisbelow
itscarryingvalue.
Therefore,animpairment
hasoccurred.
Chapter
12-29
Fair value
Car r y ing am o unt ,ne t o f g o o d will
( inm illio ns )
$ 3 3 5
15 0
I m p lie d g o o d will
18 5
Car r y ing va lue o f g o o d will
2 0 0
Lo s s o nim p air m e nt
Lossonimpairment
Goodwill
Step2:
$ ( 15 )
15,000,000
15,000,000
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
E12-15 Instructions
(b) AtDecember31,2008,itisestimatedthatthedivisionsfairvalueincreased
to$345million.Preparethejournalentry(ifany)torecordthisincreasein
fairvalue.
Noentrynecessary.
Adjustedcarryingamountofthegoodwillisitsnewaccountingbasis.
Subsequentreversalofrecognizedimpairmentlossesisnotpermitted
underSFASNo.142.
Chapter
12-30
LO 7 Explain the accounting issues related to intangible-asset impairments.
Impairment of Intangible Assets
Impairment of Intangible Assets
Summary of Impairment Tests
Illustration1211
Chapter
12-31
LO 7 Explain the accounting issues related to intangible-asset impairments.
Research and Development Costs
Research and Development Costs
Frequentlyresultsinsomethingthatacompanypatentsorcopyrights
suchas:
newproduct,
process,
idea,
formula,
composition,or
literarywork.
Becauseofdifficultiesrelatedtoidentifyingcostswithparticular
activitiesanddeterminingthefuturebenefits,allR&Dcostsare
expensed when incurred.
Chapter
12-32
LO 8 Identify the conceptual issues related to research and development costs.
Research and Development Costs
Research and Development Costs
Identifying R & D Activities
Research Activities
Plannedsearchorcriticalinvestigation
Plannedsearchorcriticalinvestigation
aimedatdiscoveryofnewknowledge.
aimedatdiscoveryofnewknowledge.
Development Activities
Translationofresearchfindingsorother
knowledgeintoaplanordesignforanew
productorprocessorforasignificant
improvementtoanexistingproductor
processwhetherintendedforsaleoruse.
Chapter
12-33
Illustration1213
Examples
Examples
Laboratoryresearchaimedatdiscoveryofnew
Laboratoryresearchaimedatdiscoveryofnew
knowledge;searchingforapplicationsofnew
knowledge;searchingforapplicationsofnew
researchfindings.
researchfindings.
Examples
Conceptualformulationanddesignofpossible
productorprocessalternatives;constructionof
prototypesandoperationofpilotplants.
LO 8 Identify the conceptual issues related to research and development costs.
Research and Development Costs
Research and Development Costs
Accounting for R & D Activities
CostsAssociatedwithR&DActivities:
Materials,Equipment,andFacilities
Personnel
PurchasedIntangibles
ContractServices
IndirectCosts
Chapter
12-34
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Research and Development Costs
E12-1 Indicatehowitemsonthelistbelowwouldgenerallybereportedinthefinancial
statements.
Item
Item
1. Investmentinasubsidiarycompany
2. Timberland
3. Costofengineeringactivityrequiredtoadvance
thedesignofaproducttothemanufacturing
stage.
4. Leaseprepayment
5. Costofequipmentobtainedunderacapital
lease.
6. Costofsearchingforapplicationsofnew
researchfindings.
Chapter
12-35
Classification
Classification
1.
2.
3.
Longterminvestments
PP&E
R&Dexpense
4.
5.
Prepaidrent
PP&E
6.
R&Dexpense
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Research and Development Costs
E12-1 Indicatehowitemsonthelistbelowwouldgenerallybereportedinthefinancial
statements.
Item
Item
7. Costincurredintheformationofa
corporation.
8. Operatinglossesincurredinthe startup
ofabusiness.
9. Trainingcostsincurredinstartupofnew
operation.
10. Purchasecostofafranchise.
11. Goodwillgeneratedinternally.
12. Costoftestinginsearchofproductalternatives.
Chapter
12-36
Classification
Classification
7.
Expense
8.
Operatingloss
9.
Expense
10.
11.
12.
Intangible
Notrecorded
R&Dexpense
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Research and Development Costs
E12-1 Indicatehowitemsonthelistbelowwouldgenerallybereportedinthefinancial
statements.
Item
Item
13. Goodwillacquiredinthepurchase
business.
14. Costofdevelopingapatent.
15. Costofpurchasingapatentfrom
inventor.
16. Legalcostsincurredinsecuringa
17. Unrecoveredcostsofasuccessful
toprotectthepatent.
Chapter
12-37
Classification
Classification
ofa
13. Intangible
an
14. R&DExpense
15. Intangible
patent.
legalsuit
16. Intangible
17. Intangible
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Research and Development Costs
E12-1 Indicatehowitemsonthelistbelowwouldgenerallybereportedinthefinancial
statements.
Item
Item
Classification
Classification
18. Costofconceptualformulationof possible
productalternatives.
18. R&DExpense
19. Costofpurchasingacopyright.
19. Intangible
20. Researchanddevelopmentcosts.
20. R&DExpense
21. Costofdevelopingatrademark.
21. Expensed
22. Costofpurchasingatrademark.
22. Intangible
Chapter
12-38
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Research and Development Costs
Other Costs Similar to R & D Costs
Startupcostsforanewoperation.
Initialoperatinglosses.
Advertisingcosts.
Computersoftwarecosts.
Chapter
12-39
LO 9 Describe the accounting for research and development and similar costs.
Research and Development Costs
Research and Development Costs
E12-17Computetheamounttobereportedasresearchanddevelopmentexpense.
$280,000/5=$56,000
Costofequipmentacquiredthatwillhavealternativeusesinfuture
R&Dprojectsoverthenext5years.
R&D
Expense
$280,000
$56,000
59,000
59,000
ConsultingfeespaidtooutsidersforR&Dprojects
100,000
100,000
PersonnelcostsofpersonsinvolvedinR&Dprojects
128,000
128,000
IndirectcostsreasonablyallocabletoR&Dprojects
50,000
50,000
MaterialspurchasedforfutureR&Dprojects
34,000
0
MaterialsconsumedinR&Dprojects
$393,000
Chapter
12-40
LO 9 Describe the accounting for research and development and similar costs.
Presentations of Intangibles
Presentations of Intangibles
Balance sheet
Intangibleassetsshownasaseparateitem.
Contraaccountsnormallynotshown.
Income statement
Reportamortizationexpenseandimpairmentlossesincontinuing
operations.
TotalR&Dcostschargedtoexpensemustbedisclosed.
Chapter
12-41
LO 10 Indicate the presentation of intangible assets and related items.
Copyright
Copyright
Copyright2007JohnWiley&Sons,Inc.Allrightsreserved.Reproductionor
translationofthisworkbeyondthatpermittedinSection117ofthe1976United
StatesCopyrightActwithouttheexpresswrittenpermissionofthecopyrightowner
isunlawful.RequestforfurtherinformationshouldbeaddressedtothePermissions
Department,JohnWiley&Sons,Inc.Thepurchasermaymakebackupcopiesfor
his/herownuseonlyandnotfordistributionorresale.ThePublisherassumesno
responsibilityforerrors,omissions,ordamages,causedbytheuseoftheseprograms
orfromtheuseoftheinformationcontainedherein.
Chapter
12-42