Ch12_intangible - Intangible Assets Chapter 12 Chapter 12 Intermediate Accounting 12th Edition Update Kieso Weygandt and Warfield Chapter 12-1

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Unformatted text preview: Intangible Assets Chapter 12 Chapter 12 Intermediate Accounting 12th Edition Update Kieso, Weygandt, and Warfield Chapter 12-1 Prepared by Coby Harmon, University of California, Santa Barbara Learning Objectives 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Chapter 12-2 Describe the characteristics of intangible assets. Identify the costs to include in the initial valuation of intangible assets. Explain the procedure for amortizing intangible assets. Explain intangible Describe the types of intangible assets. Explain the conceptual issues related to goodwill. Explain goodwill Describe the accounting procedures for recording goodwill. Explain the accounting issues related to intangible-asset Explain impairments. impairments Identify the conceptual issues related to research and development Identify costs. costs Describe the accounting for research and development and similar Describe costs. costs. Indicate the presentation of intangible assets and related items. Intangible Assets Intangible Intangible Asset Issues Asset Characteristic s Valuation Amortization Types of Types Intangibles Intangibles Marketingrelated Customerrelated Artisticrelated Contractrelated Technologyrelated Goodwill 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 Chapter 12-3 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 Copyrights Franchises or licenses Chapter 12-4 Trademarks or trade names Goodwill LO 1 Describe the characteristics of intangible assets. Intangible Asset Issues Valuation Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready for its intended use. Typical costs include purchase price, legal fees, and other incidental expenses. Internally Created Intangibles: Generally expensed. Only capitalize direct costs incurred in developing the intangible, such as legal costs. Chapter 12-5 LO 2 Identify the costs to include in the initial valuation of intangible assets. Intangible Asset Issues Amortization of Intangibles Limited-Life Intangibles: Amortize to expense. Credit asset account or accumulated amortization. Indefinite-Life Intangibles: If no legal, regulatory, contractual, competitive, or other factors limits the useful life of an intangible asset, a company considers its useful life indefinite. No foreseeable limit on time the asset is expected to provide cash flows. No amortization. Chapter 12-6 LO 3 Explain the procedure for amortizing intangible assets. Intangible Asset Issues Accounting for Intangibles Illustration 12-1 **No recoverability test is needed for indefinite-life intangibles, which might never fail the undiscounted cash flows recoverability test because cash flows could extend indefinitely into the future. Chapter 12-7 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. * “Business Combinations”, Statement of Financial Accounting Standards No. 141 (Norwalk, Conn.: FASB 2001) Chapter 12-8 LO 4 Describe the types of intangible assets. Types of Intangibles Marketing-Related Intangible Assets Examples: Trademark (or trade name), newspaper mastheads, Internet domain names, and noncompetition agreements. The U.S. Patent and Trademark Office provides legal protection for an indefinite number of renewals for periods of 10 years each. No amortization. Capitalize acquisition costs. Firms capitalize the cost at the purchase price. e.g., Drugs.com sold for $800,000 and the bidding price for Loans.com approached $500,000. If a firm develops a trademark, it capitalizes attorney fees, registration fees, design costs, consulting fees, and successful legal defense costs. Chapter 12-9 LO 4 Describe the types of intangible assets. Types of Intangibles Customer-Related Intangible Assets Examples are: customer lists, order or production backlogs, and both contractual and noncontractual customer relationships. Capitalize acquisition costs. Amortized to expense over useful life. (P. 576) We-Market acquires the customer list of a large newspaper for $6,000,000 on Jan. 1, 2007. The database includes names, contact info, order history, and demographic info. We-Market expects to benefit evenly from the info over a three-year period. Specify the accounting for the intangibles. Chapter 12-10 LO 4 Describe the types of intangible assets. Types of Intangibles 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. It gives the owner, or heirs, the exclusive right to reproduce and sell an artistic or published work. Copyrights are not renewable. Capitalize acquisition costs. Amortized to expense over useful life, which is generally less than its legal life (the life of the creator plus 70 years). Chapter 12-11 LO 4 Describe the types of intangible assets. Types of Intangibles 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. A franchise is a contract arrangement under which the franchisor grants the franchisee the right to sell certain products or services, to use certain trademarks, or to perform certain functions, usually within a designated geographical area. Franchise with an indefinite life should be carried at cost and not amortized. Chapter 12-12 LO 4 Describe the types of intangible assets. Types of Intangibles Technology-Related Intangible Assets Examples are: patented technology and trade secrets granted by the U.S. 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 12-13 LO 4 Describe the types of intangible assets. Types of Intangibles Goodwill Recorded only when an entire business is purchased (often referred to as a business combination) because goodwill cannot be separated from the business as a whole. Goodwill is recorded as the excess of ... purchase price over the fair market value of the over identifiable net assets acquired. Internally created goodwill should not be capitalized. Chapter 12-14 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, 2007. The balance sheet of Local Company just prior to acquisition is: Assets Cash Receivables Inventories Equipment T otal Liabilities and Equities Accounts payable Common stock Retained earnings T otal $ Cost 15,000 10,000 50,000 80,000 155,000 25,000 100,000 30,000 155,000 $ FMV 15,000 10,000 70,000 130,000 225,000 25,000 $ $ $ $ FMV of Net Assets = $200,000 $200,000 $ $ 25,000 Chapter 12-15 LO 6 Describe the accounting procedures for recording goodwill. Recording Goodwill Price paid for Local Book value of net assets of Local: Assets Liabilities Book value of net assets Under (Over) valued asset or liabilities: Inventory Equipment FMV of net assets of Local Goodwill $ 300,000 $ 155,000 (25,000) 130,000 20,000 50,000 200,000 100,000 $ Chapter 12-16 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, 2007. The balance sheet of Local Company just prior to acquisition is: 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 Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2007. The balance sheet of Local Company just prior to acquisition is: Journal entry recorded by Global: Cash Receivables Inventory Equipment Goodwill Accounts payable 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 Write-off Goodwill considered to have an indefinite life. Should not be amortized. Only adjust carrying value when goodwill is impaired. Chapter 12-19 LO 6 Describe the accounting procedures for recording goodwill. 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 longterm assets acquired, any remaining is accounted for as an extraordinary gain. Chapter 12-20 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. Chapter 12-21 LO 7 Explain the accounting issues related to intangible-asset impairments. Impairment of Intangible Assets Impairment E12-14 (Copyright Impairment) Presented below is information related to copyrights owned by Walter de la Mare Company at December 31, 2007. Cost $ 8,600,000 Carrying amount 4,300,000 Expected future net cash flows 4,000,000 Fair value 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, 2007. (b) Prepare the journal entry to record amortization expense for 2008 related to the copyrights. Chapter 12-22 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 Asset Chapter 12-23 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, 2007. Fair value test: Carrying amount Fair value Loss on impairment $ $ 4,300,000 3,200,000 (1,100,000) Loss on impairment Copyrights 1,100,000 1,100,000 Chapter 12-24 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 2008 related to the copyrights. Carrying amount Useful life Amortization per year $ $ ÷ ÷ 3,200,000 10 years 320,000 Amortization expense Copyrights 320,000 320,000 Chapter 12-25 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. Chapter 12-26 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. Chapter 12-27 LO 7 Explain the accounting issues related to intangible-asset impairments. Impairment of Intangible Assets Impairment E12-15 (Goodwill Impairment) Presented below is net asset information related to the Carlos Division of Santana, Inc. as of December 31, 2007 (in millions): Cash Receivables Property, plant, and equipment, net Goodwill Less: Notes payable Net assets $ 50 200 2,600 200 (2,700) 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 12-28 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, 2007. Step 1: The fair value of the reporting unit is below its carrying value. Therefore, an impairment has occurred. Step 2: Fair value of net assets Carrying amount, net of goodwill Implied goodwill Carrying value of goodwill Loss on impairment (in millions) $ 335 150 185 200 $ (15) Loss on impairment Goodwill Chapter 12-29 15,000,000 15,000,000 LO 7 Explain the accounting issues related to intangible-asset impairments. Impairment of Intangible Assets E12-15 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 12-30 LO 7 Explain the accounting issues related to intangible-asset impairments. Impairment of Intangible Assets Summary of Impairment Tests Illustration 12-11 Chapter 12-31 LO 7 Explain the accounting issues related to intangible-asset impairments. Research and Development Costs R&D costs are not in themselves intangible assets. But, R&D activities frequently results in something that a company patents or copyrights such as: new product, process, idea, formula, composition, or literary work. Because of difficulties related to identifying costs with particular activities or projects, and determining the magnitude of future benefits, all R & D costs are expensed when incurred. Chapter 12-32 LO 8 Identify the conceptual issues related to research and development costs. Research and Development Costs Identifying R & D Activities Research Activities Planned search or critical investigation aimed at discovery of new knowledge. Illustration 12-13 Examples Laboratory research aimed at discovery of new knowledge; searching for applications of new research findings. Development Activities Examples Conceptual formulation and design of Translation of research findings or possible product or process alternatives; other knowledge into a plan or construction of prototypes and operation design for a new product or process of pilot plants. or for a significant improvement to an existing product or process whether intended for sale or use. Chapter 12-33 LO 8 Identify the conceptual issues related to research and development costs. 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 12-34 Expense the entire costs, unless the items have alternative future uses. Expense immediately. Expense the entire costs, unless the items have alternative future uses. Expense the costs of service as incurred. LO 9 Describe the accounting for research and development and similar costs. Research and Development Costs E12-1 Indicate how items on the list below would generally be reported in the financial statements. Item 1. 1. 2. 2. 3. 3. Investment in a subsidiary company Investment Timberland Timberland Cost of engineering activity required to advance the design of a product to the manufacturing stage. the Lease prepayment Cost of equipment obtained under a capital lease. Cost of searching for applications of new research findings. 1. 2. 2. 3. Classification Long-term investments PP&E R & D expense 4. 4. 5. 6. 6. 4. 5. 6. Prepaid rent PP&E R & D expense Chapter 12-35 LO 9 Describe the accounting for research and development and similar costs. Research and Development Costs E12-1 Indicate how items on the list below would generally be reported in the financial statements. Item 7. 7. 8. 8. 9. 9. 10. 10. 11. 11. 12. 12. Cost incurred in the formation of a corporation. corporation. Operating losses incurred in the start-up of a business. Training costs incurred in start-up of new operation. new Purchase cost of a franchise. Purchase Goodwill generated internally. Goodwill Cost of testing in search of product alternatives. alternatives. Classification 7. Expense 8. 8. 9. 10. 11. 12. Operating loss Expense Intangible Not recorded R & D expense Chapter 12-36 LO 9 Describe the accounting for research and development and similar costs. Research and Development Costs E12-1 Indicate how items on the list below would generally be reported in the financial statements. Item 13. Goodwill acquired in the purchase 13. Goodwill of a business. 14. Cost of developing a patent. 14. Cost 15. Cost of purchasing a patent from 15. Cost an inventor. 16. Legal costs incurred in securing a 16. Legal patent. 17. Unrecovered costs of a successful 17. Unrecovered legal suit to protect the patent. Chapter 12-37 Classification 13. Intangible 14. R & D Expense 14. 15. Intangible 16. Intangible 17. Intangible LO 9 Describe the accounting for research and development and similar costs. Research and Development Costs E12-1 Indicate how items on the list below would generally be reported in the financial statements. Item 18. Cost of conceptual formulation of 18. Cost possible product alternatives. 19. Cost of purchasing a copyright. 19. Cost 20. Research and development costs. 20. Research 21. Cost of developing a trademark. 21. Cost 22. Cost of purchasing a trademark. 22. Cost Classification 18. R & D Expense 19. Intangible 19. 20. R & D Expense 21. Expensed 22. Intangible Chapter 12-38 LO 9 Describe the accounting for research and development and similar costs. Research and Development Costs Other Costs Similar to R & D Costs Start-up costs for a new operation. Initial operating losses. Advertising costs. Expense start-up costs as incurred. The operating loss during the early years should not be capitalized. Expense advertising costs as incurred or the first time the advertising takes place. Appendix 12A Computer software costs. Chapter 12-39 LO 9 Describe the accounting for research and development and similar costs. Research and Development Costs Research E12-17 Compute the amount to be reported as research and development expense. $280,000 / 5 = $56,000 $280,000 Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years. Materials consumed in R&D projects Consulting fees paid to outsiders for R&D projects Personnel costs of persons involved in R&D projects Indirect costs reasonably allocable to R&D projects Materials purchased for future R&D projects R&D R&D Expense Expense $56,000 59,000 100,000 128,000 50,000 0 $393,000 Chapter 12-40 $280,000 59,000 100,000 128,000 50,000 34,000 LO 9 Describe the accounting for research and development and similar costs. 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 12-41 LO 10 Indicate the presentation of intangible assets and related items. The end Questions? Chapter 12-42 ...
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This note was uploaded on 03/29/2010 for the course FINANCE 0011100110 taught by Professor Shentingchun during the Spring '10 term at Nashville State Community College.

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