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Summary Ch12 - Summary Ch 12 Main issues Valuation...

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Summary: Ch 12 Main issues: Valuation – Impairment test: Intangible asset with limited life, intangible asset with indefinite life other than goodwill, and goodwill Accounting for research and development costs 1. Intangible Asset Issues. a. Characteristics. i. They lack physical existence. ii. They are not financial instruments. b. Valuation. i. Purchased intangibles are recorded at cost. - Includes purchase price, legal fees, and other incidental expenses. - If acquired for stock or other assets, cost is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident. ii. Internally-created intangibles. - Only direct costs incurred in obtaining the intangible are capitalized, e.g., legal costs. c. Amortization of Intangibles. i. Limited-life intangibles are amortized over their useful lives. Factors affecting useful life are: - Expected use of the asset. - Expected useful life of a related asset. - Any legal, regulatory, or contractual provisions that may limit the useful life. - Provisions that enable renewal of extension of the asset’s legal or contractual life without substantial cost. - The effects of obsolescence, demand, competition, and other economic factors. - The level of maintenance expenditure required to obtain the expected future cash flows from the asset. ii. Amortizable base is equal to cost less residual value. - Residual value is assumed to be zero, unless - The intangible has value to another company at the end of its useful life.
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iii. Indefinite-life intangibles are not amortized. 2. Types of Intangible Assets. a. Marketing-related intangible assets —primarily used in the marketing or promotion of products or services. i . Trademarks and trade names. - Considered indefinite-life intangibles, therefore, not amortized. - If insignificant cost, it is usually expensed. ii. Company names. b. Customer-related intangible assets —result from interactions with outside parties. i. Customer lists, order or production backlogs, and contractual or noncontractual customer relationships. ii. Amortized over the asset’s useful life. iii. Residual value is assumed to be zero, unless the useful life is less than the economic life and reliable evidence exists about the residual value. c. Artistic-related intangible assets —ownership rights to plays, literary works, music, pictures, photos, and video and audiovisual material.
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