Kieso_Chapter_12 - 8658d_c12_569 4:56 PM Page 569 mac48 Mac...

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LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe the characteristics of intangible assets. Identify the costs included in the initial valuation of intangible assets. Explain the procedure for amortizing intangible assets. Identify the types of intangible assets. Explain the conceptual issues related to goodwill. Describe the accounting procedures for recording goodwill. Explain the accounting issues related to intangible asset impairments. Identify the conceptual issues related to research and development costs. Describe the accounting procedures for research and development costs and for other similar costs. Indicate the presentation of intangible assets and related items. As shown in the graph below, tangible assets as a percent of all assets has declined dramatically in the last 45 years. Intangible Assets U ntouchable CHAPTER 12 CHAPTER 12 569 80% Tangible assets as a percent of all assets of nonfinancial businesses 70% 60% 50% 1955 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 Source: Federal Reserve Board Consequently, value today is increasingly derived from intangible assets— intellectual property, technology, or reputation. For example, many well-known companies make most of their money from intangible assets: Microsoft Corp. ’s software, Pfizer Inc. ’s drug patents, and Walt Disney Co. ’s film and television productions. Although these formidable franchises are unlikely to erode soon, the experience at Winstar Communications illustrates how quickly the value of intangible assets can erode. Just before Winstar filed for bankruptcy in the spring of 2001, it listed $5 billion in assets, a large share comprised of intangible assets related to its customer base. Within just a few short months, its assets fetched just $42 million , and Winstar’s investors and creditors learned the shocking speed at which the value of such assets can decline. Similarly, the meltdown at Enron was accelerated as the market lost confidence in Enron’s ability to deliver services in its virtual energy-trading operation. Perhaps Federal Reserve Chairman Alan Greenspan’s remarks are relevant in these turbulent times: “. . . a firm is inherently fragile if its value-added emanates more from conceptual as distinct from physical assets. Trust and reputation can vanish overnight. A factory cannot.” 1 1 Adapted from Greg Ip, “The Rise and Fall of Intangible Assets Leads to Shorter Company Life Spans,” Wall Street Journal Online (April 4, 2002). 8658d_c12_569 1/2/03 4:56 PM Page 569 mac48 Mac 48:Desktop Folder:spw/456:
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PREVIEW OF CHAPTER 12 As the opening story indicates, the accounting and reporting of intangible assets is tak- ing on increasing importance in this information age, especially for companies like Microsoft , Pfizer , and Walt Disney . The purpose of this chapter is to explain the ba- sic conceptual and reporting issues related to intangible assets. The content and or- ganization of the chapter are as follows.
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