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day 7 intangible 2009 spring v2 - Dr.JamesGong Agenda n n n...

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Accounting for Intangibles Dr. James Gong
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Agenda n What are intangible assets? n Financial accounting for identifiable intangible  assets n Practice problems n Financial accounting for non-identifiable  intangible assets n Group exercise n Limitation of financial accounting for  intangible assets
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0.00 1.00 2. 00 3.00 4.00 5.00 6.00 7.00 8.00 Dec-95 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Month Market-To-Book S&P 500 Average Market-To-Book Ratio: 1995- 2002
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Questions about the Chart  n Why did market values diverge from book  values? n What information is not included in the  financial statements?
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Interpretation  n Market-to-book ratio of Standard & Poor’s  500 is greater than four.   n This means that traditional accounting  measures of book value of net assets  represent about 25% of the value of the   net assets. n A-L=E
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Another Side of P to B Ratio  After the bubble burst and the market meltdown  Average Price to Book Sept 2, 2002 Large Widely Held Stocks (1)  –  4.28 S&P 500 (2)  –  2.93 NASDAQ (3) 1.78  (1) Sunday New York Times Business Section Data Bank Favorites: Stocks Held by  largest number of accounts at Merrill Lynch, September 2, 2002 (2) Random sample of 20 S&P 500 (3) Unscientific sample of 20 NASDAQ National Market Stocks Data source: Forbes Price to Book Ratio www.forbes.com
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What Are Assets?
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Assets (FASB Concepts 6) Assets are probable future economic benefits obtained or controlled by a  particular entity as a result of past transactions or events n Criteria to be considered an asset n Defined and distinct n Effective control n Possible to predict future economic benefits n Possible to determine impairment n Asset Examples: n Property, plant, equipment n Financial assets n Purchased identifiable intangibles such as patents, trademarks,  and mailing lists What Are Assets?
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n A non-monetary asset without physical substance.  n Examples of possible intangible assets include:  n computer software  n patents  n copyrights  n motion picture films  n customer lists  n mortgage servicing rights  n licenses  n import quotas  n franchises  n customer and supplier relationships  n marketing rights  What Are Intangible Assets?
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n Lack of physical substance n Long-lived n Scalability n Large sunk costs, negligible marginal costs n Increasing returns to scale n Scalability only limited by the size of the market n Non-rivalry and Partial excludability n Use by one user does not preclude the use by another  user n Difficult to exclude non-owners n Network effects n Metcalf’s law – the value of the network increases  geometrically with each new user n Software Intangible Assets  Characteristics
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