chapter 12

chapter 12 - Chapter 12 -- II N T A N G II B L E A S S E T...

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Unformatted text preview: Chapter 12 -- II N T A N G II B L E A S S E T S Chapter 12 N T A N G B L E A S S E T S Chapter Chapter 1.. 1 Describe the characteristics of intangible assets. 2. Identify the costs to include in the initial valuation of intangible assets. 3. Explain the procedure for amortizing intangible assets. 4. Describe the types of intangible assets. 5. Explain the conceptual issues related to goodwill. 6. Describe the accounting procedures for recording goodwill. 7. Explain the accounting issues related to intangible­asset impairments. 8. Identify the conceptual issues related to research and development costs. 9. Describe the accounting for research and development and similar costs. 10. Indicate the presentation of intangible assets and related items. Intangible Assets Intangible Assets Intangible Asset Intangible Issues Issues Types of Types Intangibles Intangibles Impairment of Impairment Intangibles Intangibles Characteristic s Valuation MarketingMarketingrelated Customerrelated Artisticrelated Contractrelated Technologyrelated Goodwill Limited-life Limited-life intangibles intangibles Indefinite-life Indefinite-life intangibles other than goodwill goodwill Goodwill Amortization Summary Research and Research Development Costs Costs Identifying Identifying R&D R&D Accounting for Accounting R&D R&D Similar 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 Intangible Characteristics Two Main Characteristics: (1) They lack physical existence. (2) They are not financial instruments. Normally classified as long­term asset. Common types of intangibles: Patents Trademarks or trade names Copyrights Goodwill Franchises or licenses Intangible Asset Issues Intangible Asset Issues Intangible Valuation Purchased Intangibles: Recorded at cost. Includes all costs necessary to make the intangible asset ready for its intended use. Internally Created Intangibles: Generally expensed. Only capitalize direct costs incurred in developing the intangible, such as legal costs. Intangible Asset Issues Intangible Asset Issues Intangible Amortization of Intangibles Limited-Life Intangibles: Amortize to expense. Credit asset account or accumulated amortization. Indefinite-Life Intangibles: No foreseeable limit on time the asset is expected to provide cash flows. No amortization. Intangible Asset Issues Intangible Asset Issues Intangible Accounting for Intangibles Illustration 12-1 Types of Intangibles Types of Intangibles Types Six Major Categories: (1) Marketing­related. (2) Customer­related. (3) Artistic­related. (4) Contract­related. (5) Technology­related. (6) Goodwill. Types of Intangibles Types of Intangibles Types Marketing-Related Intangible Assets Examples are: trademarks or trade names, newspaper mastheads, Internet domain names, and noncompetition agreements. Trademark or trade name has legal protection for indefinite number of 10 year renewal periods. Capitalize acquisition costs. No amortization. Types of Intangibles Types of Intangibles Types 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. Types of Intangibles Types of Intangibles Types Illustration: Assume that Green Market Inc. acquires the customer list of a large newspaper for $6,000,000 on January 1, 2010. Green Market expects to benefit from the information evenly over a three­year period. Record the purchase of the customer list and the amortization of the customer list at the end of each year. Jan. 1 Customer List 6,000,000 Cash Dec. 31 2010 2011 2012 Customer list expense Customer list 6,000,000 2,000,000 2,000,000 Types of Intangibles Types of Intangibles Types 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. Capitalize acquisition costs. Amortized to expense over useful life. Types of Intangibles Types of Intangibles Types 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. Franchise with an indefinite life should be carried at cost and not amortized. Types of Intangibles Types of Intangibles Types 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. Types of Intangibles Types of Intangibles Types Illustration: Harcott Co. incurs $180,000 in legal costs on January 1, 2010, to successfully defend a patent. The patent’s useful life is 20 years, amortized on a straight­line basis. Harcott records the legal fees and the amortization at the end of 2010 as follows. Jan. 1 Patent 180,000 Cash Dec. 31 Patent amortization expense Patent 180,000 9,000 9,000 Types of Intangibles Types of Intangibles Types Goodwill Only recorded when an entire business is purchased because goodwill cannot be separated from the business as a whole. Goodwill is recorded as the excess of ... purchase price over the FMV of the identifiable net assets acquired. Internally created goodwill should not be capitalized. Recording Goodwill Recording Goodwill Illustration: Multi­Diversified, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Multi­ Diversified is interested in buying Tractorling Company, a small concern in Chicago. Illustration 12­3 presents the balance sheet of Tractorling Company. Illustration 12-3 Recording Goodwill Recording Goodwill Illustration: Multi­Diversified investigates Tractorling’s underlying assets to determine their fair values. Illustration 12-4 Tractorling Company decides to accept Multi­Diversified’s offer of $400,000. What is the value of the goodwill, if any? Recording Goodwill Recording Goodwill Illustration: Determination of Goodwill. Illustration 12-5 Recording Goodwill Recording Goodwill Illustration: Multi­Diversified records this transaction as follows. Recording Goodwill Recording Goodwill Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2010. The balance sheet of Local Company just prior to acquisition is: Asset s Cash Receivables I nvent ories Equipment T ot al Cost $ 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 25, 000 100, 000 30, 000 $ 155, 000 FMV of Net Assets = $200,000 $200,000 Recording Goodwill Recording Goodwill Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2010. The value assigned to goodwill is determined as follows: Book Value = $130,000 Revaluation $70,000 Fair Value = $200,000 Goodwill $100,000 Purchase Price = $300,000 Recording Goodwill Recording Goodwill Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2010. The value assigned to goodwill is determined as follows: Calculat ion of Goodwill: Cash $ 15, 000 Receivables 10, 000 I nvent ories 70, 000 Equipment 130, 000 Account s payable (25, 000) FMV of ident if iable net asset s 200, 000 Purchase price 300, 000 Goodwill $ 100, 000 Recording Goodwill Recording Goodwill Recording Example: Global Corporation purchased the net assets of Local Company for $300,000 on December 31, 2010. Prepare the journal entry to record the purchase of the net assets of Local. Journal entry recorded by Global: Cash Receivables Inventory Equipment Goodwill Accounts payable Cash 15,000 10,000 70,000 130,000 100,000 25,000 300,000 Goodwill Goodwill Goodwill Goodwill Write-off Goodwill considered to have an indefinite life. Should not be amortized. Only adjust carrying value when goodwill is impaired. Goodwill Goodwill Goodwill Bargain Purchase Purchase price less than the fair value of net assets acquired. Amount is recorded as a gain by the purchaser. Impairment of Intangible Assets Impairment of Intangible Assets Impairment Impairment of Limited-Life Intangibles Same as impairment for long­lived 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. Impairment of Intangible Assets Impairment of Intangible Assets E12-14: (Copyright Impairment) Presented below is information related to copyrights owned by Botticelli Company at December 31, 2010. 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 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, 2010. (b) Prepare the journal entry to record amortization expense for 2011 related to the copyrights. Impairment of Intangible Assets Impairment of Intangible Assets Impairment 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. 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 Impairment of Intangible Assets Impairment of Intangible Assets Impairment (a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2010. Loss on impairment Copyrights 1,100,000 1,100,000 Fair value t est : Car r y ing am o unt $ 4 ,3 0 0 ,0 0 0 Fair value 3 ,2 0 0 ,0 0 0 Lo s s o n im p air m e nt $ ( 1,10 0 ,0 0 0 ) Impairment of Intangible Assets Impairment of Intangible Assets Impairment (b) Prepare the journal entry to record amortization expense for 2011 related to the copyrights. Amortization expense 320,000 Copyrights Us e f ul lif e A m o r t iz at io n pe r y e ar $ 3 ,2 0 0 ,0 0 0 ÷ ÷ Car r y ing a m o unt 320,000 10 y e ar s $ 3 2 0 ,0 0 0 Impairment of Intangible Assets Impairment of Intangible Assets Impairment 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. Impairment of Intangible Assets Impairment of Intangible Assets Illustration: Arcon Radio purchased a broadcast license for $2,000,000. Arcon Radio has renewed the license with the FCC twice, at a minimal cost. Because it expects cash flows to last indefinitely, Arcon reports the license as an indefinite­life intangible asset. Recently the FCC decided to auction these licenses to the highest bidder instead of renewing them. Arcon Radio expects cash flows for the remaining two years of its existing license. It performs an impairment test and determines that the fair value of the intangible asset is $1,500,000. Illustration 12-7 Impairment of Intangible Assets Impairment of Intangible Assets Impairment 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. Impairment of Intangible Assets Impairment of Intangible Assets E12-15: (Goodwill Impairment) Presented below is net asset information related to the Mischa Division of Santana, Inc. as of December 31, 2010 (in millions): Ca s h $ 6 0 Re c e iva b le s 2 0 0 Pr o pe r t y , plant , a nd e q uipm e nt , ne t 2 ,6 0 0 Go o d will 2 0 0 Le s s : N o t e s pa y ab le ( 2 ,7 0 0 ) N e t a s s e t s $ 3 6 0 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. Impairment of Intangible Assets Impairment of Intangible Assets Impairment E12-15 Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2010. Step 1: The fair value of the reporting unit is below its carrying value. Therefore, an impairment has occurred. Step 2: Fa ir va lue Ca r r y ing a m o unt , ne t o f g o o d will I m plie d g o o d will Goodwill 175 200 Ca r r y ing va lue o f g o o d will Lo s s o n im pa ir m e nt Loss on impairment ( in m illio ns ) $ 335 160 $ (25) 25,000,000 25,000,000 Impairment of Intangible Assets Impairment of Intangible Assets Impairment E12-15 Instructions (b) At December 31, 2011, 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. Impairment of Intangible Assets Impairment of Intangible Assets Impairment Summary of Impairment Tests Illustration 12-11 Research and Development Costs Research and Development Costs Research 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 and determining the future benefits, all R & D costs are expensed when incurred. Research and Development Costs Research and Development Costs Identifying R & D Activities Research Activities Planned search or critical investigation Planned search or critical investigation aimed at discovery of new knowledge. aimed at discovery of new knowledge. Development Activities Translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. Illustration 12-13 Examples Examples Laboratory research aimed at discovery of new Laboratory research aimed at discovery of new knowledge; searching for applications of new knowledge; searching for applications of new research findings. research findings. Examples Conceptual formulation and design of possible product or process alternatives; construction of prototypes and operation of pilot plants. 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 Research and Development Costs Research and Development Costs E12-1: Indicate how items on the list below would generally be reported in the financial statements. Item Item 1. Investment in a subsidiary company 2. Timberland 3. Cost of engineering activity required to advance the design of a product to the manufacturing stage. 4. Lease prepayment 5. Cost of equipment obtained under a capital lease. 6. Cost of searching for applications of new research findings. Classification Classification 1.. 1 2. 3. Long­term investments PP&E R & D expense 4. 5. Prepaid rent PP&E 6. R & D expense Research and Development Costs Research and Development Costs E12-1: Indicate how items on the list below would generally be reported in the financial statements. Item Item 7. Cost incurred in the formation of a corporation. 8. Operating losses incurred in the start­up of a business. 9. Training costs incurred in start­up of new operation. 10. Purchase cost of a franchise. 11. Goodwill generated internally. 12. Cost of testing in search of product alternatives. Classification Classification 7.. 7 Expense 8. Operating loss 9. Expense 10. 11. 12. Intangible Not recorded R & D expense Research and Development Costs Research and Development Costs E12-1: Indicate how items on the list below would generally be reported in the financial statements. Item Item 13. Goodwill acquired in the purchase business. 14. Cost of developing a patent. 15. Cost of purchasing a patent from inventor. 16. Legal costs incurred in securing a 17. Unrecovered costs of a successful to protect the patent. Classification Classification of a 13. Intangible 13. an 14. R & D Expense 15. Intangible patent. legal suit 16. Intangible 17. Intangible Research and Development Costs Research and Development Costs E12-1: Indicate how items on the list below would generally be reported in the financial statements. Item Item Classification Classification 18. Cost of conceptual formulation of possible product alternatives. 18. R & D Expense 18. 19. Cost of purchasing a copyright. 19. Intangible 20. Research and development costs. 20. R & D Expense 21. Cost of developing a trademark. 21. Expensed 22. Cost of purchasing a trademark. 22. Intangible Research and Development Costs Research and Development Costs Other Costs Similar to R & D Costs Start­up costs for a new operation. Initial operating losses. Advertising costs. Computer software costs. Research and Development Costs Research and Development Costs Example: Compute the amount to be reported as research and development expense. $280,000 / 5 = $56,000 Cost of equipment acquired that will have alternative uses in future R&D projects over the next 5 years. R&D Expense $280,000 $56,000 59,000 59,000 Consulting fees paid to outsiders for R&D projects 100,000 100,000 Personnel costs of persons involved in R&D projects 128,000 128,000 Indirect costs reasonably allocable to R&D projects 50,000 50,000 Materials purchased for future R&D projects 34,000 0 Materials consumed in R&D projects $393,000 Presentations of Intangibles and R&D Presentations of Intangibles and R&D 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. Presentations of Intangibles Presentations of Intangibles Presentations Illustration 12-15 Presentations of R&D Costs Presentations of R&D Costs Presentations Illustration 12-16 ...
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This note was uploaded on 11/29/2011 for the course ACC 375 taught by Professor Lash during the Spring '11 term at Rutgers.

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