Professional Documents
Culture Documents
CH 12
CH 12
CHAPTER
12
INTANGIBLE ASSETS
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
12-2
Learning
Learning Objectives
Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Describe the accounting for research and development and similar costs.
10.
12-3
Intangible
Intangible Assets
Assets
Intangible
Asset Issues
Types of
Intangibles
Impairment of
Intangibles
Characteristic
s
Valuation
Marketingrelated
Customerrelated
Artisticrelated
Contractrelated
Technologyrelated
Goodwill
Limited-life
intangibles
Reversal of
impairment loss
Indefinite-life
intangibles other
than goodwill
Goodwill
Amortization
12-4
Research and
Development
Costs
Identifying
R&D
Accounting for
R&D
Similar costs
Conceptual
questions
Presentation of
Intangibles and
Related Items
Intangible
assets
R&D costs
Intangible
Intangible Asset
Asset Issues
Issues
Characteristics
Three Main Characteristics:
(1) Identifiable,
(2) Lack physical existence.
(3) Not monetary assets.
Normally classified as non-current asset.
12-5
Intangible
Intangible Asset
Asset Issues
Issues
Valuation
Purchased Intangibles:
12-6
Recorded at cost.
Purchase price.
Legal fees.
Intangible
Intangible Asset
Asset Issues
Issues
Valuation
Internally Created Intangibles:
12-7
Intangible
Intangible Asset
Asset Issues
Issues
Internally Created Intangibles
12-8
Illustration 12-1
Research and
Development Stages
Intangible
Intangible Asset
Asset Issues
Issues
Amortization of Intangibles
Limited-Life Intangibles:
12-9
Useful life should reflect the periods over which the asset
will contribute to cash flows.
Intangible
Intangible Asset
Asset Issues
Issues
Amortization of Intangibles
Indefinite-Life Intangibles:
12-10
No amortization.
Intangible
Intangible Asset
Asset Issues
Issues
Amortization of Intangibles
12-11
Illustration 12-2
Accounting Treatment
for Intangibles
Types
Types of
of Intangibles
Intangibles
Six Major Categories:
12-12
(1) Marketing-related.
(4) Contract-related.
(2) Customer-related.
(5) Technology-related.
(3) Artistic-related.
(6) Goodwill.
Types
Types of
of Intangibles
Intangibles
Marketing-Related Intangible Assets
Examples:
12-13
No amortization.
LO 4 Describe the types of intangible assets.
Types
Types of
of Intangibles
Intangibles
Customer-Related Intangible Assets
Examples:
12-14
Types
Types of
of Intangibles
Intangibles
Illustration: Green Market Inc. acquires the customer list of a
large newspaper for 6,000,000 on January 1, 2011. Green
Market expects to benefit from the information evenly over a
three-year 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
12-15
Amortization expense
Customer list
6,000,000
2,000,000
2,000,000
Types
Types of
of Intangibles
Intangibles
Artistic-Related Intangible Assets
Examples:
and
12-16
Mickey
Mouse
LO 4
Types
Types of
of Intangibles
Intangibles
Contract-Related Intangible Assets
Examples:
12-17
LO 4
Types
Types of
of Intangibles
Intangibles
Technology-Related Intangible Assets
Examples:
12-18
Types
Types of
of Intangibles
Intangibles
Illustration: Harcott Co. incurs $180,000 in legal costs on
January 1, 2011, to successfully defend a patent. The patents
useful life is 20 years, amortized on a straight-line basis. Harcott
records the legal fees and the amortization at the end of 2011 as
follows.
Jan. 1
Patent
180,000
Cash
Dec. 31
12-19
180,000
9,000
9,000
LO 4 Describe the types of intangible assets.
Types
Types of
of Intangibles
Intangibles
Goodwill
Conceptually, represents the future economic benefits arising
from the other assets acquired in a business combination that
are not individually identified and separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of ...
cost of the purchase over the FMV of the identifiable net
assets purchased.
Internally created goodwill should not be capitalized.
12-20
Recording
Recording Goodwill
Goodwill
Illustration: Multi-Diversified, Inc. decides that it needs a parts
division to supplement its existing tractor distributorship. The
president of Multi-Diversified is interested in buying So Paulo,
Brazil. The illustration presents the statement of financial position
of Tractorling Company.
Illustration 12-4
12-21
Recording
Recording Goodwill
Goodwill
Illustration: Multi-Diversified investigates Tractorlings underlying
assets to determine their fair values.
Illustration 12-5
Recording
Recording Goodwill
Goodwill
Illustration: Determination of Goodwill.
Illustration 12-6
12-23
Recording
Recording Goodwill
Goodwill
Illustration: Multi-Diversified records this transaction as
follows.
Property, Plant, and Equipment
Patents
Inventories
Receivables
Cash
Goodwill
Liabilities
Cash
12-24
205,000
18,000
122,000
35,000
25,000
50,000
55,000
400,000
Goodwill
Goodwill
Goodwill Write-off
Bargain Purchase
12-25
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Impairment of Limited-Life Intangibles
Same as impairment for long-lived assets in Chapter 11.
Illustration 11-15
12-26
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Illustration: Lerch, Inc. has a patent on how to extract oil from
shale rock, with a carrying value of $5,000,000 at the end of 2010.
Unfortunately, several recent non-shale-oil discoveries adversely
affected the demand for shale-oil technology, indicating that the
patent is impaired. Lerch determines the recoverable amount for
the patent, based on value-in-use (because there is no active
market for the patent). Lerch estimates the patents value-in-use at
$2,000,000, based on the discounted expected net future cash
flows at its market rate of interest.
12-27
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Calculate the impairment loss (based on value-in-use).
$3,000,000 Impairment Loss
Illustration 11-15
$5,000,000
$2,000,000
Unknown
12-28
$2,000,000
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Calculate the impairment loss (based on value-in-use).
$3,000,000 Impairment Loss
Illustration 11-15
$5,000,000
$2,000,000
3,000,000
Unknown
3,000,000
$2,000,000
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Reversal of Impairment Loss
Illustration: The carrying value of the patent after impairment is
$2,000,000. Lerchs amortization is $400,000 ($2000,000 / 5) over the
remaining five years of the patents life. The amortization expense and
related carrying amount after the impairment is shown below:
Illustration 12-8
12-30
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Reversal of Impairment Loss
Early in 2012, based on improving conditions in the market for
shale-oil technology, Lerch remeasures the recoverable amount of
the patent to be $1,750,000. In this case, Lerch reverses a portion
of the recognized impairment loss.
Patents ($1,750,000-$1,600,000)
Loss on Impairment
12-31
150,000
150,000
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Impairment of Indefinite-Life Intangibles Other
than Goodwill
12-32
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Illustration: Arcon Radio purchased a broadcast license for
$2,000,000. The license is renewable every 10 years. Arcon Radio
has renewed the license with the GCC twice, at a minimal cost.
Because it expects cash flows to last indefinitely, Arcon reports the
license as an indefinite-life intangible asset. Recently, the GCC
decided to auction these licenses to the highest bidder instead of
renewing them. Based on recent auctions of similar licenses, Arcon
Radio estimates the fair value less costs to sell (the recoverable
amount) of its license to be $1,500,000.
Illustration 12-9
12-33
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Impairment of Goodwill
12-34
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Illustration: Kohlbuy Corporation has three divisions. It purchased
one division, Pritt Products, four years ago for $2 million.
Unfortunately, Pritt experienced operating losses over the last three
quarters. Kohlbuy management is now reviewing the division (the
cash-generating unit), for purposes of its annual impairment
testing. Pritt Divisions net assets, including the associated goodwill
of $900,000 from the purchase:
Illustration 12-10
12-35
LO 7
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Kohlbuy determines the recoverable amount for the Pritt Division to
be $2,800,000, based on a value-in-use estimate.
Illustration 11-15
$2,400,000
$2,800,000
No
Impairment
Unknown
12-36
$2,800,000
LO 7
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Assume that the recoverable amount for the Pritt Division is
$1,900,000, instead of $2,800,000.
$500,000 Impairment Loss
Illustration 11-15
$2,400,000
$1,900,000
Unknown
12-37
$1,900,000
LO 7
Impairment
Impairment of
of Intangible
Intangible Assets
Assets
Assume that the recoverable amount for the Pritt Division is
$1,900,000, instead of $2,800,000.
$500,000 Impairment Loss
Illustration 11-15
$2,400,000
$1,900,000
Loss on Impairment
500,000
Goodwill
500,000
Unknown
12-38
$1,900,000
LO 7
Research
Research and
and Development
Development Costs
Costs
Research and development (R&D) costs are not in
themselves intangible assets.
Frequently results in something that a company patents or
copyrights such as:
12-39
new product,
formula,
process,
composition, or
idea,
literary work.
Research
Research and
and Development
Development Costs
Costs
Companies spend considerable sums on research and
development.
Illustration 12-12
12-40
Research
Research and
and Development
Development Costs
Costs
12-41
Research
Research and
and Development
Development Costs
Costs
Identifying R & D Activities
Illustration 12-13
Research
Research Activities
Activities
Original
Original and
and planned
planned investigation
investigation
undertaken
with
the
prospect
undertaken with the prospect of
of gaining
gaining
new
new scientific
scientific or
or technical
technical knowledge
knowledge
and
and understanding.
understanding.
Development
Development Activities
Activities
Application
Application of
of research
research findings
findings or
or other
other
knowledge
to
a
plan
or
design
for
the
knowledge to a plan or design for the
production
production of
of new
new or
or substantially
substantially
improved
improved materials,
materials, devices,
devices, products,
products,
processes,
processes, systems,
systems, or
or services
services
before
before the
the start
start of
of commercial
commercial
production
or
use.
production or use.
12-42
Examples
Examples
Laboratory
Laboratory research
research aimed
aimed at
at discovery
discovery of
of
new
knowledge;
searching
for
applications
new knowledge; searching for applications of
of
new
new research
research findings.
findings.
Examples
Examples
Conceptual
Conceptual formulation
formulation and
and design
design of
of
possible
product
or
process
alternatives;
possible product or process alternatives;
construction
construction of
of prototypes
prototypes and
and
operation
operation of
of pilot
pilot plants.
plants.
Research
Research and
and Development
Development Costs
Costs
Accounting for R & D Activities
Costs Associated with R&D Activities:
12-43
Personnel
Purchased Intangibles
Contract Services
Indirect Costs
LO 9 Describe the accounting for research and development and similar costs.
Research
Research and
and Development
Development Costs
Costs
E12-1: Indicate how items on the list below would generally be
reported in the financial statements.
Item
Item
Classification
Classification
1.
1.
Long-term investments
2.
Timberland.
2.
PP&E
3.
3.
R&D expense
4.
Prepaid rent
5.
PP&E
6.
R&D expense
4.
Lease prepayment.
5.
6.
12-44
LO 9
Research
Research and
and Development
Development Costs
Costs
Item
Item
7.
Expense
8.
Operating loss
9.
Expense
10.
9.
Intangible
11.
Not recorded
10.
12.
R&D expense
11.
12.
7.
8.
12-45
Classification
Classification
LO 9 Describe the accounting for research and development and similar costs.
Research
Research and
and Development
Development Costs
Costs
Item
Item
13.
14.
15.
16.
17.
12-46
Classification
Classification
13.
Intangible
14.
R&D expense
15.
Intangible
16.
Intangible
17.
Intangible
LO 9 Describe the accounting for research and development and similar costs.
Research
Research and
and Development
Development Costs
Costs
Item
Item
18.
19.
20.
21.
Long-term receivables.
22.
23.
12-47
Classification
Classification
18.
R&D expense
19.
Intangible
20.
Intangible
21.
Long-term investment
22.
Expense
23.
Intangible
LO 9 Describe the accounting for research and development and similar costs.
Research
Research and
and Development
Development Costs
Costs
Other Costs Similar to R & D Costs
Advertising costs.
LO 9 Describe the accounting for research and development and similar costs.
Research
Research and
and Development
Development Costs
Costs
E12-17: Compute the amount to be reported as research and
development expense.
$330,000 / 5 = $66,000
Cost of equipment acquired that will have alternative uses in
future R&D projects over the next 5 years.
R&D
Expense
$330,000
$66,000
59,000
59,000
100,000
100,000
128,000
128,000
50,000
50,000
34,000
$403,000
12-49
LO 9 Describe the accounting for research and development and similar costs.
Presentations
Presentations of
of Intangibles
Intangibles and
and Related
Related Items
Items
Presentation of Intangible Assets
Statement of Financial Position
12-50
Presentations
Presentations of
of Intangibles
Intangibles and
and Related
Related Items
Items
Presentation of Intangible Assets
Income Statement
12-51
Amortization expense.
Presentations
Presentations of
of Intangibles
Intangibles and
and Related
Related Items
Items
Presentation of Intangible Assets
Illustration 12-15
12-52
Presentations
Presentations of
of Intangibles
Intangibles and
and Related
Related Items
Items
Presentation of Intangible Assets
Illustration 12-16
12-53
12-54
Both U.S. GAAP and IFRS segregate the costs associated with
research and development into the two components. Costs in the
research phase are always expensed under both IFRS and U.S. GAAP.
Under IFRS, however, costs in the development phase are capitalized
once economic viability is achieved.
12-55
While IFRS allows reversal of impairment losses when there has been a
change in economic conditions or in the expected use of the asset,
under U.S. GAAP, impairment losses cannot be reversed for assets to
be held and used; the impairment loss results in a new cost basis for
the asset. IFRS and U.S. GAAP are similar in the accounting for the
impairments of assets held for disposal.
12-56
Copyright
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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Request for further information should be addressed to the
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programs or from the use of the information contained herein.
12-57