Ch 12 : Intangible Assets Issues

► Characteristics of Intangible assets:

Three Main Characteristics:
(1) Identifiable,
(2) Lack physical existence.
(3) Not monetary assets.
Normally classified as non-current asset.

► Valuation of Intangible assets:

Purchased Intangibles:
 Recorded at cost.
 Includes all costs necessary to make the intangible asset ready for its intended use.
 Typical costs include:
 Purchase price.
 Legal fees.
 Other incidental expenses. ‫مصروفات عرضية‬

Internally Created Intangibles:

 Recorded as expenses except Research and Development
 Companies expense all research phase costs and some development phase costs.
 Certain development costs are capitalized once economic viability criteria are met.
 IFRS identifies several specific criteria that must be met before development costs are
capitalized.

Beginning of Ready for

The Project Sale or use
Research phase Development phase
Expenses Expenses Capitalize
Economic Viability

► Amortization of Intangibles
Limited-Life Intangibles:
 Amortize by systematic charge to expense over useful life.
 Credit asset account or accumulated amortization.
 Useful life should reflect the periods over which the asset will contribute to cash flows.
 Amortization should be cost less residual value.
 IFRS requires companies to assess the residual values and useful lives of intangible assets at
least annually.

Indefinite-Life Intangibles:
 No foreseeable limit on time the asset is expected to provide cash flows.
 No amortization.
 Must test indefinite-life intangibles for impairment at least annually.

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Accounting Treatment for Intangibles

► Types of Intangibles
Six Major Categories:
(1) Marketing-related.
(2) Customer-related.
(3) Artistic-related.
(4) Contract-related.
(5) Technology-related.
(6) Goodwill.

Marketing-Related Intangible Assets

 Examples:
►Trademarks or trade names, newspaper mastheads, Internet domain names, and non-
competition agreements.
 In the United States trademark or trade name has legal protection for indefinite number
of 10 year renewal periods.
 Capitalize acquisition costs.
 No amortization.

Customer-Related Intangible Assets

 Examples:
►Customer lists, order or production backlogs, and both contractual and non-contractual
customer relationships.
 Capitalize acquisition costs.
 Amortized to expense over useful life.

Artistic-Related Intangible Assets

 Examples:
Plays, literary works, musical works, pictures, photographs, and video and audiovisual
material.
 Copyright granted for the life of the creator plus 70 years.
 Capitalize costs of acquiring and defending.
 Amortized to expense over useful life.

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Contract-Related Intangible Assets

 Examples:
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.

Technology-Related Intangible Assets

 Examples:
Patented technology and trade secrets granted by a governmental body.
 Patent gives holder exclusive use for a period of 20 years.
 Capitalize costs of purchasing a patent.
 Expense any R&D costs in developing a patent.
 Amortize over legal life or useful life, whichever is shorter.

Goodwill
 Conceptually, represents the future economic benefits arising from the other assets
acquired in a business combination that are not individually identified.
 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.

Goodwill = Purchase Price – Fair market Value of net assets received

Fair Value of Net assets = ( Fair Value of Assets – Fair Value of Liabilities )
= Book Value of net assets (Assets – Liabilities)
(+ ) Under valued assets
( - ) Over Valued assets
( - ) Under valued Liabilities
(+ ) Over Valued Liabilities
Bargain Purchase
Purchase price less than the fair value of net assets acquired.
Amount is recorded as a gain by the purchaser.

Impairment of Goodwill
 Companies must test goodwill at least annually.
 Impairment test is conducted based on the cash-generating unit to which the goodwill is
assigned.
 Because there is rarely a market for cash-generating units, estimation of the recoverable
amount for goodwill impairments is usually based on value-in-use estimates.

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► Practice on Amortization and Impairment:

Ex. 12-156—Acquisition of tangible and intangible assets.
Vasquez Manufacturing Company decided to expand further by purchasing Wasserman Company.
The statement of financial position of Wasserman Company as of December 31, 2011 was as
follows:

Wasserman Company
Statement of Financial Position
December 31, 2011

Assets Equity and Liabilities

Plant assets (net) $1,025,000 Share capital-ordinary $ 800,000
Inventory 275,000 Retained earnings 885,000
Receivables 550,000 Accounts payable 375,000
Cash 210,000
Total assets $2,060,000 Total equity and liabilities $2,060,000

An appraisal, agreed to by the parties, indicated that the fair value of the inventory was $350,000
and the fair value of the plant assets was $1,225,000. The fair value of the receivables is equal to
the amount reported on the statement of financial position. The agreed purchase price was
$2,075,000, and this amount was paid in cash to the previous owners of Wasserman Company.

Instructions
1. Determine the amount of goodwill (if any) implied in the purchase price of $2,075,000.
Show calculations.
2. Prepare the journal entry to record the acquisition of Wasserman Company.

Solution 12-156

1- The amount of goodwill

Purchase price $2,075,000

Less Fair Value of tangible net assets acquired:
Book value of net assets ($2,060,000 – $375,000) $1,685,000
Appraisal increment—inventory 75,000
Appraisal increment—plant assets 200,000
Total fair value of tangible net assets acquired 1,960,000
Goodwill $ 115,000

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2- The Journal entry will be as follows:

Date Accounts Dr. Cr.

Plant assets 1,225,000
Inventory 350,000
Receivable 550,000
Cash 210,000
Goodwill 115,000
Accounts Payable 375,000
Cash 2,075,000

Ex. 12-145
Barkley Corp. obtained a trade name in January 2010, incurring legal costs of $15,000. The company
amortizes the trade name over 8 years. Barkley successfully defended its trade name in January 2011,
incurring $4,900 in legal fees. At the beginning of 2012, based on new marketing research, Barkley
determines that the recoverable amount of the trade name is $12,000.

Instructions
Prepare the necessary journal entries for the years ending December 31, 2010, 2011, and 2012. Show
all computations.

Solution 12-145
2010
Dec. 31 Amortization Expense - Trade Name 1,875
Trade Name 1,875
($15,000 ÷ 8 years)

2011
Dec. 31 Amortization Expense – Trade Name 2,575
Trade Name 2,575
[($15,000 - $1,875 + $4,900) ÷ 7 years]

2012
Dec. 31 Loss on Impairment 3,450
Trade Name 3,450

Carrying value = $15,000 - $1,875 + $4,900 - $2,575 = $15,450

Carrying value = $15,450
Recoverable amount = (12,000)
Loss on impairment = $ 3,450

Ex. 12-148—Carrying value of patent.

Sisco Co. purchased a patent from Thornton Co. for $180,000 on July 1, 2008. Expenditures of $68,000 for
successful litigation in defense of the patent were paid on July 1, 2011. Sisco estimates that the useful life
of the patent will be 20 years from the date of acquisition.

Instructions
Prepare a computation of the carrying value of the patent at December 31, 2011.

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Solution 12-148
Cost of patent $180,000
Amortization 7/1/08 to 7/1/11 [($180,000 ÷ 20) × 3] (27,000)
Carrying value at 7/1/11 153,000
Cost of successful defense 68,000
Carrying value 221,000
Amortization 7/1/11 to 12/31/11 [$221,000 × 1/(20 – 3) × 1/2] (6,500)
Carrying value at 12/31/11 $214,500

Ex. 12-153—Impairment of copyrights.

Presented below is information related to copyrights owned by Wamser Corporation at December 31,
2010.
Cost $2,700,000
Carrying amount 2,350,000
Recoverable amount 1,400,000

Assume Wamser will continue to use this asset in the future. As of December 31, 2010, the copyrights have
a remaining useful life of 5 years.

Instructions
(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.
(c) The recoverable amount of the copyright at December 31, 2012 is $1,500,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.

Solution 12-153
(a) December 31, 2010
Loss on Impairment ................................................................................ 950,000
Copyrights ................................................................................... 950,000
Carrying amount $2,350,000
Recoverable amount 1,400,000
Loss on impairment $ 950,000

(b) December 31, 2011

Amortization Expense ............................................................................ 280,000
Copyrights ................................................................................... 280,000
New carrying amount $1,400,000
Useful life ÷ 5 years
Amortization $ 280,000

(c)
Copyrights............................................................................................... 380,000
Recovery of Impairment Loss .................................................. 380,000
[$1,500,000 – ($1,400,000 – $280,000)]

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Pr. 12-158—Goodwill, impairment.

On May 31, 2011, Armstrong Company paid $3,500,000 to acquire all of the common stock of Hall
Corporation, which became a division of Armstrong. Hall reported the following statement of financial
position at the time of the acquisition:

Non-current assets $2,700,000 Equity $2,500,000

Current assets 900,000 Non-current liabilities 500,000
Current liabilities $ 600,000
Total assets $3,600,000 Total equity and liabilities $3,600,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Hall was
$2,800,000. At December 31, 2011, Hall reports the following statement of financial position information:

Current assets $ 800,000

Non-current assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Non-current liabilities (500,000)
Net assets $2,000,000

It is determined that the recoverable amount value of the Hall division is $2,100,000.

Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2011.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2011.
(c) Assume that the recoverable amount of the Hall division is $1,900,000 instead of $2,100,000. Prepare
the journal entry to record the impairment loss, if any, on December 31, 2011.

Solution 12-158
(a) Goodwill = Fair value of the division less the fair value of the identifiable assets.
$3,500,000 – $2,800,000 = $700,000.

(b) No impairment loss is recorded, because the recoverable amount of Hall ($2,100,000) is greater than
the carrying value ($2,000,000) of the new assets.

(c) Computation of impairment loss:

Recoverable amount of Hall division $1,900,000

Carrying value of division 2,000,000
Loss on impairment $ (100,000)

Loss on Impairment ............................................................................ 100,000

Goodwill .................................................................................. 100,000

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