9 Intangibles
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
? There is generally a higher degree of
uncertainty regarding the future benefits that
may be derived.
? Their value is subject to wider fluctuations
because it may depend to a considerable extent
on competitive conditions.
? They may have value only to a particular
company.
? Goodwill and intangible assets with indefinite
lives are not expensed,
Intermediate Accounting 9 Intangibles
1,Accounting for Intangibles
Characteristics that Distinguish Intangibles
Classification of Intangibles
Purchased
Identifiable
Capitalize the cost
incurred to acquire an
intangible assets with a
finite life and amortize
over its useful life.
Unidentifiable
(i.e.,goodwill)
Capitalize the cost
incurred to acquire
goodwill and review
it for impairment at
least annually.
Intermediate Accounting 9 Intangibles
Classification of Intangibles
Internally
Developed
Identifiable
Unidentifiable
Expense research and
development costs as incurred
Capitalize certain costs
incurred for an intangible
asset with a finite life and
amortize over its useful life
Capitalize certain costs
incurred for an intangible
asset with an infinite life and
amortize over its useful life
Expense costs as incurred
Intermediate Accounting 9 Intangibles
1,Purchased Identifiable Intangibles,A
company may purchase an intangible asset
from another company,The purchase is
handled in the same manner as the acquisition
of a single asset,in a group of assets,or in an
exchange of similar or dissimilar assets.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
continued
2,Purchased Unidentifiable Intangibles,A
company capitalizes the cost of a purchased
unidentifiable intangible asset,The principal
example of an unidentifiable intangible is
goodwill.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
continued
3,Internally Developed Identifiable Intangibles.
When a company internally develops an
intangible assets,it can capitalize only certain
costs,The expensing of research and
development costs represents an exception to
the general rule of capitalizing of internally
developed identifiable intangibles.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
continued
4,Internally Developed Unidentifiable
Intangibles,A company expenses the costs of
internally developed unidentifiable intangibles
as incurred even thought they may be expected
to have benefits extending beyond the current
period.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
Intangible Assets
With a Finite Life
Are Amortized.
The calculation of the
amortization of intangible
assets follows the same
principles as the depreciation
of tangible assets.
Amortization of Intangibles
Intermediate Accounting 9 Intangibles
Amortization of Intangibles
A company purchases a patent for $85,000.
Patent 85,000
Cash 85,000
At year-end the patent is amortized over 10
years (no expected residual value).
Amortization Expense (or
Factory Overhead) 8,500
Accumulated Amorti-
zation,Patent 8,500
Intermediate Accounting 9 Intangibles
Impairment of an Intangible
A company purchased a trademark several years
ago for $60,000,As the company considered the
trademark to have an indefinite life,the trademark
has a carry value of $60,000,At the end of the
current year,the company determines that the fair
value of the trademark is $20,000,An entry is
needed to record the $40,000 loss in fair value.
Impairment Loss on Trademark 40,000
Trademark 40,000
Intermediate Accounting 9 Intangibles
2,Research and Development Costs
? Research is the planned search or critical
investigation aimed at discovery of new
knowledge.
? Development is the 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.
Intermediate Accounting 9 Intangibles
Research and Development Costs
Costs associated with
activities excluded
from R&D are either
expensed or
capitalized according
to normal
capitalization criteria.
Intermediate Accounting 9 Intangibles
? Materials,equipment,and facilities
? Personnel
? Intangibles purchased from others
? Contract services
? Indirect costs— R&D includes a
reasonable allocation of indirect costs.
Expenditures for the following elements of R&D
activities are included in R&D costs and thus
expensed as incurred:
Intermediate Accounting 9 Intangibles
Research and Development Costs
Kent Company incurred the following costs for R&D
activities:
Materials used from inventory $50,000
Wages and salaries 90,000
Allocation of general and administrative
costs 20,000
Depreciation on building housing R&D
activities 25,000
Machine purchased for R&D project that
has no alternative future uses 30,000
Continued
Intermediate Accounting 9 Intangibles
Research and Development Costs
The company includes all these costs in R&D
expenses,and records them as follows:
Research and Development Expense 215,000
Cash,Payables,etc,140,000
Inventory 50,000
Accumulated Depreciation,Building 25,000
Intermediate Accounting 9 Intangibles
Research and Development Costs
3,Identifiable Intangible Assets
Cost of
Intangibles Expense
In period cost
incurredIdentifiable Intangible
Assets That Are
Typically Amortized
Patents
Copyrights
Franchises
Computer Software
Costs
Leasehold Improvements
Amortize
over service
life
Continued
R & D
Intermediate Accounting 9 Intangibles
Identifiable Intangible Assets
Cost of
Intangibles
Identifiable Intangible
Assets That Are
Typically Reviewed for
Impairment
Trademarks and
tradenames
Licenses that may be
renewed indefinitely
Recognize
loss when
impaired
Continued
Intermediate Accounting 9 Intangibles
Cost of
Intangibles
Unidentifiable
Intangible Assets That
Are Reviewed for
Impairment
Goodwill
Recognize
loss when
impaired
Intermediate Accounting 9 Intangibles
Identifiable Intangible Assets
Patents
A patent is an exclusive
right granted by the federal
government giving the
owner control…
…of the manuf cture,sale,
or othe us of an inv ntion
for 20 years from the dat of
filing.
Intermediate Accounting 9 Intangibles
A company can capitalize the costs of
successfully defending the legal
validity of a patent,If the suit is lost,
all legal costs are expensed.
Intermediate Accounting 9 Intangibles
Patents
Copyrights
?
A copyright is a grant by the federal
government to publish,sell or otherwise
control literary or artistic products for the
life of the author plus 70 year.
Books
Music
Films
Intermediate Accounting 9 Intangibles
Goodwill
Purchased goodwill
arises when a company
is acquired,It is the
difference between the
purchase price of the
acquired company as a
whole and the fair value
of the reported
identifiable net assets.
Intermediate Accounting 9 Intangibles
4,Unidentifiable Intangibles
Sara Company purchases all the assets of Trevor Company
for $790,000 cash and Trevor Company is dissolved,
Trevor Company’s identifiable assets had a fair value of
$920,000 and its liabilities totaled $200,000.
Assets 920,000
Goodwill 70,000
Liabilities 200,000
Cash 790,000
Individual assets and liabilities
actually would be debited or credited.
Intermediate Accounting 9 Intangibles
Goodwill
Impairment of Goodwill
A company must review its
goodwill for impairment
annually at the reporting unit
level.
Intermediate Accounting 9 Intangibles
A company must also review its
goodwill for impairment whenever
events or changes in circumstances
occur that would more-likely-than-
not reduce the fair value of the
goodwill below its carrying value.
Intermediate Accounting 9 Intangibles
Impairment of Goodwill
The Kent Company acquired the Devon Company as a
subsidiary several years ago,The Devon Company has a
book value of $3.6 million,including goodwill of $400,000,
Kent Company estimates that its fair value is $3 million,If
Kent Company allocates $2.7 million of the fair market
value to Devon Company’s identifiable assets and liabilities,
this means that $300,000 is implied for goodwill,Thus,
there has been an impairment loss of $100,000.
Impairment Loss on Goodwill 100,000
Goodwill 100,000
Intermediate Accounting 9 Intangibles
Impairment of Goodwill
5,Disclosure of Intangibles
FASB Statement No,142 requires a company to disclose
certain information about its intangible assets,in either
the financial statement or it notes,including:
1,In the period it acquires intangible assets:
a,The cost of any intangible asset acquired,separated into
categories.
b,For assets subject to amortization,the residual value and
the weighted-average amortization expense for the next
five years.
c,The cost of any R&D acquired and written off,and where
it is included in the income statement.
Continued
Intermediate Accounting 9 Intangibles
FASB Statement No,142 requires a company to
disclose certain information about its intangible assets,
in either the financial statement or it notes,including:
2,In each period for which it presents a balance sheet:
a,For intangible assets that are amortized,the total cost,the
accumulated amortization,the amortization expense,and
the estimated amortization expense for the next five years.
b,For intangible assets that are not amortized,the total cost
and the cost of each major intangible asset class.
Continued
Intermediate Accounting 9 Intangibles
2,In each period for which it presents a balance sheet:
c,For goodwill,the amount of goodwill acquired,the amount
of any impairment losses recognized,and the amount of
goodwill included in the disposal of a reporting unit.
d,For any intangible asset impairment,the facts and
circumstances leading to the impairment,the amount of the
loss,and the method used.
Intermediate Accounting 9 Intangibles
FASB Statement No,142 requires a company to
disclose certain information about its intangible assets,
in either the financial statement or it notes,including:
6,Conceptual Issues
Expensing internally generated goodwill is justified
on the basis that measuring the cost of internally
generated goodwill with a reasonable degree of
reliability is very difficult.
Capitalization of internally generated goodwill
would require amortization,It would be very
difficult to identify the revenues generated and
therefore to decide over which periods,and by
which method,to match the amortization expenses
against the benefits.
Intermediate Accounting 9 Intangibles
The End
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
? There is generally a higher degree of
uncertainty regarding the future benefits that
may be derived.
? Their value is subject to wider fluctuations
because it may depend to a considerable extent
on competitive conditions.
? They may have value only to a particular
company.
? Goodwill and intangible assets with indefinite
lives are not expensed,
Intermediate Accounting 9 Intangibles
1,Accounting for Intangibles
Characteristics that Distinguish Intangibles
Classification of Intangibles
Purchased
Identifiable
Capitalize the cost
incurred to acquire an
intangible assets with a
finite life and amortize
over its useful life.
Unidentifiable
(i.e.,goodwill)
Capitalize the cost
incurred to acquire
goodwill and review
it for impairment at
least annually.
Intermediate Accounting 9 Intangibles
Classification of Intangibles
Internally
Developed
Identifiable
Unidentifiable
Expense research and
development costs as incurred
Capitalize certain costs
incurred for an intangible
asset with a finite life and
amortize over its useful life
Capitalize certain costs
incurred for an intangible
asset with an infinite life and
amortize over its useful life
Expense costs as incurred
Intermediate Accounting 9 Intangibles
1,Purchased Identifiable Intangibles,A
company may purchase an intangible asset
from another company,The purchase is
handled in the same manner as the acquisition
of a single asset,in a group of assets,or in an
exchange of similar or dissimilar assets.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
continued
2,Purchased Unidentifiable Intangibles,A
company capitalizes the cost of a purchased
unidentifiable intangible asset,The principal
example of an unidentifiable intangible is
goodwill.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
continued
3,Internally Developed Identifiable Intangibles.
When a company internally develops an
intangible assets,it can capitalize only certain
costs,The expensing of research and
development costs represents an exception to
the general rule of capitalizing of internally
developed identifiable intangibles.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
continued
4,Internally Developed Unidentifiable
Intangibles,A company expenses the costs of
internally developed unidentifiable intangibles
as incurred even thought they may be expected
to have benefits extending beyond the current
period.
Accounting for the cost of intangibles is discussed
in FASB Statement No,142 as follows:
Intermediate Accounting 9 Intangibles
Intangible Assets
With a Finite Life
Are Amortized.
The calculation of the
amortization of intangible
assets follows the same
principles as the depreciation
of tangible assets.
Amortization of Intangibles
Intermediate Accounting 9 Intangibles
Amortization of Intangibles
A company purchases a patent for $85,000.
Patent 85,000
Cash 85,000
At year-end the patent is amortized over 10
years (no expected residual value).
Amortization Expense (or
Factory Overhead) 8,500
Accumulated Amorti-
zation,Patent 8,500
Intermediate Accounting 9 Intangibles
Impairment of an Intangible
A company purchased a trademark several years
ago for $60,000,As the company considered the
trademark to have an indefinite life,the trademark
has a carry value of $60,000,At the end of the
current year,the company determines that the fair
value of the trademark is $20,000,An entry is
needed to record the $40,000 loss in fair value.
Impairment Loss on Trademark 40,000
Trademark 40,000
Intermediate Accounting 9 Intangibles
2,Research and Development Costs
? Research is the planned search or critical
investigation aimed at discovery of new
knowledge.
? Development is the 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.
Intermediate Accounting 9 Intangibles
Research and Development Costs
Costs associated with
activities excluded
from R&D are either
expensed or
capitalized according
to normal
capitalization criteria.
Intermediate Accounting 9 Intangibles
? Materials,equipment,and facilities
? Personnel
? Intangibles purchased from others
? Contract services
? Indirect costs— R&D includes a
reasonable allocation of indirect costs.
Expenditures for the following elements of R&D
activities are included in R&D costs and thus
expensed as incurred:
Intermediate Accounting 9 Intangibles
Research and Development Costs
Kent Company incurred the following costs for R&D
activities:
Materials used from inventory $50,000
Wages and salaries 90,000
Allocation of general and administrative
costs 20,000
Depreciation on building housing R&D
activities 25,000
Machine purchased for R&D project that
has no alternative future uses 30,000
Continued
Intermediate Accounting 9 Intangibles
Research and Development Costs
The company includes all these costs in R&D
expenses,and records them as follows:
Research and Development Expense 215,000
Cash,Payables,etc,140,000
Inventory 50,000
Accumulated Depreciation,Building 25,000
Intermediate Accounting 9 Intangibles
Research and Development Costs
3,Identifiable Intangible Assets
Cost of
Intangibles Expense
In period cost
incurredIdentifiable Intangible
Assets That Are
Typically Amortized
Patents
Copyrights
Franchises
Computer Software
Costs
Leasehold Improvements
Amortize
over service
life
Continued
R & D
Intermediate Accounting 9 Intangibles
Identifiable Intangible Assets
Cost of
Intangibles
Identifiable Intangible
Assets That Are
Typically Reviewed for
Impairment
Trademarks and
tradenames
Licenses that may be
renewed indefinitely
Recognize
loss when
impaired
Continued
Intermediate Accounting 9 Intangibles
Cost of
Intangibles
Unidentifiable
Intangible Assets That
Are Reviewed for
Impairment
Goodwill
Recognize
loss when
impaired
Intermediate Accounting 9 Intangibles
Identifiable Intangible Assets
Patents
A patent is an exclusive
right granted by the federal
government giving the
owner control…
…of the manuf cture,sale,
or othe us of an inv ntion
for 20 years from the dat of
filing.
Intermediate Accounting 9 Intangibles
A company can capitalize the costs of
successfully defending the legal
validity of a patent,If the suit is lost,
all legal costs are expensed.
Intermediate Accounting 9 Intangibles
Patents
Copyrights
?
A copyright is a grant by the federal
government to publish,sell or otherwise
control literary or artistic products for the
life of the author plus 70 year.
Books
Music
Films
Intermediate Accounting 9 Intangibles
Goodwill
Purchased goodwill
arises when a company
is acquired,It is the
difference between the
purchase price of the
acquired company as a
whole and the fair value
of the reported
identifiable net assets.
Intermediate Accounting 9 Intangibles
4,Unidentifiable Intangibles
Sara Company purchases all the assets of Trevor Company
for $790,000 cash and Trevor Company is dissolved,
Trevor Company’s identifiable assets had a fair value of
$920,000 and its liabilities totaled $200,000.
Assets 920,000
Goodwill 70,000
Liabilities 200,000
Cash 790,000
Individual assets and liabilities
actually would be debited or credited.
Intermediate Accounting 9 Intangibles
Goodwill
Impairment of Goodwill
A company must review its
goodwill for impairment
annually at the reporting unit
level.
Intermediate Accounting 9 Intangibles
A company must also review its
goodwill for impairment whenever
events or changes in circumstances
occur that would more-likely-than-
not reduce the fair value of the
goodwill below its carrying value.
Intermediate Accounting 9 Intangibles
Impairment of Goodwill
The Kent Company acquired the Devon Company as a
subsidiary several years ago,The Devon Company has a
book value of $3.6 million,including goodwill of $400,000,
Kent Company estimates that its fair value is $3 million,If
Kent Company allocates $2.7 million of the fair market
value to Devon Company’s identifiable assets and liabilities,
this means that $300,000 is implied for goodwill,Thus,
there has been an impairment loss of $100,000.
Impairment Loss on Goodwill 100,000
Goodwill 100,000
Intermediate Accounting 9 Intangibles
Impairment of Goodwill
5,Disclosure of Intangibles
FASB Statement No,142 requires a company to disclose
certain information about its intangible assets,in either
the financial statement or it notes,including:
1,In the period it acquires intangible assets:
a,The cost of any intangible asset acquired,separated into
categories.
b,For assets subject to amortization,the residual value and
the weighted-average amortization expense for the next
five years.
c,The cost of any R&D acquired and written off,and where
it is included in the income statement.
Continued
Intermediate Accounting 9 Intangibles
FASB Statement No,142 requires a company to
disclose certain information about its intangible assets,
in either the financial statement or it notes,including:
2,In each period for which it presents a balance sheet:
a,For intangible assets that are amortized,the total cost,the
accumulated amortization,the amortization expense,and
the estimated amortization expense for the next five years.
b,For intangible assets that are not amortized,the total cost
and the cost of each major intangible asset class.
Continued
Intermediate Accounting 9 Intangibles
2,In each period for which it presents a balance sheet:
c,For goodwill,the amount of goodwill acquired,the amount
of any impairment losses recognized,and the amount of
goodwill included in the disposal of a reporting unit.
d,For any intangible asset impairment,the facts and
circumstances leading to the impairment,the amount of the
loss,and the method used.
Intermediate Accounting 9 Intangibles
FASB Statement No,142 requires a company to
disclose certain information about its intangible assets,
in either the financial statement or it notes,including:
6,Conceptual Issues
Expensing internally generated goodwill is justified
on the basis that measuring the cost of internally
generated goodwill with a reasonable degree of
reliability is very difficult.
Capitalization of internally generated goodwill
would require amortization,It would be very
difficult to identify the revenues generated and
therefore to decide over which periods,and by
which method,to match the amortization expenses
against the benefits.
Intermediate Accounting 9 Intangibles
The End
