Acc 305 Chapter 12

Front 1

Characteristics of intangible assets

Back 1

1. They lack physical existence
2. They are not financial instruments (i.e. stocks, bonds)
3. Normally classified as long-term asset

Front 2

Common type of intangible assets

Back 2

1. Pattens
2. Copyright
3. Franchises/licenses
4. Trademark
5. Goodwill

Front 3

Costs to include in the initial evaluation of intangible assets

Back 3

1. Purchased:
-recorded at cost
-include all costs necessary to make the intangible assets ready for its intended use
-Example: purchase price, legal fees and other incidental expenses.
-if acquired for stock or other assets, cost is the fair value of the consideration given for the fair value of begin and will received, whichever is more clearly evident.
2. Internally created intangibles:
-only direct costs incurred in developing the intangible are capitalized (i.e. legal costs)

Front 4

Procedures for amortizing intangible assets (Limited life intangibles)

Back 4

1. Are amortized over their "useful" lives
2. Factors affecting useful lives
-expected use of the asset
-any legal, regulatory or contractual provision that may limit the useful life
3. Amortization base = Cost - residual value
-residual value is assumed to be zero unless the intangible has value to another company at the end of its useful life.

Front 5

Types of intangible assets

Back 5

1. Marketing related intangible assets
2. Consumer related intangible assets
3. Artistic related intangible assets
4. Contract related intangible assets
5. Technology related intangible assets
6. Goodwill

Front 6

Marketing related intangible assets

Back 6

Examples:
1. Trademark/trade name:
-considered indefinite life in tangibles, therefore, not amortized
-if insignificant cost, it is usually expensed
2. Newspaper
3. Mastheads
4. Internet domain names
5. Non-competition agreements
6. Corporate names

Front 7

Consumer related intangible assets

Back 7

-Examples:
1. Customer list
2. Order/production backlogs
3. Contractual and non-contractual customer relationship
-Amortized over the assets useful life
-Residual value is assumed to be zero

Front 8

Artistic related intangible assets

Back 8

1. Ownership rights to plays, literary works, pictures, photographs and video and audiovisual material.
2. Copyrights:
-are granted for the life of the creator +70.
-useful life is generally considered less than legal life.

Front 9

Contract related intangible assets

Back 9

Examples:
1. Franchise and licensing agreements
-contractual agreement under which the franchisor grants the franchisee certain rights.
-Type of franchise agreements:
i. Corporate
ii. Governmental
iii. Licenses or permits (liquor license)
-Limited life franchises should be amortized over the term of the contract
-Indefinite life franchises should be carried out at cost and not amortized.
2. Construction permits
3. Broadcast rights
4. Service or supply contracts

Front 10

Technology related intangible assets

Back 10

Examples:
1. Patent:
-Exclusive rights to use, manufacture, and sell a product or process for 20 years.
-Amortized over the "useful life" or "legal life", whichever is shorter
-Legal fees and other costs incurred to successfully defend a patent suit are capitalized
2. Trade secrets
granted by the U.S. Patent Trademark Office

Front 11

Goodwill

Back 11

1. "Purchased" goodwill is recorded as the excess of the purchase price of an acquired business over the fair value of the identified net assets acquired.
2. Goodwill is considered an "indefinite life intangible" and therefore is not subject to amortization.
3. Goodwill is only adjusted if it has been "impaired".

Front 12

Negative goodwill - bargain purchase

Back 12

1. Purchase price < fair value of the net assets acquired.
2. "Negative goodwill" should be allocated against long-term assets acquired.
3. After long-term assets have been revalued, any remaining negative goodwill should be recognized as a gain by the purchaser (extraordinary item) and disclosed in the footnotes to the financial statements.

Front 13

Intangible asset impairments

Back 13

1. Impairments (other than goodwill) - occur when the expected future net cash flows (undiscounted) of an asset is less than the assets carrying value.
2. The test for impairment must be done at least annually.
3. Impairment test:
i. One-step test (fair value test)
ii. Two-step process

Front 14

One-step test (fair value test)

Back 14

If an impairment has occurred, the company must recognize an impairment loss for the amount by which the carrying value of the asset exceeds the fair value of the asset.

Front 15

Two-step process

Back 15

1. Performed when:
fair value of reporting unit < carrying amount including goodwill.
2. The fair value (implied value) of the goodwill must be determined and compared to its carrying amount
i. Implied value of goodwill = fair value of reporting unit - carrying value of of the net assets (excluding goodwill)
ii. An impairment loss occurred and must be recognize when:
implied goodwill < carrying amount of goodwill

Front 16

Research and development costs

Back 16

1. Includes expenditures to discover new knowledge, products, assesses, and techniques
2. Accounting for research and development costs are expensed as incurred.

Front 17

Presentation of Intangible assets and related items

Back 17

1. Intangibles are generally recorded at their unamortized cost
i. All intangibles other than goodwill should be reported as a separate item
ii. If goodwill is present, it should be reported as a separate item.
2. The income statement should reflect:
i. "Amortization expense" and "impairment losses - if applicable" for all intangibles other than goodwill.
ii. Goodwill impairment losses should be shown as a separate item in the income statement
3. Notes to the financial statement should include
i. Aggregate amortization expense for each of next five years
ii. Changes in the "caring" amount of goodwill during the period.