PREVIEW OF CHAPTER 12

Financial Accounting
Lecture 9: Intangible assets

HANU – FMT – Dinh Le Mai

Intermediate Accounting, IFRS 2/e
Chapter 12
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
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INTANGIBLE ASSET ISSUES

12 Intangible Assets
Characteristics
1. Identifiable.
Coca-Cola Company’s
(USA) success comes
from its secret formula
for making Coca-Cola,
LEARNING OBJECTIVES 2. Lack physical existence. not its plant facilities.

After studying this chapter, you should be able to: 3. Not monetary assets.
1. Describe the characteristics of intangible 6. Explain the accounting issues related to
assets. intangible asset impairments. Normally classified as non-current asset.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs. Common types of intangibles:
3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs. Patent Trademark or trade name
9. Indicate the presentation of intangible assets
4. Describe the types of intangible assets.
and related items.
Copyright Customer list
5. Explain the accounting issues for recording
goodwill. Franchise or license Goodwill
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INTANGIBLE ASSET ISSUES INTANGIBLE ASSET ISSUES

Valuation Valuation
Purchased Intangibles Internally Created Intangibles
Recorded at cost. Companies expense all research phase costs and some
development phase costs.
Includes all acquisition costs plus expenditures to make the
intangible asset ready for its intended use. Certain development costs are capitalized once economic
viability criteria are met.
Typical costs include:

► Purchase price.
IFRS identifies several specific
criteria that must be met before
► Legal fees.
development costs are capitalized.
► Other incidental expenses.

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 INTANGIBLE ASSET ISSUES INTANGIBLE ASSET ISSUES

Internally Created Intangibles ILLUSTRATION 12-1 Amortization of Intangibles

Research and
Development Stages
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.

Companies must evaluate the limited-life intangibles

annually for impairment.

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INTANGIBLE ASSET ISSUES INTANGIBLE ASSET ISSUES

Amortization of Intangibles Amortization of Intangibles ILLUSTRATION 12-2

Accounting Treatment
for Intangibles
Indefinite-Life Intangibles
No foreseeable limit on time the asset is expected to provide
cash flows.

Must test indefinite-life intangibles for impairment at least

annually.

No amortization.

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TYPES OF INTANGIBLE ASSETS TYPES OF INTANGIBLE ASSETS

Six Major Categories: Marketing-Related Intangible Assets

(1) Marketing-related. (4) Contract-related. Examples:
► Trademarks or trade names, newspaper
(2) Customer-related. (5) Technology-related.
mastheads, Internet domain names, and non-
(3) Artistic-related. (6) Goodwill. competition agreements.

In the United States trademarks or trade names have

legal protection for indefinite number of 10 year
renewal periods.

Capitalize purchase price.

No amortization.

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 TYPES OF INTANGIBLE ASSETS TYPES OF INTANGIBLE ASSETS
Illustration: Green Market Inc. acquires the customer list of a large
Customer-Related Intangible Assets
newspaper for €6,000,000 on January 1, 2015. Green Market
Examples: expects to benefit from the information evenly over a three-year
► Customer lists, order or production backlogs, and both period. Record the purchase of the customer list and the
contractual and non-contractual customer relationships. amortization of the customer list at the end of each year.

Capitalize acquisition costs.

Jan. 1 Customer List 6,000,000
Amortized to expense over useful life. 2015
Cash 6,000,000

Dec. 31 Amortization Expense 2,000,000

2015
Customer List * 2,000,000
2016
2017

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TYPES OF INTANGIBLE ASSETS TYPES OF INTANGIBLE ASSETS

Artistic-Related Intangible Assets Contract-Related Intangible Assets

Examples: Examples:
► Plays, literary works, musical works, pictures, ► Franchise and licensing agreements, construction permits,
photographs, and video and audiovisual material. broadcast rights, and service or supply contracts.

Copyright granted for the life of the creator plus 70 years. Franchise (or license) with a limited life should be amortized
as operating expense over the life of the franchise.
Capitalize costs of acquiring and defending.
Franchise with an indefinite life should be carried at cost and
Amortized to expense over useful life if less than the legal
not amortized.
life.

and Mickey
Mouse

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TYPES OF INTANGIBLE ASSETS TYPES OF INTANGIBLE ASSETS

Illustration: Harcott Co. incurs $180,000 in legal costs on January
Technology-Related Intangible Assets
1, 2015, to successfully defend a patent. The patent’s useful life is
Examples: 20 years, amortized on a straight-line basis. Harcott records the
► Patented technology and trade secrets granted by a legal fees and the amortization at the end of 2015 as follows.
government body.
Jan. 1 Patents 180,000
Patent gives holder exclusive use for a period of 20 years.
Cash 180,000
Capitalize costs of purchasing a patent.

Expense any R&D costs in developing a patent. Dec. 31 Patent Amortization Expense 9,000

Amortize over legal life or useful life, whichever is shorter. Patents (or Accumulated Amortization) 9,000

Patent Amortization Expense = ($180,000 ÷ 20) = $9,000

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 TYPES OF INTANGIBLE ASSETS RECORDING GOODWILL

Goodwill Illustration: Feng, Inc. decides that it needs a parts division to

supplement its existing tractor distributorship. The president of Feng is
Conceptually, represents the future economic benefits arising from interested in buying Tractorling Company. The illustration presents the
the other assets acquired in a business combination that are not statement of financial position of Tractorling Company.
individually identified and separately recognized.
ILLUSTRATION 12-4
Only recorded when an entire business is purchased.

Goodwill is measured as the excess of ...

cost of the purchase over the fair value of the identifiable net
assets (assets less liabilities) purchased.

Internally created goodwill should not be capitalized.

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RECORDING GOODWILL RECORDING GOODWILL

Illustration: Feng investigates Tractorling’s underlying assets to Illustration: Determination of Goodwill.

determine their fair values. ILLUSTRATION 12-6

ILLUSTRATION 12-5

Tractorling Company decides to accept Feng’s offer of $400,000. What

is the value of the goodwill, if any?

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RECORDING GOODWILL RECORDING GOODWILL

Illustration: Feng records this transaction as follows. Goodwill Write-Off

Property, Plant, and Equipment 205,000 Goodwill considered to have an indefinite life.
Patents 18,000 Should not be amortized.
Inventory 122,000
Only adjust carrying value when goodwill is impaired.
Accounts Receivables 35,000
Cash 25,000
Bargain Purchase
Goodwill 50,000
Purchase price less than the fair value of net assets
Liabilities 55,000
acquired.
Cash 400,000
Amount is recorded as a gain by the purchaser.

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 IMPAIRMENT OF INTANGIBLE ASSETS IMPAIRMENT OF INTANGIBLE ASSETS
Illustration: Lerch, Inc. has a patent on how to extract oil from shale
Impairment of Limited-Life Intangibles
rock, with a carrying value of €5,000,000 at the end of 2014.
The impairment loss is the carrying amount of the asset less the Unfortunately, several recent non-shale-oil discoveries adversely
recoverable amount of the impaired asset. affected the demand for shale-oil technology, indicating that the patent
ILLUSTRATION 11-15 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 patent’s value-in-use at €2,000,000,
based on the discounted expected net future cash flows at its market
rate of interest.
.

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IMPAIRMENT OF INTANGIBLE ASSETS IMPAIRMENT OF INTANGIBLE ASSETS

Calculate the impairment loss (based on value-in-use). Calculate the impairment loss (based on value-in-use).

€3,000,000 Impairment Loss €3,000,000 Impairment Loss

ILLUSTRATION 11-15 ILLUSTRATION 11-15

€5,000,000 €2,000,000 €5,000,000 €2,000,000

Lerch makes the following entry to record the impairment.

Loss on Impairment 3,000,000
Unknown €2,000,000 Unknown $2,000,000
Patents 3,000,000
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IMPAIRMENT OF INTANGIBLE ASSETS IMPAIRMENT OF INTANGIBLE ASSETS

Reversal of Impairment Loss Reversal of Impairment Loss

Illustration: The carrying value of the patent after impairment is Early in 2016, based on improving conditions in the market for
€2,000,000. Lerch’s amortization is €400,000 (€2000,000 ÷ 5) over shale-oil technology, Lerch remeasures the recoverable amount of
the remaining five years of the patent’s life. The amortization expense the patent to be €1,750,000. In this case, Lerch reverses a portion
and related carrying amount after the impairment is shown below: of the recognized impairment loss.
ILLUSTRATION 12-8

Patents (€1,750,000 - €1,600,000) 150,000

Recovery of Impairment Loss 150,000

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 IMPAIRMENT OF INTANGIBLE ASSETS IMPAIRMENT OF INTANGIBLE ASSETS

Impairment of Indefinite-Life Intangibles Illustration: Arcon Radio purchased a broadcast license for
€2,000,000. The license is renewable every 10 years. Arcon Radio
Other than Goodwill has renewed the license with the GCC twice, at a minimal cost.
Should be tested for impairment at least annually. Because it expects cash flows to last indefinitely, Arcon reports the
license as an indefinite-life intangible asset. Recently, the GCC
Impairment test is the same as that for limited-life decided to auction these licenses to the highest bidder instead of
intangibles. That is, renewing them. Based on recent auctions of similar licenses, Arcon
Radio estimates the fair value less costs to sell (the recoverable
► compare the recoverable amount of the intangible amount) of its license to be €1,500,000.
ILLUSTRATION 12-9
asset with the asset’s carrying value. Computation of Loss on
Impairment of Broadcast License

► If the recoverable amount is less than the carrying

amount, the company recognizes an impairment.

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IMPAIRMENT OF INTANGIBLE ASSETS IMPAIRMENT OF INTANGIBLE ASSETS

Impairment of Goodwill Illustration: Kohlbuy Corporation has three divisions. It purchased

one division, Pritt Products, four years ago for €2 million.
Companies must test goodwill at least annually. Unfortunately, Pritt experienced operating losses over the last three
Impairment test is conducted based on the cash-generating quarters. Kohlbuy management is now reviewing the division (the
unit to which the goodwill is assigned. cash-generating unit), for purposes of its annual impairment testing.
Illustration 12-10 lists the Pritt Division’s net assets, including the
► Cash-generating unit = smallest identifiable group of associated goodwill of €900,000 from the purchase.
assets that generate cash flow. ILLUSTRATION 12-10

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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IMPAIRMENT OF INTANGIBLE ASSETS IMPAIRMENT OF INTANGIBLE ASSETS

Kohlbuy determines the recoverable amount for the Pritt Division to Assume that the recoverable amount for the Pritt Division is
be €2,800,000, based on a value-in-use estimate. €1,900,000 instead of €2,800,000.

$500,000 Impairment Loss

ILLUSTRATION 11-15 ILLUSTRATION 11-15

$2,400,000 $2,800,000 $2,400,000 $1,900,000

No
Impairment

Unknown $2,800,000 Unknown $1,900,000

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7
 IMPAIRMENT OF INTANGIBLE ASSETS RESEARCH AND DEVELOPMENT COSTS
Assume that the recoverable amount for the Pritt Division is Research and development (R&D) costs are not in
€1,900,000 instead of €2,800,000. themselves intangible assets.
$500,000 Impairment Loss
Frequently results in the development of patents or
ILLUSTRATION 11-15
$2,400,000 $1,900,000 copyrights such as new

product, formula,

process, composition, or

idea, literary work.

Kohlbuy makes the following entry to record the impairment.
Loss on Impairment 500,000
Goodwill Unknown 500,000
$1,900,000
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RESEARCH AND DEVELOPMENT COSTS RESEARCH AND DEVELOPMENT COSTS

Companies spend considerable sums on research and Research costs must be expensed as incurred.
development. ILLUSTRATION 12-12
R&D Outlays, as a Development costs may or may not be expensed as
Percentage of Sales
incurred.

Capitalization begins when the project is far enough along

in the process such that the economic benefits of the R&D
project will flow to the company (the project is
economically viable).

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RESEARCH AND DEVELOPMENT COSTS

Identifying R & D Activities ILLUSTRATION 12-13

Research Activities versus
Development Activities
12 Intangible Assets

Research Activities Examples

Original and planned investigation Laboratory research aimed at discovery of LEARNING OBJECTIVES
undertaken with the prospect of gaining new knowledge; searching for applications of
new scientific or technical knowledge new research findings.
After studying this chapter, you should be able to:
and understanding.
1. Describe the characteristics of intangible 6. Explain the accounting issues related to
assets. intangible asset impairments.
Development Activities Examples
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
Application of research findings or other Conceptual formulation and design of
valuation of intangible assets. research and development costs.
knowledge to a plan or design for the possible product or process alternatives;
production of new or substantially construction of prototypes and 3. Explain the procedure for amortizing 8. Describe the accounting for research
improved materials, devices, products, operation of pilot plants. intangible assets. and development and similar costs.
processes, systems, or services before 4. Describe the types of intangible assets.
the start of commercial production or 9. Indicate the presentation of intangible assets
use. 5. Explain the accounting issues for recording and related items.
goodwill.

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 RESEARCH AND DEVELOPMENT COSTS RESEARCH AND DEVELOPMENT COSTS
E12-1: Indicate how items on the list below would generally be reported in
Accounting for R & D Activities the financial statements.

Costs Associated with R&D Activities: Item Classification

Materials, equipment, and facilities. 1. Investment in a subsidiary company. 1. Long-term investments

Personnel. 2. Timberland. 2. PP&E

3. Cost of engineering activity required to 3. R&D expense
Purchased intangibles. advance the design of a product to the
manufacturing stage.
Contract Services.
4. Lease prepayment (6 months’ rent). 4. Prepaid rent
Indirect Costs.
5. Cost of equipment obtained. 5. PP&E
6. Cost of searching for applications of 6. R&D expense
new research findings.
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RESEARCH AND DEVELOPMENT COSTS RESEARCH AND DEVELOPMENT COSTS

Item Classification Item Classification

7. Cost incurred in the formation of a 7. Expense 13. Goodwill acquired in the purchase 13. Intangible
corporation. of a business.
8. Operating losses incurred in the 8. Operating loss 14. Cost of developing a patent (before 14. R&D expense
start-up of a business. achieving economic viability).
9. Training costs incurred in start-up of 9. Expense 15. Cost of purchasing a patent from 15. Intangible
new operation. an inventor.
10. Purchase cost of a franchise. 10. Intangible 16. Legal costs incurred in securing a 16. Intangible
11. Goodwill generated internally. 11. Not recorded patent.

12. Cost of testing in search of product 12. R&D expense 17. Unrecovered costs of a successful legal 17. Intangible
alternatives. suit to protect the patent.

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RESEARCH AND DEVELOPMENT COSTS RESEARCH AND DEVELOPMENT COSTS

Item Classification Costs Similar to R & D Costs

18. Cost of conceptual formulation of 18. R&D expense
possible product alternatives. Start-up costs for a new operation.
19. Cost of purchasing a copyright. 19. Intangible Initial operating losses.
20. Development costs incurred after 20. Intangible
achieving economic viability. Advertising costs.
21. Long-term receivables. 21. Long-term investment
22. Cost of developing a trademark. 22. Expense These costs are expensed as incurred, similar to the accounting
23. Cost of purchasing a trademark. 23. Intangible for R&D costs.

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 RESEARCH AND DEVELOPMENT COSTS PRESENTATION OF INTANGIBLES
E12-17: Compute the amount to be reported as research and
Presentation of Intangible Assets
development expense.
$330,000 / 5 = $66,000 R&D Statement of Financial Position
Expense
Cost of equipment acquired that will have alternative Companies should report as a separate item all intangible
uses in future R&D projects over the next 5 years. $330,000 $66,000
assets other than goodwill.
Materials consumed in R&D projects 59,000 59,000
Reporting is similar to the reporting of property, plant, and
Consulting fees paid to outsiders for R&D projects 100,000 100,000 equipment.

Personnel costs of persons involved in R&D projects 128,000 128,000 Contra accounts may not normally shown for intangibles.
Indirect costs reasonably allocable to R&D projects 50,000 50,000
Materials purchased for future R&D projects 34,000 0

$403,000

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PRESENTATION OF INTANGIBLES PRESENTATION OF INTANGIBLES

Presentation of Intangible Assets Presentation of Intangible Assets

ILLUSTRATION 12-15
Income Statement Nestlé’s Intangible Asset
Disclosures

Companies should report

amortization expense and

impairment losses and reversals

for intangible assets other than goodwill separately in net income

(usually in the operating section).

Notes to the financial statements should include the amortization

expense for each type of asset.
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PRESENTATION OF INTANGIBLES

Presentation of Research and Development

Costs
Companies should disclose the total R&D costs charged to
expense each period.
ILLUSTRATION 12-16
R&D Reporting

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