Prepared by

Coby Harmon
University of California, Santa Barbara
Westmont College
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 CHAPTER 12
Intangible Assets
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics, 4. Identify impairment
valuation, and amortization of procedures and presentation
intangible assets. requirements for intangible
assets.
2. Describe the accounting for
various types of intangible 5. Describe the accounting and
assets. presentation for research and
development and similar
3. Explain the accounting issues for
costs.
recording goodwill.

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 PREVIEW OF CHAPTER 12

Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
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 Intangible Asset Issues LEARNING OBJECTIVE 1
Discuss the characteristics,
valuation, and amortization of
intangible assets.
Characteristics
◆ Identifiable.

◆ Lack physical existence.

Christian Dior’s
◆ Not monetary assets. (FRA) most
important asset is its
Normally classified as non-current asset. brand image, not its
store fixtures.
Common types of intangibles:

1. Marketing-related. 4. Contract-related.
2. Customer-related. 5. Technology-related.
3. Artistic-related. 6. Goodwill.
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 Intangible Asset Issues

Valuation
Purchased Intangibles
◆ Recorded at cost.

◆ Includes all acquisition costs plus expenditures to make

the intangible asset ready for its intended use.

◆ Typical costs include:

► Purchase price.

► Legal fees.

► Other incidental expenses.

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 Valuation

Internally Created Intangibles

◆ Might include patents, computer software, copyrights,
and trademarks.

◆ 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.

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 Intangible Asset Issues

Internally Created Intangibles

ILLUSTRATION 12.1
Research and Development Stages

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 Intangible Asset Issues

Amortization of Intangibles
Limited-Life Intangibles
◆ Amortize by systematic charge to expense over useful life.

◆ Amortization expense should reflect the pattern in which

the company consumes or uses up the asset.

◆ Credit asset account or accumulated amortization.

◆ Amortization should be cost less residual value.

◆ Companies must evaluate the limited-life intangibles

annually for impairment.

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 Intangible Asset Issues

Amortization of Intangibles
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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 Intangible Asset Issues

Amortization of Intangibles

ILLUSTRATION 12.2
Accounting Treatment for Intangibles

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 LEARNING OBJECTIVE 2
Types of Intangible Describe the accounting for
various types of intangible
Assets assets.

Six Major Categories:

1. Marketing-related. 4. Contract-related.

2. Customer-related. 5. Technology-related.

3. Artistic-related. 6. Goodwill.

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 Types of Intangible Assets

Marketing-Related Intangible Assets

◆ Examples:
► Trademarks or trade names, newspaper
mastheads, Internet domain names, and non-
competition agreements.

◆ Under common law, the right to use a trademark or

trade name rests exclusively with the original user
as long as the original user continues to use it.

◆ Capitalize purchase price.

◆ No amortization.
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 Types of Intangible Assets

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.

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 Types of Intangible Assets

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 if less than the legal

life.
and Mickey
Mouse

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 Types of Intangible Assets

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

as operating expense over the life of the franchise.

◆ Franchise with an indefinite life should be carried at cost and

not amortized.

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 Types of Intangible Assets

Technology-Related Intangible Assets

◆ Examples:
► Patented technology and trade secrets granted by a
government body.

◆ Patent gives holder exclusive use for a period of 20 years.

◆ Capitalize costs of purchasing a patent.

◆ Expense all R&D costs and any development costs incurred

before achieving economic viability.

◆ Amortize over legal life or useful life, whichever is shorter.

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 Types of Intangible LEARNING OBJECTIVE 3
Explain the accounting issues
Assets for recording goodwill.

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 over the fair value of the identifiable net assets
(assets less liabilities) acquired.

Internally created goodwill should not be capitalized.

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 Recording Goodwill

Goodwill Write-Off
◆ Goodwill considered to have an indefinite life.

◆ Should not be amortized.

◆ Only adjust carrying value when goodwill is impaired.

Bargain Purchase
◆ Purchase price less than the fair value of net assets
acquired.

◆ Amount is recorded as a gain by the purchaser.

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 LEARNING OBJECTIVE 4
Impairment of Identify impairment procedures
and presentation requirements
Intangible Assets for intangible assets.

An intangible asset is impaired when a company is not able

to recover the asset’s carrying amount either through using it
or by selling it.
The specific procedures for recording impairments depend
on the type of intangible asset—
1. limited-life or
2. indefinite-life (including goodwill).

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 Impairment of Limited-Life Intangibles

The rules that apply to impairments of property, plant, and

equipment also apply to limited-life intangibles.
The impairment loss is the carrying amount of the asset less
the recoverable amount of the impaired asset.

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 Impairment of Limited-Life Intangibles

Fair value less costs to sell means what the asset could be sold
for after deducting costs of disposal. Value-in-use is the present
value of cash flows expected from the future use and eventual
sale of the asset at the end of its useful life.
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 Impairment of Intangible Assets

Impairment of Indefinite-Life Intangibles

Other than Goodwill
◆ Should be tested for impairment at least annually.

◆ Impairment test is the same as that for limited-life

intangibles. That is,

► compare the recoverable amount of the intangible

asset with the asset’s carrying value.

► 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 Goodwill
◆ Companies must test goodwill at least annually.

◆ Impairment test is conducted based on the cash-generating

unit to which the goodwill is assigned.

► Cash-generating unit = smallest identifiable group of

assets that generate cash flow.

◆ Estimation of the recoverable amount for goodwill impairments

is usually based on value-in-use estimates.

◆ Goodwill impairment loss reversals are not permitted.

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 Presentation of Intangible Assets

Statement of Financial Position

◆ Companies should report as a separate item all
intangible assets other than goodwill.

◆ Reporting is similar to the reporting of property, plant,

and equipment.

◆ Contra accounts are not normally shown for

intangibles.

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 Presentation of Intangible Assets

Income Statement
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 Intangible Assets
The reporting of intangible assets is similar to the reporting of
property, plant, and equipment.

ILLUSTRATION 12.12
Nestlé’s Intangible Asset Disclosures Unknown $1,900,000
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