Part 6: Intangible Assets

Intangible Assets

Non-physical Assets that provide long-term economic benefits

Ex. Patents, copyrights, software, franchising rights, customers lists, goodwill

Externally Acquired Intangible

Acquisition Cost includes purchase price + all expenditures needed to prepare the intangible.

Entry:

Intangible

• Cash

Internally Acquired Intangible

Expenditures classified as Research or Development

Has the company proven that the idea will work?

NO —> Research

YES —> Development

Research Entry:

Research Expense

• Cash

Development Entry:

Intangible

• Cash

Amortization of Intangibles

Amortize over the shorter of:

• Estimated Useful Life

• Legal Life

No amortization for indefinite useful life

Entry:

Amortization Expense

• Accumulated Amortization Expense

Impairment of Intangibles

Like PP&E, carrying amount must be compared to recoverable amount.

When Recoverable Amount < Carrying Amount:

For intangible with an estimated useful life:

Impairment Loss

• Accumulated Amortization

For intangibles with indefinite useful life:

Impairment Loss

• Intangible Asset

Appearance of Long-Lived Assets on Financial Statements

1. Balance Sheet

Only carrying amount (net balance) of long-lived assets is listed.

In notes: breakdown by type with accumulated depreciation/amortization, depreciation method, useful life, and impairment policies.

2. Income Statement

Dep Exp, impairment losses, gains/losses on disposal

All in Operating Expenses

3. Cash Flow Statements

Cash/Non-Cash Acquisition of long-lived assets

Cash proceeds from disposal of long-lived assets.

Goodwill

Intangible asset created through businesses combination

Indefinite life, no amortization

Remains on Balance Sheet unless impaired

Must be tested annually for impairment

For most companies, largest intangible asset

Goodwill = purchase price - identifiable net assets acquired