Chapter 11: Intangible Assets

What are different types of intangible assets?

Marketing-related (trademarks)

Customer-related (customer lists)

Artistic-related (copyright)

Contract-related (franchise, construction permits, broadcast rights)

Technology-related (patent)

Goodwill

Crypto assets

What are 2 ways a company may obtain intangible assets and how are they valued?

Purchased intangibles: capitalize purchase price and related legal fee and incidental expenses. (Similar to tangible assets)

Internally created intangibles: Only capitalize direct costs incurred in developing the intangible, such as legal costs and filing fees when applying or successfully defending an intangible asset. (R&D and advertising costs are usually expensed.)

For limited-life intangibles (e.g., land), do you amortize and do the impairment test? What about indefinite-life intangibles (e.g., land)?

Amortize limited-life intangibles over their useful like and for impairment, do the recoverability test and then fair value test.

DO NOT amortize indefinite-life intangibles, and for impairment, do the fair value test only.

What are 3 characteristics of intangible assets?

1. Lack physical existence

2. Not financial instruments

3. Exhibits high degree of uncertainty about future economic benefits.

What is typically missing on a balance sheet when recording the value of intangible assets?

1. Advertising costs (Coca-Cola, Proctor & Gamble)

2. Research & Development costs (Pfizer, Google)

3. Start-up costs (legal and state fees incurred to organize a new business, opening a new plant, introducing a new product or service)

Under U.S. GAAP, companies usually expense all research and development costs when incurred. What is the exception?

Exceptions exist for certain industries such as software development cost.

The controversy surrounding the policy to expense all R&D costs associated with internally created intangible assets results in under/overstating assets and under/overstating expenses.

understating assets and overstating expenses

In the U.S., trademarks or trade names have legal protection for how long?

An indefinite number of 10-year renewal periods.

What do you do with trademarks when purchased and when internally created?

If purchased, capitalize acquisition costs.

If internally created, capitalize direct costs related to securing it, such as attorney fees, registration fees, design costs, consulting fees, and successful legal defense costs. Advertising costs are expensed.

What do you typically do with trademarks when it comes to amortization?

No amortization if treated as indefinite life. Only amortize if the company plans to phase out the purchased trademarks.

How long are copyrights granted and how do you capitalize/amortize costs?

Granted for the life of the creator plus 70 years (95 years for corporate holder). Capitalize costs of acquiring and defending. Amortize to expense over useful life.

What are the 2 types of costs when it comes to contract-related intangible assets (e.g., franchise and licensing agreements)?

1. Initial franchisor fee (capitalized and amortized)

2. Periodic payments to the franchisor (expensed)

Patents give holders exclusive use for how long?

20 years (from the date of patent application)

How do you capitalize/amortize purchased patents? What about internally created?

Capitalize costs of purchase. Amortize over legal life or useful life, whichever is shorter.

Internally created: expense any R&D costs in developing the patent. Successful legal defense costs are capitalized and amortized.

Goodwill is the excess of the ____________ of an enterprise over the _________________ of the net assets required.

purchase price; fair market value

Conceptually, what is goodwill?

Goodwill is the future economic benefits of all the other intangible assets acquired that are not separately identifiable.

When can goodwill be purchased and do you capitalize internally created goodwill?

Goodwill can only be purchased through the acquisition of another company. Internally created goodwill should NOT be capitalized.

Why pay more than the fair market value of net assets for goodwill?

There is value associated with employees, customer lists, and reputation that’s not accounted for on the balance sheet. There also may be a synergy associated with purchase of a particular firm, giving rise to goodwill.

What if a company pays less than the fair market value of net assets of the acquired company for goodwill?

Bargain purchase price and a gain for the purchaser.

What do you do with crypto-related intangible assets?

Record at cost. Adjust to fair value with unrealized holding gains and losses reported in net income.

What are the steps in the impairment of limited-life intangibles?

Step 1: recoverability test (sum of expected future cash flows vs carrying value). If FCF < book value (aka carrying value), then there is an impairment. Move to step 2. If not, no impairment.

Step 2: Fair value test. Impairment loss = book value - fair value.

How often is goodwill tested for impairment and how do you know if it’s impaired?

Tested for impariment at least annually. Book value > fair value = goodwill impaired.

How do you compute the amount of goodwill in an acquisition?

Purchase price - (Fair value of assets - fair value of liabilities) = value assigned to goodwill

When there is an impairment loss on an intangible asset, how do you record an increase in fair value if there is one?

No entry is necessary. Restoration of any impairment loss is not permitted/

fair value of assets - fair value of liabilities = ?

fair value of net assets

_______________ intangible assets result from interactions with outside parties. Examples include customer lists, order or production backlogs, and both contractual and noncontractual customer relationships.

customer-related

A company capitalizes, normally to that asset's account, all legal fees and other costs incurred in ?

successfully defending a trademark or a patent and to obtain a copyright.

Because goodwill measures the value of unidentifiable intangible assets, it is considered a ?

master valuation asset