ACCT 327 Chapter 13 - Intangible Assets

Intangible assets

Lack physical substance, are NOT financial instruments, usually long term in nature

Amortization of intangible assets

Similar to depreciation/depletion, only LIMITED LIFE intangibles are amortized

What method do we use for amortization

Straight line:

(Cost-salvage)/useful life

What is the typical salvage value for intangible assets

0, unless indicated otherwise

Trademarks/Trade names

• A distinguishing name/symbol that identifies a product or company

• UNLIMITED useful life

• No amortization

• Renewed every 10 years unlimited times

Copyrights

• Right to artwork granted to the creator by the federal government

• Life of creator + 70 years

• Amortize LESSER of legal or useful life

• Legal defense fees should be capitalized if successful

Franchises

• A franchisor gives a franchisee permission to sell the related product or service using franchisor’s selling strategies, usually limited geographic area

• Unlimited or limited life, WATCH AGREEMENT

• Capitalize acquisition costs, expense periodic franchise fees

Licenses

• Permission to use government owned asset for private use, similar to franchise

• Unlimited or limited life, WATCH AGREEMENT

• Capitalize acquisition costs, expense periodic fees

Patents

• gives the right to use a process or manufacture and sell a product

• 20 year legal life

• Amortize LESSER of useful or legal life

• Capitalize successful legal defense to patent account

Goodwill

• Excess purchase price over the fair value of a company’s NET identifiable assets

• UNLIMITED useful life

• No amoritization

Research & Development (R&D)

• Expenditures related to researching and developing new products

• N/A life

• ALWAYS EXPENSE

How do you recalculate amortization?

(New cost-salvage)/remaining useful life

Goodwill is a:

residual amount! not valued directly (plug)

Should goodwill that is created internally be reported?

NO! It can only be recorded when a company purchases another business for more than the fair value of the net identifiable assets

Can goodwill be impaired?

Yes! Check for it!

Goodwill formula

Purchase price - (PV of net assets)

Negative goodwill/Bargain purchase

When the opposite of goodwill occurs, purchaser records a gain because you paid less than the FV of the assets

Impairment of Intangible Assets

ALL intangible assets should be periodically checked for impairment, its easy for these items to lose value because their is no substance!

Impairment of limited life intangibles

Like impairment we know!

1. Recoverability test

2. Compare FV to BV for impairment

Impairment for unlimited life intangible assets OTHER than goodwill

Only use the fair value test and compare to book value!

Impairment for goodwill

Happens annually, unit-by-unit basis, one step fair value test

1. Compare FV of WHOLE to BV of net assets

2. Impairment = FV whole - BV of net assets

Recoverability test

Compare BV to undiscounted cash flows

Fair value test

Compare FV to BV