Chapter 11 - Intangible Assets

Characteristics

1. Lack physical existence

2. Not a financial instrument

3. Normally classified as long-term assets

Types

1. Patents

2. Copyright

3. Franchises or licenses

4. Trademarks or trade names

5. Goodwill

Valuation - purchased

1. Recorded at cost

2. Other cost to make the intangible ready for use

   Cost include: purchase price, legal fees, other

Valuation of internally created intangibles

• Recorded at cost

• Generally expensed

• Capitalize direct costs

• Incurred in developing intangible

Limited life intangibles

• Amortize over the useful life

• Accumulated amortization

• Useful life: period when asset will contribute to operations

• Evaluate for impairment

Impairment of limited life intangible

Two Steps:

1. Recoverability test

• Expected cash flow is more than carrying value

  • No impairment

• Expected cash flow less than the carrying value

  • Impairment

2. Fair value test

• Carrying value more than fair value = Impairment

Goodwill

• Arises from business combinations

• Where asset not identified are classified as goodwill

• Goodwill represent future economic benefit

• Arises from purchase of a business

• Goodwill is express of purchase price over the fair value identified net assets

You buy a company for 400,000

Fair Value

Cash 25,000

Account Receivable 35,000

Inventory 122,000

PPE 205,000

Patents 18,000

Liabilities (55,800)

350,000

Purchase price 400,00 - 350,000 = 50,000 (Goodwill)