KAS 15 - INTANGIBLE ASSETS

EXPLANATORY NOTE

Explanatory notes to the Kosovo Accounting Standards are intended to provide

additional understanding of the standards and technical guidance as to their use
and application. In case of any divergence between Explanatory Notes and
Standards, the Standards prevail.

1. Intangible assets are Identifiable non-monetary assets without physical

substance expected to be used for more than one year in the production or
supply of goods or services, for rental to others, or for administrative purposes.
Intangible assets are controlled by the enterprise by virtue of legal rights and
include: patents, licenses, intellectual property, trademarks, brand names,
publishing titles, franchises, computer software, copyrights, customer lists and
marketing rights.

Basic Principles of Accounting for Intangible Assets

2. Accounting for intangible assets involves the same accounting principles and
procedures that apply to tangible assets such as property, plant, and equipment.
Briefly, these principles are:
 At acquisition, application of the cost principle.
 During the period of use, application of the matching principle, which
requires that the expenses incurred and the revenue generated from those
expenses should be recognized at the same time.
 At disposition, application of the revenue recognition principle, under
which a gain or loss is recognized on disposal equal to the difference
between the consideration received and the book value of the asset
disposed.

3. In conformity with the cost principle, intangible assets should be recorded at

acquisition at their current cash equivalent cost. Cost includes all expenditures
made to acquire the asset, including purchase price, transfer and legal fees and
any other expenditures related to acquisition.

4. Amortization of an intangible asset usually involves a year-end adjusting

entry. The amount to be amortized is recorded as a debit to amortization
expense and as a credit to the intangible asset account directly.

Recognizing Intangible Assets

5. Intangible assets are measured similar to property, plant and equipment,
except that depreciation is called amortization. An intangible asset is recognized
only when its cost to the enterprise can be measured reliably. If an intangible
asset is purchased, all costs directly related to the purchase may be added to the
cost of the asset.

Page 1 of 6
6. If an intangible is developed internally, it may be measurable by reference to
the costs incurred for this purpose. Costs incurred and recognized as expenses
in previous periods may not be reinstated as assets.

7. The depreciable amount of an intangible asset should be amortized over the

shorter of useful life, or twenty years from the date of initial recognition. A life
longer than twenty years may be justified if the asset is the subject of a legal right
for the longer period, and either it is not separable from a specific tangible asset
with a useful life of at least the longer period, or there is an active secondary
market for the asset in question.

8. When an intangible asset is sold, exchanged, or otherwise disposed of, its

unamortized cost (or cost net of accumulated amortization, if separately
recorded) must be removed from the accounts and a gain or loss on disposal
recorded.

Impairment of the Value of Intangible Assets

9. During the period an intangible asset or a deferred charge has a carrying
value on the balance sheet, a periodic assessment of the value of future benefits
associated with the asset may show that its current book value exceeds its
economic utility (continuing value in use) to the enterprise. In such cases, the
unamortized cost should be written down, and a loss recognized. This reflects
impairment of value. The revised value should be amortized over the estimated
remaining useful life, not to exceed 20 years form date of acquisition. When a
write-down occurs due to an impairment of value, disclosure is required in notes
to the financial statements

Patents
10. A patent is an exclusive right recognized by law and registered with legal
jurisdiction. A patent right enables the holder to use, manufacture, sell, and
control the item, process, or activity covered by the patent without interference or
infringement by others. In reality, the registration of the patent with the
appropriate government office is no guarantee of protection. A patent does not
become established until it has been successfully defended in court. For this
reason, there is general agreement that the cost of successful court defense
should be capitalized as part of the patent. If the suit is lost, the legal cost, as
well as the unamortized cost of the patent, is written off. The carrying amount of
the patent is reduced to its impaired value, which could be zero. An impairment
loss should be debited for the amount of any write-down.

Example of patent accounting

The Mousetrap Company developed a new type of mousetrap. The
Mousetrap Company is in the business of manufacturing mousetraps and
intended to add the new mousetrap to their products offered for sale.

Page 2 of 6
 Company accountants determined that the costs of employee salaries,
materials, testing and other development costs associated with the new
mousetrap total 120,000. Since these are development costs the total of
120,000 will be recognized as an intangible asset.

Three years later, The Mousetrap Company sold a patent on its new
mousetrap to the Critter Catcher Company. Critter Catcher paid 160,000 for
the patent. The patent is for twenty years. The Mousetrap Company will
calculate and recognize a gain on sale of the intangible asset that is equal to
the difference between the asset’s amortized value after three years and the
160,000 received. Critter Catcher will record an intangible asset on its
accounting records for 160,000.

Two years later a new company, Rodent Ridders, offered to buy the patent
from Critter Catcher for 200,000. Critter Catcher decided not to sell, since it
was their most successful product. Rodent Ridders began to sell a similar
product and Critter Catcher sued to protect its patent. The suit was
successful, but cost 18,000. Critter Catcher will capitalize the legal costs to
the intangible patent asset and amortize the additional cost over the
remaining life of the patent

Copyrights
11. A copyright is a form of protection given by law to the authors of literary,
musical, artistic, and similar works. Owners of copyrights are granted certain
exclusive rights, including the right to print, reprint, and copy the work; to sell or
distribute copies; and to perform and record the work.

12. As expected, the cost of a copyright is measured in conformity with the cost
principle. A copyright often does not have economic value for its entire legal life.
The cost of a copyright should be amortized over the period the copyrighted item
is expected to produce revenue. However, in no case should a copyright be
amortized over time in excess of its legal life.

Trademarks and Trade Names

13. Trademarks and/or trade names (such as Coca-Cola) are names, symbols,
or other distinctive identities given to companies, products, and services. They
can be registered to help substantiate ownership. Registered trademarks and
trade names can be renewed, thus extending their lives indefinitely. In this way,
names, symbols, or any other distinctive identity for a product is given legal
protection.

14. The cash equivalent amount paid for the purchase of a trademark is
capitalized. Amounts directly incurred in the development, protection, expansion,
registration, or defense of a trademark should be capitalized. Such capitalized
amounts should be amortized over the useful life of the trademark or 20 years,
whichever is shorter.

Page 3 of 6
Franchises
15. Franchises (such as for a television company) often are granted by
governmental units for the right to use public properties or to furnish public utility
services (such as electricity), and by business entities for the right to use a
particular designation and specified services (such as MacDonald’s). Each
franchise contract specifies a period of time for which the franchise is valid and
the rights and obligations of the franchisor and franchisee. The cost of obtaining
a franchise often is high and usually requires an initial franchise fee to be paid by
the franchisee to the franchisor. The initial cost of a franchise should be
capitalized and then amortized as an expense. If the franchise is for a limited
period of time, its cost should be amortized over that period in a rational and
systematic manner. If the time is indefinite, amortization should be based on a
reliably estimated life, with periodic evaluations. These evaluations determine
whether the prior estimate needs revision; however, the total amortization period
may not exceed 20 years.

16. Annual and current payments by the franchisee to the franchisor for
services, such as assistance with promotional campaigns, accounting, and
organizational matters, should be expensed by the franchisee as incurred
because they do not create a measurable future benefit for the franchise. If a
franchise becomes worthless or is voided by law, the unamortized amount should
be written off immediately as an impairment of asset value.

Research and Development Costs

17. Research is original and planned investigation undertaken to gain new
scientific or technical knowledge and understanding. Examples are activities
aimed at obtaining new knowledge, the search for applications of research
findings or other knowledge, the search for product or process alternatives, and
the formulation and design of possible new or improved product or process
alternatives. Research costs should be charged to expense as incurred and not
capitalized.

18. Development is the application of research finding or other knowledge to a

plan or design for the production of new or substantially improved materials,
devices, products, processes, systems, or services prior to the commencement
of commercial production or use. Development activities typically include the
evaluation of product or process alternatives, the design, construction, and
testing of pre-production prototypes and models, the design of tools, jigs, molds,
and dies involving new technology, and the design, construction, and operation
of a pilot plant that is not of a scale economically feasible for commercial
production. Development costs should be capitalized as an asset based on
certain criteria.

19. The criteria for capitalizing development costs are:

Page 4 of 6
  The product or process is clearly defined and the attributable costs can be
separately identified and measured reliably.
 The technical feasibility of the product or process can be demonstrated.
 The enterprise intends to produce and market, or use, the product or
process.
 The existence of a market for the product or process, or if it is to be used
internally, its usefulness to the enterprise can be demonstrated.
 Adequate resources exist, or their availability can be demonstrated, to
complete the project and market or use the product or process.

20. The amount of development costs recognized as an asset should be

amortized and recognized as an expense on a systematic basis so as to reflect
the pattern in which the related economic benefits are recognized. They are
normally amortized on a systematic basis up to 20 years, unless a longer useful
life can be specifically determined.

Identifying Research and Development Costs

21. Listed below are examples of activities that typically would be included in
research, and of activities that would not be included as development.

Activities typically included in research:

 Laboratory research aimed at discovery of new knowledge
 Searching for applications of new research findings or other knowledge
 Conceptual formulation and design of possible product or process
alternatives

Activities typically included in development:

 Testing in search for, or evaluation of, product or process alternatives.
 Design, construction, and testing or pre-production prototypes and models
 Design of tools, jugs, moulds, and dies involving new technology.

Activities typically excluded from research and development:

 Engineering follow-through in an early phase or commercial production
 Quality control during commercial production, including routine testing of
products
 Trouble-shooting in connection with breakdowns during commercial
production
 Routing or periodic alterations to existing products, production lines,
manufacturing processes and other ongoing operations, even though such
alterations may represent improvement.
 Adaptation of an existing capability to a particular requirement or
customer’s need as part of a continuing commercial activity

Page 5 of 6
  Routing design of tools, jigs, moulds and dies.
 Activity, including design and construction engineering, related to the
construction, relocation, rearrangement or start-up of facilities or
equipment other than facilities or equipment whose sole use is for a
particular research and development project.

Accounting guidance for research and development:

1. Research costs should be charged as an expense of the period in which they
are incurred.
2. Development costs should be deferred to future periods only if all of the
following criteria are satisfied:
 The product or process is clearly defined and the costs attributable
thereto can be identified.
 The technical feasibility of the product or process has been established.
 The management of the enterprise has indicated its intention to produce
and market, or use, the product or process.
 There is a clearly defined future market for goods and process sale or
destiny for internal use.
 Adequate resources exist, or are expected to be available, to complete
the project.
3. Financial statements must disclose the amounts of research and
development costs charged to expense for the period, the amount of deferred
development costs charged to expense for the period, development costs
deferred during the period, and the unamortized deferred development costs.

Note that the above information does not apply to specialized activities such as
work done for others, enterprise in the development stage, and the special
activities of enterprises in extractive industries such as mining.

Factors to Consider in Estimating the Life of an Intangible Asset

22. The following factors should be considered in estimating the life of an
intangible asset:
 Legal, regulatory, or contractual provisions that may limit the maximum
useful life.
 Provision for renewal or extensions that may alter a specified limit on
useful life
 Effects of obsolescence, demand, and other economic factors that may
reduce useful life.
 Expected actions of competitors and others that may restrict present
competitive advantages.
 An intangible asset that may be a composite of many individual factors
with varying effective useful lives.

Page 6 of 6