Professional Documents
Culture Documents
CH 12
CH 12
Coby Harmon
University of California, Santa Barbara
Westmont College
12-1
CHAPTER 12
Intangible Assets
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss the characteristics, 4. Identify impairment
valuation, and amortization of procedures and presentation
intangible assets. requirements for intangible
2. Describe the accounting for assets.
various types of intangible 5. Describe the accounting and
assets. presentation for research and
3. Explain the accounting issues for development and similar
recording goodwill. costs.
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PREVIEW OF CHAPTER 12
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
12-3
Intangible Asset Issues LEARNING OBJECTIVE 1
Discuss the characteristics,
valuation, and amortization of
intangible assets.
Characteristics
Identifiable.
Lack physical existence.
Christian Dior’s
Not monetary assets. (FRA) most
important asset is its
Normally classified as non-current asset. brand image, not its
store fixtures.
Common types of intangibles:
1. Marketing-related. 4. Contract-related.
2. Customer-related. 5. Technology-related.
3. Artistic-related. 6. Goodwill.
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Intangible Asset Issues
Valuation
Purchased Intangibles
Recorded at cost.
Includes all acquisition costs plus expenditures to make
the intangible asset ready for its intended use.
Typical costs include:
► Purchase price.
► Legal fees.
► Other incidental expenses.
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Valuation
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Intangible Asset Issues
ILLUSTRATION 12.1
Research and Development Stages
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Intangible Asset Issues
Amortization of Intangibles
Limited-Life Intangibles
Amortize by systematic charge to expense over useful life.
Amortization expense should reflect the pattern in which
the company consumes or uses up the asset.
Credit asset account or accumulated amortization.
Amortization should be cost less residual value.
Companies must evaluate the limited-life intangibles
annually for impairment.
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Intangible Asset Issues
Amortization of Intangibles
Indefinite-Life Intangibles
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Must test indefinite-life intangibles for impairment at least
annually.
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Intangible Asset Issues
Amortization of Intangibles
ILLUSTRATION 12.2
Accounting Treatment for Intangibles
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LEARNING OBJECTIVE 2
Types of Intangible Describe the accounting for
various types of intangible
Assets assets.
2. Customer-related. 5. Technology-related.
3. Artistic-related. 6. Goodwill.
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Types of Intangible Assets
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Types of Intangible Assets
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Types of Intangible Assets
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Types of Intangible Assets
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Types of Intangible Assets
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Types of Intangible Assets
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Types of Intangible LEARNING OBJECTIVE 3
Explain the accounting issues
Assets for recording goodwill.
Goodwill
Conceptually, represents the future economic benefits arising
from the other assets acquired in a business combination that are
not individually identified and separately recognized.
Only recorded when an entire business is purchased.
ILLUSTRATION 12.4
Tractorling Statement of Financial Position
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Recording Goodwill
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Recording Goodwill
ILLUSTRATION 12.6
Determination of Goodwill—
Master Valuation Approach
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Recording Goodwill
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Recording Goodwill
Goodwill Write-Off
Goodwill considered to have an indefinite life.
Should not be amortized.
Only adjust carrying value when goodwill is impaired.
Bargain Purchase
Purchase price less than the fair value of net assets
acquired.
Amount is recorded as a gain by the purchaser.
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LEARNING OBJECTIVE 4
Impairment of Identify impairment procedures
and presentation requirements
Intangible Assets for intangible assets.
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Impairment of Limited-Life Intangibles
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Impairment of Limited-Life Intangibles
Fair value less costs to sell means what the asset could be sold
for after deducting costs of disposal. Value-in-use is the present
value of cash flows expected from the future use and eventual
sale of the asset at the end of its useful life.
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Impairment of Limited-Life Intangibles
Illustration: Lerch SE has a patent on how to extract oil from shale
rock, with a carrying value of €5,000,000 at the end of 2018.
Unfortunately, several recent non-shale-oil discoveries adversely
affected the demand for shale-oil technology, indicating that the patent
is impaired. Lerch determines the recoverable amount for the patent,
based on value-in-use (because there is no active market for the
patent). Lerch estimates the patent’s value-in-use at €2,000,000,
based on the discounted expected net future cash flows at its market
rate of interest.
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Impairment of Limited-Life Intangibles
€5,000,000 €2,000,000
Unknown €2,000,000
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Impairment of Limited-Life Intangibles
€5,000,000 €2,000,000
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Impairment of Limited-Life Intangibles
ILLUSTRATION 12.8
Post-Impairment Carrying Value of Patent
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Impairment of Limited-Life Intangibles
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Impairment of Intangible Assets
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Impairment of Indefinite-Life Intangibles
ILLUSTRATION 12.9
Computation of Loss on Impairment of Broadcast License
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Impairment of Intangible Assets
Impairment of Goodwill
Companies must test goodwill at least annually.
Impairment test is conducted based on the cash-generating
unit to which the goodwill is assigned.
► Cash-generating unit = smallest identifiable group of
assets that generate cash flow.
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Impairment of Goodwill
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Impairment of Goodwill
€2,400,000 €2,800,000
No
Impairment
Unknown €2,800,000
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Impairment of Goodwill
€2,400,000 €1,900,000
Unknown €1,900,000
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4
Impairment of Goodwill
€2,400,000 €1,900,000
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Presentation of Intangible Assets
Income Statement
Companies should report
amortization expense and
impairment losses and reversals
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Presentation of Intangible Assets
ILLUSTRATION 12.12
Nestlé’s Intangible Asset Disclosures Unknown $1,900,000
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4
LEARNING OBJECTIVE 5
Research and Describe the accounting and
presentation for research and
Development development and similar costs.
Costs
Research and development (R&D) costs are not in
themselves intangible assets.
product, formula,
process, composition, or
idea, literary work.
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Research and Development Costs
ILLUSTRATION 12.13
R&D Outlays, as a Percentage of Sales
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Research and Development Costs
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Research and Development Costs
Research
Research Activities
Activities Examples
Examples
Original
Original and
and planned
planned investigation
investigation Laboratory
Laboratory research
research aimed
aimed at
at discovery
discovery of
of
undertaken
undertaken with
with the
the prospect
prospect of
of gaining
gaining new
new knowledge;
knowledge; searching
searching for
for applications
applications of
of
new
new scientific
scientific or
or technical
technical knowledge
knowledge new
new research
research findings.
findings.
and understanding.
and understanding.
Development
Development Activities
Activities Examples
Examples
Application
Application of
of research
research findings
findings or
or other
other Conceptual
Conceptual formulation
formulation and
and design
design of
of
knowledge
knowledge to to a
a plan
plan or
or design
design for
for the
the possible
possible product
product or or process
process alternatives;
alternatives;
production
production ofof new
new or
or substantially
substantially construction
construction of
of prototypes
prototypes and
and
improved
improved materials,
materials, devices,
devices, products,
products, operation
operation of
of pilot
pilot plants.
plants.
processes,
processes, systems,
systems, oror services
services before
before
the
the start of commercial production or
start of commercial production or
use.
use.
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Research and Development Costs
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Accounting for R & D Activities
Illustration 12.15 Sample R&D Expenditures and Their Accounting
Treatment.
Type
Typeof
ofExpenditure
Expenditure Accounting
AccountingTreatment
Treatment
1. Construction of long-range research 1. Capitalize and depreciate
facility for use in current and future as R&D expense.
projects (three-story, 400,000-square-
foot building).
2. Acquisition of R&D equipment for use on 2. Expense immediately as
current project only. R&D.
3. Acquisition of machinery for use on 3. Capitalize and depreciate
current and future R&D projects. as R&D expense.
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Accounting for R & D Activities
Type
Typeof
ofExpenditure
Expenditure Accounting
AccountingTreatment
Treatment
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Accounting for R & D Activities
Type
Typeof
ofExpenditure
Expenditure Accounting
AccountingTreatment
Treatment
8. Costs of testing prototype and design 8. Expense immediately as
modifications (economic viability not R&D.
achieved).
9. Legal fees to obtain patent on new laser 9. Capitalize as patent and
scanner. amortize to overhead as
part of cost of goods
manufactured.
10. Executive salaries. 10. Expense as operating
expense.
11. Cost of marketing research to promote 11. Expense as operating
new laser scanner. expense.
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Accounting for R & D Activities
Type
Typeof
ofExpenditure
Expenditure Accounting
AccountingTreatment
Treatment
12. Engineering costs incurred to advance 12. Expense as operating
the laser scanner to full production stage expense. Capitalize as
(economic viability achieved). R&D.
13. Costs of successfully defending patent 13. Capitalize as patent and
on laser scanner. amortize to overhead as
part of cost of goods
manufactured.
14. Commissions to sales staff marketing 14. Expense as operating
new laser scanner. expense.
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Research and Development Costs
Advertising costs.
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Research and Development Costs
E12.17: Compute the amount to be reported as research and
development expense.
$330,000 / 5 = $66,000
R&D
Cost of equipment acquired that will have alternative Expense
uses in future R&D projects over the next 5 years
(uses straight-line depreciation) $330,000 $66,000
$403,000
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Presentation of R&D Costs
ILLUSTRATION 12.16
R&D Reporting
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