Chapter 6 – Part A

Property, Plant, and Equipment, Investment

Property and Intangible Assets:
Acquisition and Disposition

Textbook Coverage: Pages 372-379 (Skip 374-376)

Intermediate Accounting I

Dr. Nafis Rahman

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 Types of Assets
Long-lived, revenue-producing assets

Property, plant, and Intangible assets:

equipment: • Patents
Land, buildings, equipment, • Copyrights
machinery, furniture, autos, • Trademarks
and trucks • Franchises
Investment property: • Goodwill
Land and buildings held for
rental income and capital
appreciation
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 Capitalizing vs. expensing

1) Capitalization
 Record current expenditures as an asset if they
are expected to produce economic benefits
over multiple periods in the future
→ Recognize expenses over the useful life of the asset.

• Example: Expenditures on a major improvement of a

building (e.g., the replacement of a centralized air
conditioning system)

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 Capitalizing vs. expensing

2) Expensing
 Record current expenditures as an expense if
they are expected to produce economic
benefits only in the current period

• Example: Expenditures for ordinary repairs and normal

maintenance of a building (e.g., carpet cleaning)

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 Costs to be capitalized
Initial cost = Purchase price + All expenditures
necessary to bring the asset
to its desired condition and
location for use

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 Cost Capitalization- Equipment
Capitalizable costs for equipment will include:
• Purchase price
• Any sales tax
• Transportation costs
• Expenditures for installation and testing
• Legal fees to establish title
• Any other costs to bring the asset to its
condition and location for use

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 Cost Capitalization--Land
When purchasing land, usually the following costs are
capitalized:
• Purchase price
• Attorney fees
• Real estate agent commissions
• Costs related to title and title search
• Recording fees
• Any back taxes, liens, mortgages, or other obligations
• Expenditures such as clearing, filling, draining, and
even removing old buildings
Proceeds from the sale of salvaged
materials after purchase reduce the cost of
land
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Cost Capitalization—Land Improvements

• Land improvement costs should also be

capitalized. Land improvements usually have
useful lives that are estimable
• Costs:
– Separately identified and capitalized
– Depreciated over periods benefited by
their use
• Examples:
– Cost of parking lots, driveways, private
roads, fences, and sprinkler systems

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Cost Capitalization--Buildings

• Cost of acquiring a building usually includes:

– Purchase price
– Realtor commissions and legal fees
– Reconditioning costs

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 Intangible Assets
• Represent exclusive rights that provide benefits to the owner
• Lack physical substance
• Difficult to anticipate the timing and the existence of future
benefits attributable to many intangible assets
Purchase intangible assets from other entities
Companies Ex: Existing patent, copyright, trademark
can either:
Develop intangible assets internally
Ex: Develop a new product that is then patented

Amortized Finite useful lives

Not
Indefinite useful lives Amortized
Cost = Purchase price + All other costs necessary to bring the asset to its desired
condition and location for use
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 Intangible Assets
Identifiable
a) Separable (i.e., can be sold, rented, transferred,
licensed or exchanged individually or together
with a related contract or an identifiable asset or
liability), or
b) Arising from contractual or other legal rights
----accounting regulated by IAS 38
Example: Patent, Copyright, Trademark,
Franchise
Unidentifiable
The intangible asset cannot exist separately
without the business. It cannot be sold, rented,
licensed separately---- accounting regulated by IFRS 11
 Common identifiable intangible assets

1. Patents
‒ Exclusive rights to use, manufacture, or sell
products or processes without interference or
infringement by others
• Recognized by law and granted by a country for a
limited period (usually 20 years)
• Example: The GoPro patent of cameras that can be
strapped to the athlete’s body (fairly simple idea).

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 Common identifiable intangible assets

2. Copyrights
– Exclusive rights to print, reprint, copy, sell,
distribute, perform and record works
• Protection given by law to authors of literary, musical,
artistic, and similar works (e.g., films)
• The legal life of copyright = The life of the creator + 50
to 100 years (or a finite period for anonymous or
corporate creations)
• Example: J. K. Rowling, became a billionaire by the sale
of Harry Potter Books and the royalty from the related
movies, and royalty from the toys and theme parks.
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 Common identifiable intangible assets

3. Trademarks
 Exclusive rights to display symbols, designs, or
logos associated with a business
– Registered with relevant national authority
– Renewable indefinitely in (usually) 10-year periods
– Example: The CocaCola Trademark is supremely
valuable. The other soft drinks are not allowed to use
that name.

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 Common identifiable intangible assets

4. Franchises
– Rights to use a firm’s business model and brand
for a prescribed period of time
Example:
• Fast food outlets
• Automobile dealerships, etc.

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 Intangible Assets
Specifically identifiable
Patents Copyrights Trademarks Franchises
Right to Right of protection Right to display a
Exclusive right by
manufacture a given to a creator of word, a slogan, a franchisor to
product or to use a a published work. symbol, or anfranchisee to use the
process Ex: Song/film/book emblem franchisor’s
trademark/product
Granted by the US Granted for the life of Registered with US Franchisor
Patent Office for a the creator plus 70 Patent Office for a grants it for a specified
period of 20 years years period of 10 years period of time to the
franchisee

Costs include Costs include Costs include Initial payment plus

purchase price, legal purchase price, legal purchase price, legal periodic payments
fees, filing fees, not fees, filing fees, not fees, filing fees, not over the life of the
including internal including internal including internal franchise agreement
research and research and research and
development development development

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Recognition of intangible assets

1. Recognition of Identifiable intangible assets

(IAS 38)
• Acquired separately or as a result of business
combination
• Satisfying the definition of an intangible asset and
the recognition criteria (IAS 38.18)
2. Recognition of purchased goodwill (IFRS 3)
• Acquired as a result of business combination, but
• Not satisfying the IAS 38 definition of an intangible
asset (i.e., not identifiable)
Note: Research and development is not covered.

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The cost of a separately acquired intangible
asset at the date of acquisition
 The asset is recorded at cost (cost = A + B)
A. The purchase price
• reflects the probability that the economic benefits
embodied in the asset will flow to the entity
(meeting criterion (a))
• the fair value of the purchase consideration = the
amount of cash or the fair value of other monetary
assets paid (meeting criterion (b))
• The purchase price = the price paid to the seller
+ import duties and non-refundable purchase
taxes
– trade discounts and rebates
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The cost of a separately acquired intangible
asset at the date of acquisition

B. Any directly attributable costs of preparing the

asset for its intended use
• Costs of employee (during the preparation stage)
• Professional fees
• Costs of testing the asset, etc.

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Example: Initial measurement of separately
acquired intangible assets
 Example 1. The cost of a separately acquired
patent, copyright, or trademark
a) The price paid to an original holder
b) Legal and filing fees to secure the asset
• Attorney fees, registration fees, design costs, consulting fees,
and successful legal defense costs

 Example 2. The cost of franchise

a) Initial franchise fee to set up the franchise
b) Any legal costs associated with the contract agreement
 Continuing franchise fees in return for provision of
services by franchisor are expensed as incurred
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The cost of an intangible asset acquired as part
of a business combination
 The asset is recorded at its fair value at the
acquisition date
– Reflects the probability of the economic benefit flowing
to the entity
– Sufficient information exists to measure the fair value of
the identifiable asset reliably
– This is true regardless of whether the acquired firm
purchased or internally developed the asset
Example: Company A has acquired company B. Company
B owns a drilling license with a fair value of $2 million at
the date of acquisition. The cost of the license in the
consolidated accounts will be $2 million. 21
Capitalization of subsequent intangible
asset costs
 Costs incurred after initial recognition should be
expensed unless
a) those costs enable the asset to generate future
economic benefits in excess of the originally assessed
standards of performance
b) those costs can be measured reliably

Q: Should legal costs of defending against a patent

infringement after initial measurement be expensed?
– Yes, these costs are incurred to maintain the asset at
its originally assessed standard of performance
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Summary of the recognition and initial
measurement requirement of IAS 38

Note: Internally generated development is beyond our coverage

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 Goodwill
• Represents the unique value of a company as a
whole over and above its identifiable tangible
and intangible assets
Goodwill can emerge from a company’s:

Clientele and reputation

Trained employees and
management team
Favorable business
location

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 Goodwill
Goodwill is a portion of the value of a company that
cannot be attributed to other assets
1. Internally generated goodwill
– Developed by advertising, training, research
and development, and other efforts
• Examples: A list of major clients, reputation, well-
trained employees and management team, favorable
business location, etc.
• Accountants do NOT recognize internally generated
goodwill (difficult to ascertain a value for the asset)
2. Purchased goodwill
– Acquired by a business combination (recognized) 25
Initial measurement of purchased goodwill
(IFRS 3)
 Key assumptions
• The buyer and seller negotiate and agree on a price
• The price consists of the value of identifiable net assets
on a stand-alone basis and a premium for goodwill

 The cost of purchased goodwill is imputed as

• the difference between the purchase price and the buyer’s
own valuation of the identifiable net assets acquired
– All identifiable assets acquired and liabilities assumed by the
buyer are individually recognized at fair values

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Example: Initial measurement of purchased
goodwill (IFRS 3)
Net assets acquired Fair value at the date of acquisition
Cash $25,000
Accounts receivable 35,000
Inventories 62,000
Property, plant, and equipment 265,000
All identifiable assets (A) 387,000
All liabilities (B) (55,000)
Net assets (C = A – B) 332,000

All common shares of the acquired company are purchased for

$400,000 and the purchase price is paid in cash.
The cost of goodwill acquired by the business combination is
imputed as:
Purchase price – The fair value of the net assets acquired
= $400,000 – $332,000 = $68,000
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Example: Initial measurement of purchased
goodwill (IFRS 3)
Journal entry
Dr. Cash (FV) 25,000
Dr. Accounts receivable (FV) 35,000
Dr. Inventory (FV) 62,000
Dr. PP&E (FV) 265,000
Dr. Goodwill (difference) 68,000*
Cr. Liabilities (FV) 55,000
Cr. Cash (Purchase price) 400,000

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 measurement of purchased goodwill

 What if the purchase price of the company is less

than the sum of fair value of its identifiable
components (bargain purchase, distressed sale)?

 There is nothing called negative goodwill

 Recognize the difference in the purchase price and

the fair value of the company ‘net assets’ as gain.

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