5 - Intangible Assetscc

Intangible Assets
12-1 By: Dr. Nunung Nuryani, MSi., Ak., CA

“Intangible asset management is the most
important issue for top management at
present…”
Intangible assets, % of market value
Coca-Cola 96
M icros oft 94
Inte l 85
ABB 85
3M 83
GE 82
BP 74
Honda 68
Chrys le r 60
12-2
“Intangible asset management is the most
important issue for top management at
present…”
12-3
Defining Intangible Assets
Assets having no material form that appear as a

result of (1) past events that has a (2) measurable
effect and that presents a (3) future benefit .
[Financial Accounting Standards Board (FASB)]
Assets arising as a result of past events and

possess three main attributes: they are non
physical in nature, they are capable of producing
future economic net benefits, and they are
protected legally or through a de facto right
[Bouteiller, 2002]
12-4
Non-physical sources of value (claims to future

benefits) generated by innovation (discovery),
unique organizational designs, or human resource
practices
(B. Lev, 2003)
Any asset, belonging to a company or controlled

by it, having no physical or financial (in case of
financial investment) form, but capable of
producing future economic benefits
(D. Volkov, T. Garanina, 2007)
12-5
Three terms are widely used:
 Intangible Assets — in accounting literature,

 Knowledge Assets — by economists,
 Intellectual Capital — in management and law
literature;
“and on the whole they come to the same: to the

future benefits that are not embodied materially”.
12-6
Intangible Assets
Research and Presentation of

Intangible Types of Impairment of
Development Intangibles and
Asset Issues Intangibles Intangibles
Costs Related Items
Characteristics Marketing- Limited-life Identifying Intangible

Valuation related intangibles R&D assets
Amortization Customer- Reversal of Accounting for R&D costs
related impairment R&D
Artistic-related loss Similar costs
Contract-related Indefinite-life Conceptual
intangibles questions
Technology-
other than
related
goodwill
Goodwill
Goodwill
12-7
Intangible Asset Issues
Characteristics
Three Main Characteristics:
(1) Identifiable,
(2) Lack physical existence.

(3) Not monetary assets.
Normally classified as non-current asset.
12-8
Valuation
Purchased Intangibles:
 Recorded at cost.
 Includes all costs necessary to make the intangible asset
ready for its intended use.
 Typical costs include:
► Purchase price.
► Legal fees.
► Other incidental expenses.
12-9
Valuation
Internally Created Intangibles:
 Companies expense all research phase costs and some
development phase costs.
 Certain development costs are capitalized once economic
viability criteria are met.
 IFRS identifies several specific criteria that must be met
before development costs are capitalized.
12-10
Internally Created Intangibles

IFRS
12-11
US GAAP
Valuation
Internally Created Intangibles:
 Generally expensed.
 Only capitalize direct costs incurred in developing the
intangible, such as legal costs.
12-12
Amortization of Intangibles IFRS = US GAAP

Limited-Life Intangibles:
 Amortize by systematic charge to expense over useful life.
 Credit asset account or accumulated amortization.
 Useful life should reflect the periods over which the asset
will contribute to cash flows.
 Amortization should be cost less residual value.
 IFRS requires companies to assess the residual values
and useful lives of intangible assets at least annually.
12-13
Amortization of Intangibles IFRS = US GAAP

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.
12-14
Accounting Treatment
Amortization of Intangibles for Intangibles
IFRS
US GAAP
12-15
Types of Intangibles
Six Major Categories:
(1) Marketing-related. (4) Contract-related.

(2) Customer-related. (5) Technology-related.
(3) Artistic-related. (6) Goodwill.
12-16
Marketing-Related Intangible Assets

 Examples:
► Trademarks or trade names, newspaper
mastheads, Internet domain names, and non-
competition agreements.
 In the United States trademark or trade name has
legal protection for indefinite number of 10 year renewal
periods.
 Capitalize acquisition costs.
 No amortization.
12-17
Customer-Related Intangible Assets

 Examples:
► Customer lists, order or production backlogs, and both
contractual and non-contractual customer
relationships.
 Capitalize acquisition costs.
 Amortized to expense over useful life.
12-18
Artistic-Related Intangible Assets

 Examples:
► Plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
 Copyright granted for the life of the creator plus 70 years.
 Capitalize costs of acquiring and defending.
 Amortized to expense over useful life.
and Mickey
Mouse
12-19
Contract-Related Intangible Assets

 Examples:
► Franchise and licensing agreements, construction
permits, broadcast rights, and service or supply
contracts.
 Franchise (or license) with a limited life should be amortized
to expense over the life of the franchise.
 Franchise with an indefinite life should be carried at cost
and not amortized.
12-20
Technology-Related Intangible Assets

 Examples:
► Patented technology and trade secrets granted by a
governmental body.
 Patent gives holder exclusive use for a period of 20 years.
 Capitalize costs of purchasing a patent.
 Expense any R&D costs in developing a patent.
 Amortize over legal life or useful life, whichever is shorter.
12-21
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.
Goodwill is measured as the excess of ...

cost of the purchase over the FMV of the identifiable net
assets purchased.
Internally created goodwill should not be capitalized.
12-22
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.
12-23
Impairment of Intangible Assets
Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets
IFRS
12-24
Calculate the impairment loss (based on value-in-use).
$3,000,000 Impairment Loss
$5,000,000 $2,000,000
Unknown $2,000,000
12-25
Calculate the impairment loss (based on value-in-use).
$3,000,000 Impairment Loss
$5,000,000 $2,000,000
Entry to record the impairment loss.

Loss on Impairment 3,000,000
Patents 3,000,000 Unknown $2,000,000
12-26
Reversal of Impairment Loss

Illustration: The carrying value of the patent after impairment is
$2,000,000. Lerch’s amortization is $400,000 ($2000,000 / 5) over the
remaining five years of the patent’s life. The amortization expense
and related carrying amount after the impairment is shown below:
12-27
Reversal of Impairment Loss

Early in 2012, based on improving conditions in the market for
shale-oil technology, Lerch remeasures the recoverable amount of
the patent to be $1,750,000. In this case, Lerch reverses a portion
of the recognized impairment loss.
Patents ($1,750,000-$1,600,000) 150,000

Loss on Impairment 150,000
12-28
Impairment of Intangible Assets – US GAAP
Impairment of Limited-Life Intangibles
Same as impairment for long-lived assets

1. If the sum of the expected future net cash flows is less
than the carrying amount of the asset, an impairment has
occurred (recoverability test).
2. The impairment loss is the amount by which the carrying
amount of the asset exceeds the fair value of the asset
(fair value test).
The loss is reported as part of income from continuing
operations, “Other expenses and losses” section.
12-29
Example: (Copyright Impairment) Presented below is information
related to copyrights owned by Botticelli Company at December 31,
2012.
Cost $ 8,600,000
Carrying amount 4,300,000
Expected future net cash flows 4,000,000
Fair value 3,200,000
The copyright has a remaining useful life of 10 years.

(a) Prepare the journal entry (if any) to record the impairment of the
asset at December 31, 2012.
(b) Prepare the journal entry to record amortization expense for 2013
related to the copyrights.
12-30
Recoverability test: If the sum of the expected future net cash

flows is less than the carrying amount of the asset, an
impairment has occurred.
Expected future cash flow $ 4,000,000

Carrying value 4,300,000
$ (300,000)
Asset is Impaired
12-31
(a) Prepare the journal entry (if any) to record the impairment of
the asset at December 31, 2012.
Loss on impairment 1,100,000

Copyrights 1,100,000
Fair value test:

Carrying amount $ 4,300,000
Fair value 3,200,000
Loss on impairment $ (1,100,000)
12-32
(b) Prepare the journal entry to record amortization expense for

2013 related to the copyrights.
Amortization expense 320,000

Copyrights 320,000
Carrying amount $ 3,200,000

÷
Useful life 10 years
Amortization per year $ 320,000
12-33
Impairment of Indefinite-Life Intangibles Other

than Goodwill
 Should be tested for impairment at least annually.
 Impairment test is the same as that for limited-life
intangibles. That is,
► compare the recoverable amount of the intangible
asset with the asset’s carrying value.
► If the recoverable amount is less than the carrying
amount, the company recognizes an impairment.
12-34
Illustration: Arcon Radio purchased a broadcast license for

$2,000,000. The license is renewable every 10 years. Arcon Radio
has renewed the license with the GCC twice, at a minimal cost.
Because it expects cash flows to last indefinitely, Arcon reports the
license as an indefinite-life intangible asset. Recently, the GCC
decided to auction these licenses to the highest bidder instead of
renewing them. Based on recent auctions of similar licenses, Arcon
Radio estimates the fair value less costs to sell (the recoverable
amount) of its license to be $1,500,000.
12-35
Impairment of Indefinite-Life Intangibles Other

than Goodwill
 Should be tested for impairment at least annually.
 Impairment test is a fair value test.
► If the fair value of asset is less than the carrying
amount, an impairment loss is recognized for the
difference.
► Recoverability test is not used.
12-36
Illustration: Arcon Radio purchased a broadcast license for
$2,000,000. Arcon Radio has renewed the license with the FCC
twice, at a minimal cost. Because it expects cash flows to last
indefinitely, Arcon reports the license as an indefinite-life intangible
asset. Recently the FCC decided to auction these licenses to the
highest bidder instead of renewing them. Arcon Radio expects cash
flows for the remaining two years of its existing license. It performs
an impairment test and determines that the fair value of the intangible
asset is $1,500,000.
12-37
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.
 Because there is rarely a market for cash-generating units,
estimation of the recoverable amount for goodwill
impairments is usually based on value-in-use estimates.
12-38
Illustration: Kohlbuy Corporation has three divisions. It purchased

one division, Pritt Products, four years ago for $2 million.
Unfortunately, Pritt experienced operating losses over the last three
quarters. Kohlbuy management is now reviewing the division (the
cash-generating unit), for purposes of its annual impairment
testing. Pritt Division’s net assets, including the associated goodwill
of $900,000 from the purchase:
12-39
Kohlbuy determines the recoverable amount for the Pritt Division to

be $2,800,000, based on a value-in-use estimate.
$2,400,000 $2,800,000
No
Impairment
Unknown $2,800,000
12-40
Assume that the recoverable amount for the Pritt Division is

$1,900,000, instead of $2,800,000.
$500,000 Impairment Loss
$2,400,000 $1,900,000
Unknown $1,900,000
12-41
Assume that the recoverable amount for the Pritt Division is

$1,900,000, instead of $2,800,000.
$500,000 Impairment Loss
$2,400,000 $1,900,000
Loss on Impairment 500,000

Goodwill 500,000
Unknown $1,900,000
12-42
Impairment of Goodwill US GAAP
Two Step Process:

Step 1: If fair value is less than the carrying amount of the
net assets (including goodwill), then perform a
second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill (implied

value of goodwill) and compare to carrying amount.
12-43
Exercise: (Goodwill Impairment) Presented below is net asset
information related to the Mischa Division of Santana, Inc. as of
December 31, 2012 (in millions):
Management estimated its future net cash flows from the division to be
$400 million. Management has also received an offer to purchase the
division for $335 million. All identifiable assets’ and liabilities’ book and fair
value amounts are the same.
12-44
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December
31, 2012.
Step 1: The fair value Step 2: (in millions)

of the reporting unit is Fair value $ 335
below its carrying Carrying amount, net of goodwill 160
value. Therefore, an Implied goodwill 175
impairment has Carrying value of goodwill 200
occurred. Loss on impairment $ (25)
Loss on impairment 25,000,000

Goodwill 25,000,000
12-45
Instructions
(b) At December 31, 2011, it is estimated that the division’s fair value
increased to $345 million. Prepare the journal entry (if any) to record
this increase in fair value.
 No entry necessary.
 Adjusted carrying amount of the goodwill is its new accounting
basis.
 Subsequent reversal of recognized impairment losses is not
permitted under SFAS No. 142.
12-46
Research and Development Costs
Research and development (R&D) costs are not in

themselves intangible assets.
Frequently results in something that a company patents or

copyrights such as:
► new product, ► formula,

► process, ► composition, or
► idea, ► literary work.
12-47
Companies spend considerable sums on research and

development.
12-48
 Research costs must be expensed as incurred.

 Development costs may or may not be expensed as
incurred.
 Capitalization begins when the project is far enough along
in the process such that the
economic benefits of the R&D
project will flow to the company
(the project is economically
viable).
12-49
Identifying R & D Activities
Research Activities Examples

Original and planned investigation Laboratory research aimed at discovery of
undertaken with the prospect of gaining new knowledge; searching for applications of
new scientific or technical knowledge new research findings.
and understanding.
Development Activities Examples

Application of research findings or other Conceptual formulation and design of
knowledge to a plan or design for the possible product or process alternatives;
production of new or substantially construction of prototypes and
improved materials, devices, products, operation of pilot plants.
processes, systems, or services
before the start of commercial
production or use.
12-50
Accounting for R & D Activities

Costs Associated with R&D Activities:
 Materials, Equipment, and Facilities. Expense the entire
cost, unless the items have alternative future uses.
 Personnel. Expense as incurred salaries, wages & other
costs of personal engaged in R&D.
 Purchased Intangibles. Recognized & measure at fair value
 Contract Services. Expense the costs of service performed
by others in connection with the R&D as incurred
 Indirect Costs. Include a reasonable allocation of indirect
costs in R&D costs, except general and administrative cost,
which must be clearly related in order to be included in R&D.
12-51
Exercise: Compute the amount to be reported as research and

development expense.
$330,000 / 5 = $66,000
R&D
Expense
Cost of equipment acquired that will have alternative
uses in future R&D projects over the next 5 years. $330,000 $66,000
Materials consumed in R&D projects 59,000 59,000
Consulting fees paid to outsiders for R&D projects 100,000 100,000
Personnel costs of persons involved in R&D projects 128,000 128,000

Indirect costs reasonably allocable to R&D projects 50,000 50,000
Materials purchased for future R&D projects 34,000 0
$403,000
12-52
END
12-53

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Intangible Assets

12-1 By: Dr. Nunung Nuryani, MSi., Ak., CA

Intangible assets, % of market value

Assets having no material form that appear as a

Assets arising as a result of past events and

Non-physical sources of value (claims to future

Any asset, belonging to a company or controlled

Three terms are widely used:

 Intangible Assets — in accounting literature,

“and on the whole they come to the same: to the

Research and Presentation of

Characteristics Marketing- Limited-life Identifying Intangible

(2) Lack physical existence.

Normally classified as non-current asset.

Internally Created Intangibles

Amortization of Intangibles IFRS = US GAAP

Amortization of Intangibles IFRS = US GAAP

Six Major Categories:

(1) Marketing-related. (4) Contract-related.

Marketing-Related Intangible Assets

Customer-Related Intangible Assets

Artistic-Related Intangible Assets

Contract-Related Intangible Assets

Technology-Related Intangible Assets

Goodwill is measured as the excess of ...

Internally created goodwill should not be capitalized.

Impairment of Limited-Life Intangibles

Calculate the impairment loss (based on value-in-use).

$3,000,000 Impairment Loss

Calculate the impairment loss (based on value-in-use).

$3,000,000 Impairment Loss

Entry to record the impairment loss.

Reversal of Impairment Loss

Reversal of Impairment Loss

Patents ($1,750,000-$1,600,000) 150,000

Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets

The copyright has a remaining useful life of 10 years.

Recoverability test: If the sum of the expected future net cash

Expected future cash flow $ 4,000,000

Loss on impairment 1,100,000

Fair value test:

(b) Prepare the journal entry to record amortization expense for

Amortization expense 320,000

Carrying amount $ 3,200,000

Impairment of Indefinite-Life Intangibles Other

Illustration: Arcon Radio purchased a broadcast license for

Impairment of Indefinite-Life Intangibles Other

Illustration: Kohlbuy Corporation has three divisions. It purchased

Kohlbuy determines the recoverable amount for the Pritt Division to

Assume that the recoverable amount for the Pritt Division is

$500,000 Impairment Loss

Assume that the recoverable amount for the Pritt Division is

$500,000 Impairment Loss

Loss on Impairment 500,000

Impairment of Goodwill US GAAP

Two Step Process:

Step 2: Determine the fair value of the goodwill (implied

Step 1: The fair value Step 2: (in millions)

Loss on impairment 25,000,000

Research and development (R&D) costs are not in

Frequently results in something that a company patents or

► new product, ► formula,