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

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 “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, p.540]
12-4
 Defining Intangible Assets

Non-physical sources of value (claims to future

benefits) generated by innovation (discovery),
unique organizational designs, or human resource
practices
(B. Lev, 2003, p299-300)

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, p.541)
12-5
 Defining Intangible Assets

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”.
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 Intangible
Intangible Assets
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-
related other than
goodwill
Goodwill
Goodwill

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 Intangible
Intangible Asset
Asset Issues
Issues

Characteristics
Three Main Characteristics:
(1) Identifiable,
(2) Lack physical existence.
(3) Not monetary assets.

Normally classified as non-current asset.

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 Intangible
Intangible Asset
Asset Issues
Issues

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.

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 Intangible
Intangible Asset
Asset Issues
Issues

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.

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 Intangible
Intangible Asset
Asset Issues
Issues

Internally Created Intangibles

IFRS

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 Intangible
Intangible Asset
Asset Issues
Issues
US GAAP
Valuation
Internally Created Intangibles:
 Generally expensed.
 Only capitalize direct costs incurred in developing the
intangible, such as legal costs.

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 Intangible
Intangible Asset
Asset Issues
Issues

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.

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 Intangible
Intangible Asset
Asset Issues
Issues

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.

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 Intangible
Intangible Asset
Asset Issues
Issues
Accounting Treatment
Amortization of Intangibles for Intangibles

IFRS

US GAAP

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 Types
Types of
of Intangibles
Intangibles

Six Major Categories:

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

(2) Customer-related. (5) Technology-related.
(3) Artistic-related. (6) Goodwill.

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 Types
Types of
of Intangibles
Intangibles

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.

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 Types
Types of
of Intangibles
Intangibles

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.

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 Types
Types of
of Intangibles
Intangibles

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
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 Types
Types of
of Intangibles
Intangibles

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.

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 Types
Types of
of Intangibles
Intangibles

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.

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 Types
Types of
of Intangibles
Intangibles

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.

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 Goodwill
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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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets
IFRS

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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

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

$3,000,000 Impairment Loss

$5,000,000 $2,000,000

Unknown $2,000,000

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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

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

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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets –– US
US GAAP
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.

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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets
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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets
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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

(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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

(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
Impairment of
of Intangible
Intangible Assets
Assets

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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

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
Impairment of
of Intangible
Intangible Assets
Assets

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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets
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
Impairment of
of Intangible
Intangible Assets
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.
 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.

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 Impairment
Impairment of
of Goodwill
Goodwill

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:

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 Impairment
Impairment of
of Goodwill
Goodwill

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
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 Impairment
Impairment of
of Goodwill
Goodwill

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
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 Impairment
Impairment of
of Goodwill
Goodwill

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
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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets

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
 Impairment
Impairment of
of Intangible
Intangible Assets
Assets
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.
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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets
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

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 Impairment
Impairment of
of Intangible
Intangible Assets
Assets
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
Research and
and Development
Development Costs
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.

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 Research
Research and
and Development
Development Costs
Costs

Companies spend considerable sums on research and

development.

12-48
 Research
Research and
and Development
Development Costs
Costs

 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
 Research
Research and
and Development
Development Costs
Costs

Identifying R & D Activities

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; searching for applications of
knowledge; searching for applications of
new
new scientific
scientific or
or technical
technical knowledge
knowledge new
new research
research findings.
findings.
and
and understanding.
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 to a plan or design for
knowledge to a plan or design for thethe possible product or process alternatives;
possible product or process alternatives;
production
production of
of 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
start of
of commercial
commercial
production or use.
production or use.

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 Research
Research and
and Development
Development Costs
Costs

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
 Research
Research and
and Development
Development Costs
Costs
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
END

12-53