CH 12 INTANGIBLE ASSETS: 2 main characteristics1) They lack phy existence 2) They are not financial instruments How do intangibles

get their value? From the rights & privileges that their user gets from using them How do financial instruments get their value? From their right to obtain cash or cash equivalent in future. VALUATION OF INTANGIBLES-what is it recorded at? When purchased from third party Cost Cost includes purchase price, legal fees & other incidental expenditure necessary to get the asset in a condition ready for its intended use. When exchanged for stock or other asset FMV of asset received or asset given upwhichever is more clearly evident When internally created generally expensed. Only direct costs incurred in developing the intangible are capitalized. R&D costs generally expensedwhether you will have future economic benefits after R&D is uncertain. Therefore to be conservative expense it. If benefits= certain capitalize it.

Amount of intangible amortized cost residual value Intangibles classified on basis of : How acquired? Purchased internally created Common intangibles: Patent Copyright Trademark/tradenames Internet domain names, newspaper mastheads Contractual- franchise/licenses Customer lists

Life -limited life - indefinite life

Limited life Limited life Unlimited life

Upto 20 years Life of owner +70yrs Allowed indefinite 10 yr renewal

Depends* Limited life

Nature of contract defines ltd of unltd life

What if life of limited life intangible changes? The remaining carrying value should be amortized over remaining useful life.

Limited life amortize Indefinite life check for impairment at least annually.

DEFENDING COPYRIGHTS & PATENTS By defending the copyright or patent, the company is basically ensuring that the economic befit will continue. So one logic to capitalize These amounts capitalized are not significant Treatment of counting is same in both casesany unrecoverable amount/legal fees toward defending it must go to asset expense account.

Jan 1: you get the patent/copyright for cashyou are paying cash to defend it Dr..Patent/copy Cr. Cash. Dec 31: you will amortize it over useful life Dr.patent amortization exp Cr..Patent ---

or

dr.Patent amortization expense cr. Accu. Patent amortization

GOODWILL: A g/w is acquired only when whole unit/company is purchased because g/w cannot be separated. When a co purchases another co., it assumes its entire assets & liabilities. Apart from that, there are some intangibles that are also acquired, that were not shown on books of the acquired co. They may have created it internally and therefore expensed it. So you are assuming the net assets of that co.( A- L) and something else too. How is g/w calculated? It is referred to as plug in figure or master valuation account. It is never calculated directly or first, it is the remaining value always. G/W= excess of cost of the purchase over the FMV of the identifiable net assets purchased g/w called most intangible of the intangibles. Master valuation approach considers that goodwill covers all values that cannot be specifically identified with any identifiable intangible or tangible asset. Recording g/w: Internally created G/w not to be capitalized as the calculation= difficult. Sometimes g/w is just created w/o any relted expenditure specifically for creating it. So if companies capitalize it, they will have to show some expense= which may or may not have occurred = which could be small or huge in proportion to g/w. Possibility of misrepresentation. Purchased G/w cost- FMV of identifiable net asset **** Before you record g/w in your book (after purchasing another co), you must know the FMV of the net assets. It may be given that FMV = BV. Else look for ways to identify the FMV. If you is miss this, you may end up comparing BV (@ historical cost) and the costwhich could show very high g/w. Not a correct valuation!

GOODWILL WRITEOFF: Co. assumes that the goodwill that they acquired through purchase will have indefinite life. So, it should not be amortized, but should be checked for impairment. Some say- just like internally created g/weven purchased g/w should be expensed. However, the best way to give most useful fin info to investing community= non amortization of g/w + adequate impairment testing. Bargain purchase The purchaser will sometimes pay less than the FMV of the net assets while purchasing a company. In such case, the purchaser will record gain. So basically if co. purchased cost> FMV record g/w If co purchased cost< FMV---record gain Either waypurchaser benefits! IMPAIRMENT OF INTANGIBLE ASSETS Limited life intangibles Similar to PPE. Involves 2 step process recoverability test & FV test If impairment loss has occurred, it is recorded as part of Income from continuing ops in other expenses and losses section. Indefinite life intangibles- other than g/w Only FV test Companies should check the indefinite life intangibles other than g/w (e.g. trademark, trade names, internet domain names etc.) for impairment at least annually. Co. dont use recoverability test as life of asset is indefinite, the undiscounted c/f expected in future will never be < carrying value. Hence this step will never show if Imp has occurred. Impairment of g/w 2 step process FV of the whole unit, FV of goodwill Step 1: Compare FMV of whole unit with CV of whole unit. If FMV> CV. No impairment of G/W. If FMV< CV of whole unit impairment of goodwill has occurred Step 2: You need to get implied value of goodwill first. FMV whole unit: XXXX Less: Net asset- G/W (XXXX) as on books =Implied value of g/w * Step 3: compare implied value of g/w to CV of goodwill. If CV greater difference = loss on impairment

Research & Development costs: Outcomes and future eco benefits of R&D activity = uncertain. Hence these costs re expensed when incurred. Research critical investigation or Planned search aimed at discovery of new knowledge Development translation of research findings or other knowledge into plan or design for new product/process or for significant improvement of existing oneintended for sale or use. Costs associated with R&D: -Material, equipment & facilities -personnel -Purchased intangibles -contract services -indirect costs Other costs similar to R&D but not R&D: -startup costs for new operation -initial operating losses -advertising costs -computer software costs 1. Costs to create software that will be sold/leased/marketed to third parties first to be charged to R&D expense. After technological feasibility established capitalize the costs. 2. If purchased software and if it has alternate uses capitalize it 3. When capitalizing- companies need to estb Amortization base. This can be done in one of 2 ways...% of revenue method (ratio of current cost to current & anticipated costs) OR straight line method (using SL method to amortize over remaining useful life of asset). 4. Companies chose the GREATER of the two to be conservative