Dosen: Dra. Triani Arofah, M.Si.,Ak.

,CA
UNSOED
2020
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
intangible assets. presentation requirements
for intangible assets.
2. Describe the accounting for
various types of intangible 5. Describe the accounting
assets. and presentation for
research and development
3. Explain the accounting issues
and similar costs.
for recording goodwill.

2
PREVIEW OF CHAPTER 12

Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
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
Normally classified as non-current important asset is
its brand image,
asset. 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.
4 LO 1
 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.

5
► Other incidental expenses. LO 1
 Valuation

Internally Created Intangibles

◆ Might include patents, computer software,
copyrights, and trademarks.
◆ 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.

6 LO 1
 Intangible Asset Issues

Internally Created Intangibles

ILLUSTRATION 12.1
Research and Development Stages

7 LO 1
 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.
8 LO 1
 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.

9 LO 1
 Intangible Asset Issues

Amortization of Intangibles

ILLUSTRATION 12.2
Accounting Treatment for Intangibles

10 LO 1
 LEARNING OBJECTIVE 2
Types of Intangible Describe the accounting for
various types of intangible
Assets assets.

Six Major Categories:

1. Marketing-related. 4. Contract-related.

2. Customer-related. 5. Technology-related.

3. Artistic-related. 6. Goodwill.

11 LO 2
 Types of Intangible Assets

Marketing-Related Intangible Assets

◆ Examples:
► Trademarks or trade names, newspaper
mastheads, Internet domain names, and
non-competition agreements.

◆ Under common law, the right to use a

trademark or trade name rests exclusively with
the original user as long as the original user
continues to use it.
◆ Capitalize purchase price.

12
◆ No amortization. LO 2
What Do The Numbers Mean? Keep Your Hands Off My
Intangible!
Companies go to great extremes to Taylor® sneakers. While Converse is
protect their valuable intangible assets. suing for monetary damages, its main
Consider how the creators of the highly goal is to get these imposters off store
successful game Trivial Pursuit protected shelves. The company went as far as fi
their creation. First, they copyrighted the ling a separate complaint with the
6,000 questions that are at the heart of International Trade Commission to
the game. Then, they shielded the Trivial stop any shoes considered to be
Pursuit name by applying for a counterfeit from entering the country.
registered trademark. As a third mode of That Converse (Nike) is going to these
protection, they obtained a design patent ends to protect its trademark is
on the playing board’s design as a understandable given that Nike
unique graphic creation. reinvigorated the brand by expanding
Another more recent example is the the franchise, introducing more colors
case of Converse (owned by Nike (USA)) and styles, and helping to push All
and its eff orts to protect its classic Stars® into overseas markets.
Chuck Taylor trademark. Converse
accused 31 companies (including U.S.
companies such as Wal-Mart Stores, Source: “Converse Sues to Product Its
Inc., Kmart, and Skechers) of Chuck Taylor All Stars,” The New Work
trademark infringement for co-opting its Times (October 14, 2014).
widely recognizable Chuck
13 LO 2
 Types of Intangible Assets

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.

14 LO 2
 Types of Intangible Assets
Illustration: Green Market AG acquires the customer list of a
large newspaper for €6,000,000 on January 1, 2019. Green
Market expects to benefit from the information evenly over a
three-year period. Record the purchase of the customer list and
the amortization of the customer list for each year on the
straight-line basis.
Jan. 1 Customer List 6,000,000
2019
Cash 6,000,000

Dec. 31 Amortization Expense 2,000,000

2019
Customer List * 2,000,000
2020
2021

15 * or Accumulated Amortization LO 2
 Types of Intangible Assets

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 if less than the
legal life.
and Mickey
Mouse

16 LO 2
 Types of Intangible Assets

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 as operating expense over the life of the
franchise.
◆ Franchise with an indefinite life should be carried at
cost and not amortized.

17 LO 2
 Types of Intangible Assets

Technology-Related Intangible Assets

◆ Examples:
► Patented technology and trade secrets granted by a
government body.

◆ Patent gives holder exclusive use for a period of 20

years.
◆ Capitalize costs of purchasing a patent.
◆ Expense all R&D costs and any development costs
incurred before achieving economic viability.
◆ Amortize over legal life or useful life, whichever is
shorter.
18 LO 2
 Types of Intangible Assets
Illustration: Harcott Co. incurs $180,000 in legal costs on
January 1, 2019, to successfully defend a patent. The
patent’s useful life is 10 years, amortized on a straight-line
basis. Harcott records the legal fees and the amortization at
the end of 2019 as follows.
Jan. 1 Patents 180,000
Cash 180,000

Dec. 31 Patent Amortization Expense 18,000

Patents (or Accumulated Amortization)
18,000
Patent Amortization Expense ($180,000
= ÷ 10) = $18,000

19 LO 2
 Types of Intangible LEARNING OBJECTIVE 3

Assets Explain the accounting

issues 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.

Goodwill is measured as the ...

excess of cost over the fair value of the identifiable net

assets (assets less liabilities) acquired.

Internally created goodwill should not be capitalized.

20 LO 3
 Recording Goodwill

Illustration: Feng, Inc. decides that it needs a parts division to

supplement its existing tractor distributorship. The president of
Feng is interested in buying Tractorling SA. The illustration
presents the statement of financial position of Tractorling SA.

ILLUSTRATION 12.4
Tractorling Statement of Financial Position

21 LO 3
 Recording Goodwill

Illustration: Feng investigates Tractorling’s underlying assets to

determine their fair values.
ILLUSTRATION 12.5
Fair Value of Tractorling’s Net
Assets

Tractorling Company decides to accept Feng’s offer of $400,000.

What is the value of the goodwill, if any?

22 LO 3
 Recording Goodwill

Illustration: Determination of Goodwill.

ILLUSTRATION 12.6
Determination of Goodwill—
Master Valuation Approach

23 LO 3
 Recording Goodwill

Illustration: Feng records this transaction as follows.

Property, Plant, and Equipment 205,000

Patents 18,000
Inventory 122,000
Accounts Receivables 35,000
Cash 25,000
Goodwill 50,000
Liabilities 55,000
Cash 400,000

24 LO 3
 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.

25 LO 3
 LEARNING OBJECTIVE 4
Impairment of Identify impairment
procedures and presentation
Intangible Assets requirements for intangible
assets.

An intangible asset is impaired when a company is not

able to recover the asset’s carrying amount either
through using it or by selling it.
The specific procedures for recording impairments
depend on the type of intangible asset—
1. limited-life or
2. indefinite-life (including goodwill).

26 LO 4
 Impairment of Limited-Life Intangibles

The rules that apply to impairments of property, plant,

and equipment also apply to limited-life intangibles.
The impairment loss is the carrying amount of the asset
less the recoverable amount of the impaired asset.

27 LO 4
 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.
28 LO 4
 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.

29 LO 4
 Impairment of Limited-Life Intangibles

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

€3,000,000 Impairment Loss

€5,000,000 €2,000,000

Unknown €2,000,000

30 LO 4
 Impairment of Limited-Life Intangibles

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

€3,000,000 Impairment Loss

€5,000,000 €2,000,000

Lerch makes the following entry to record the

impairment.
Loss on Impairment Unknown 3,000,000
$2,000,000

31
Patents 3,000,000 LO 4
 Impairment of Limited-Life Intangibles

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 carrying amount after the
impairment is shown below:

ILLUSTRATION 12.8
Post-Impairment Carrying Value of Patent

32 LO 4
 Impairment of Limited-Life Intangibles

Reversal of Impairment Loss

Early in 2020, 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

Recovery of Impairment Loss 150,000

33 LO 4
 Impairment of Intangible 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.
34 LO 4
 Impairment of Indefinite-Life Intangibles
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.

ILLUSTRATION 12.9
Computation of Loss on Impairment of Broadcast License

35 LO 4
 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.

◆ Estimation of the recoverable amount for goodwill

impairments is usually based on value-in-use
estimates.

◆ Goodwill impairment loss reversals are not permitted.

36 LO 4
 Impairment of Goodwill
Illustration: Kohlbuy AG 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. Illustration 12.10 lists the Pritt Division’s
net assets, including the associated goodwill of €900,000 from
the purchase.
ILLUSTRATION 12.10

37 LO 4
 Impairment of 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
38 LO 4
 Impairment of 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
39 LO 4
5
 Impairment of 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

Kohlbuy makes the following entry to record the impairment.

Loss on Impairment 500,000
Goodwill 500,000
Unknown $1,900,000
40 LO 4
5
 Presentation of Intangible Assets

Statement of Financial Position

◆ Companies should report as a separate item all
intangible assets other than goodwill.

◆ Reporting is similar to the reporting of property,

plant, and equipment.

◆ Contra accounts are not normally shown for

intangibles.

41 LO 4
 Presentation of Intangible Assets

Income Statement
Companies should report

◆ amortization expense and

◆ impairment losses and reversals

for intangible assets other than goodwill separately in net

income (usually in the operating section).

Notes to the financial statements should include the

amortization expense for each type of asset.

42 LO 4
 Presentation of Intangible Assets
The reporting of intangible assets is similar to the reporting of
property, plant, and equipment.

ILLUSTRATION 12.12
Nestlé’s Intangible Asset Disclosures Unknown $1,900,000
43 LO 4
5
 LEARNING OBJECTIVE 5
Research and Describe the accounting and
presentation for research and
Development Costs development and similar
costs.

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

themselves intangible assets.

Frequently results in the development of patents or

copyrights such as new

◆ product, ◆ formula,
◆ process, ◆ composition, or
◆ idea, ◆ literary work.

44 LO 5
 Research and Development Costs

Companies spend considerable sums on research and

development.

ILLUSTRATION 12.13
R&D Outlays, as a Percentage of Sales
45 LO 5
 Research and Development 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).

46 LO 5
 Research and Development Costs

Identifying R & D Activities ILLUSTRATION 12.14

Research Activities versus
Development Activities

Research Activities Examples

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

Development Activities Examples

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

47 LO 5
 Research and Development Costs

Accounting for R & D Activities

Costs Associated with R&D Activities:
◆ Materials, equipment, and facilities.

◆ Personnel.

◆ Purchased intangibles.

◆ Contract Services.

◆ Indirect Costs.

48 LO 5
 Accounting for R & D Activities
Illustration 12.15 Sample R&D Expenditures and Their
Accounting Treatment.

Type of Expenditure Accounting 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 2. Expense immediately as
on 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.

49 LO 5
 Accounting for R & D Activities

Type of Expenditure Accounting Treatment

4. Purchase of materials for use on 4. Inventory and allocate to

current and future R&D projects. R&D projects; expense as
consumed.
5. Salaries of research staff designing 5. Expense immediately as
new laser bone scanner. R&D.
6. Research costs incurred under 6. Record as a receivable.
contract with New Horizon, Inc., and
billable monthly.
7. Material, labor, and overhead costs 7. Expense immediately as
of prototype laser scanner (economic R&D.
viability not achieved).

50 LO 5
 Accounting for R & D Activities

Type of Expenditure Accounting 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 9. Capitalize as patent and
laser 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 11. Expense as operating
promote new laser scanner. expense.

51 LO 5
 Accounting for R & D Activities

Type of Expenditure Accounting Treatment

12. Engineering costs incurred to 12. Expense as operating

advance the laser scanner to full expense. Capitalize as
production stage (economic viability R&D.
achieved). 13. Capitalize as patent and
13. Costs of successfully defending amortize to overhead as
patent on laser scanner. part of cost of goods
manufactured.
14. Expense as operating
14. Commissions to sales staff marketing expense.
new laser scanner.

52 LO 5
 Research and Development Costs

Costs Similar to R & D Costs

◆ Start-up costs for a new operation.

◆ Initial operating losses.

◆ Advertising costs.

These costs are expensed as incurred, similar to the

accounting for R&D costs.

53 LO 5
 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 Expense
alternative uses in future R&D projects over the
next 5 years (uses straight-line depreciation) $330,00 $66,000
0
Materials consumed in R&D projects 59,000 59,000
Consulting fees paid to outsiders for R&D 100,000 100,000
projects
128,000 128,000
Personnel costs involved in R&D projects
50,000 50,000
Indirect costs reasonably allocable to R&D
projects 34,000 0

Materials purchased for future R&D projects $403,000

54 LO 5
 Presentation of R&D Costs

Companies should disclose the total R&D costs charged to

expense each period.

ILLUSTRATION 12.16
R&D Reporting

55 LO 5
 COPYRIGHT

Copyright © 2018 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that
permitted in Section 117 of the 1976 United States Copyright
Act without the express written permission of the copyright
owner is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley &
Sons, Inc. The purchaser may make back-up copies for his/
her own use only and not for distribution or resale. The
Publisher assumes no responsibility for errors, omissions, or
damages, caused by the use of these programs or from the
use of the information contained herein.

56