Operational Assets - Intangibles

Chapter 12

Kieso, Weygandt, Warfield

Actively Used in OperationsActively Used in Operations

Tangible

Property, Plant,

Equipment & Natural

Resources

Tangible

Property, Plant,

Equipment & Natural

Resources

Intangible

No PhysicalSubstance

Intangible

No PhysicalSubstance

Types of Operational Assets

Expected to Benefit Future PeriodsExpected to Benefit Future Periods

Intangible Assets

Two features of Intangible Assets

1. They lack physical existence2. They are not financial instruments

** Examples include:Trademarks, Copyrights, Patents,

Franchise Agreements, and Goodwill

Purchased Intangibles

Intangibles purchased from another party are recorded at cost [all costs necessary to make the intangible asset ready for its intended use].

Internally Created Intangibles

Intangibles created internally are generally expensed as incurred.

The only internal costs capitalized to intangible asset accounts are direct costs such as legal costs and fees.

Research & Development Costs

Research and Development (R&D) Costs are not intangible assets.

Any R&D costs incurred in the development of intangibles such as copyrights, patents, or trademarks MUST be expensed when incurred.

Research & Development Costs

If an enterprise owns a research facility consisting of building, labs, or equipment that conducts R&D activities and that have alternative future uses, the facility should be accounted for as a Capitalized Operational Asset.

The depreciation should be accounted for as R&D expenses.

Start Up Costs

All Start-Up costs and Organizational Costs incurred in organizing a new entity should be expensed as incurred.

Limited Life Intangibles

Intangibles with a limited life are amortized over time using Straight-Line Amortization. There is typically no salvage value for an intangible asset.

Ex) A patent is purchased for $50,000 with a useful remaining life of 10 years. Amortization for the patent would be recorded as follows:

Amortization Expense 5,000Accumulated Amortization 5,000

Indefinite-Life Intangibles

Intangibles with indefinite lives are NOT amortized over time.

Ex) Trademarks, Trade Names, Goodwill

Types of Intangibles

Trademarks – Marketing Related Intangible

A trademark is a word, phrase, or symbol that identifies a particular company or product.

Registration with the U.S. Patent and Trademark Office provides legal protection for an indefinite number of renewals for periods of 10 years each.

Trademarks are considered to have an indefinite life and are typically not amortized.

ex.) Kleenex, GE, Amazon.com

Types of IntangiblesCopyrights – Artistic Related Intangible

Copyrights are federally granted rights to artistic creations with a life of the creator plus 70 years.

Copyrights are not renewable.

Copyrights are to be amortized over the lesser of their useful life or their legal life. Generally, the useful life is less than the legal life, and therefore, the asset is amortized over its useful life.

Legal costs or fees incurred during the life of a Copyright asset for the purpose of defending the copyright may be capitalized to the cost of the Asset and amortized over its remaining useful life.

ex) Songs, Paintings, Books, etc.

Types of IntangiblesPatent – Technology Related Intangibles A patent gives the holder the right to use,

manufacture, and sell a product or process for a period of 20 years without interference or infringement by others.

The original patent is not renewable, but small changes may lead to a new patent extending the life another 20 years. [Pharmaceutical companies often do this by simply changing the color of a pill.]

A patent should be amortized over its legal life of 20 years or its useful life – whichever is shorter.

Legal costs or fees incurred during the life of the patent to successfully defend the Asset are capitalized to the Patent Asset account and amortized over its remaining useful life.

Torch, Inc. has developed a new device. Research and development costs

totaled $30,000. Patent registration costs consisted of $2,000 in attorney

fees and $1,000 in federal registration fees.

What is Torch’s patent cost to be capitalized?

Torch, Inc. has developed a new device. Research and development costs

totaled $30,000. Patent registration costs consisted of $2,000 in attorney

fees and $1,000 in federal registration fees.

What is Torch’s patent cost to be capitalized?

Torch’s cost for the new patent is $3,000. The $30,000 R & D cost is

expensed as incurred.

Torch’s cost for the new patent is $3,000. The $30,000 R & D cost is

expensed as incurred.

Patents

Types of Intangibles

Franchise – Contract Related Intangible

A contract under which the franchisor grants the franchisee the right sell certain products or services & use certain trademarks usually with a specific geographic area.

Franchise agreements may have a definite life or an indefinite life.

If the Franchise agreement has a limited or definite life, it should be amortized over the life of the Asset.

Types of Intangibles

Goodwill – “The most intangible of the intangibles”

Goodwill is only recorded when an entire business has been purchased.

Goodwill is the difference between FMV of the Net Identifiable Assets and the Purchase Price of the business.

Goodwill has an indefinite life and should NOT be amortized.

If the Purchase Price of a company is less than the FMV of Net Identifiable Assets then there is Negative Goodwill. Negative Goodwill is reported as a Gain on the Purchase and is disclosed in the Non-Operating section of the Income Statement.

Occurs when onecompany buys

another company.

The amount by which thepurchase price exceeds the fair

market value of net assets acquired.

Only purchased goodwill is an

intangible asset.

Goodwill

Goodwill

Eddy Company paid $1,000,000 to purchase all of James Company’s

assets and assumed James Company’s liabilities of $200,000. James

Company’s assets were appraised at a fair value of $900,000.

Eddy Company paid $1,000,000 to purchase all of James Company’s

assets and assumed James Company’s liabilities of $200,000. James

Company’s assets were appraised at a fair value of $900,000.

Goodwill

What amount of goodwill should be recorded on Eddy Company

books?

a. $100,000b. $200,000c. $300,000d. $400,000

What amount of goodwill should be recorded on Eddy Company

books?

a. $100,000b. $200,000c. $300,000d. $400,000

What amount of goodwill should be recorded on Eddy

Company books?

a. $100,000b. $200,000c. $300,000d. $400,000

What amount of goodwill should be recorded on Eddy

Company books?

a. $100,000b. $200,000c. $300,000d. $400,000

Goodwill