CHAPTER 12
Intangible Assets
LEARNING OBJECTIVES
1. Discuss the characteristics, valuation and amortization of intangible assets.
2. Describe the accounting for various types of intangible assets.
CHAPTER REVIEW
1. Chapter 12 discusses the basic conceptual and reporting issues related to intangible assets.
Intangible Asset Issues
2. (L.O. 1) The characteristics of intangible assets are: (1) they are identifiable, (2) they lack
physical existence, and (3) they are not monetary assets. The most common types of
3. Cost is the appropriate basis for recording purchased intangible assets. Like tangible
assets, cost includes acquisition price and all other expenditures necessary in making the
4. Limited-life intangibles are amortized over their useful lives. The amount to be
amortized should be cost less residual value. Residual value is assumed to be zero
5. If there are no legal, regulatory, contractual, competitive, or other factors limiting the
useful life of an intangible asset, it is considered an indefinite-life intangible. Indefinite-
Types of Intangibles
6. (L.O. 2) Marketing-related intangible assets are those assets primarily used in the
7. A trademark or trade name is a word, phrase, or symbol that distinguishes or identifies
a particular enterprise or product. The right to use a trademark or trade name, whether it
8. Customer-related intangible assets occur as a result of interactions with outside parties.
9. Artistic-related intangible assets involve ownership rights to plays, literary works,
musical works, pictures, photographs, and video and audiovisual material. These ownership
10. Contract-related intangible assets represent the value of rights that arise from contractual
arrangements. Examples are franchise and licensing agreements, construction permits,
broadcast rights, and service or supply contracts. A franchise is a contractual arrangement
11. Technology-related intangible assets relate to innovations or technological advances.
Examples are patented technology and trade secrets. A patent gives the holder exclusive
right to use, manufacture, and sell a product or a process for a period of 20 years without
12. The costs of a patent should be amortized over its legal life or its useful life, whichever is
shorter. The periodic amortization may be credited to either the Patents account or the
13. (L.O. 3) In a business combination, the cost (purchase price) is assigned where possible
to the identifiable tangible and intangible net assets, and the remainder is recorded in an
intangible asset account called goodwill. Goodwill generated internally should not be
Impairment of Intangibles
14. (L.O. 4) An intangible asset is impaired when a company is not able to recover the
15. The rules that apply to impairments of property, plant, and equipment also apply to
limited-life intangibles. At each financial statement date, a company reviews each
16. The test involves determining the recoverable amount, which is the higher of the asset’s
fair value less costs to sell or value-in-use. Value-in-use is the present value of cash
17. If a review for impairment in future years indicates that an intangible asset is no longer
impaired because the recoverable amount exceeds the carrying amount, the impairment
18. Indefinite-life intangibles other than goodwill are tested annually for impairment. The
impairment test for such assets is the same as that for limited-life intangibles. That is,
19. Goodwill must be tested at least annually for impairment. The impairment test is
conducted based on the cash-generating unit to which the goodwill is assigned. Under
IFRS, when a company records goodwill in a business combination, it must assign the
Research and Development Costs
20. (L.O. 5) Planned research or critical investigation aimed at discovery of new knowledge
21. IFRS requires that all research costs be expensed as incurred. Development costs
may or may not be expensed as incurred. Once a project moves to the development
phase, certain development costs are capitalized. If all of the following criteria are met,
development costs are capitalized; otherwise, they are expensed as incurred. The criteria
are:
a. The project achieves technical feasibility of completing the intangible asset so that it
will be available for or sale;
22. The costs associated with R&D activities and the accounting treatment accorded them are
as follows:
a. Materials, Equipment, and Facilities. Expense the entire costs, unless the items have
alternative future uses (in other R&D projects or otherwise), in which case carry as
23. Start-up costs, initial operating costs, and advertising costs are also expensed as
incurred.
Presentation of Intangibles and Related Items
24. On the statement of financial position, all intangible assets other than goodwill should be
reported as a separate item. If goodwill is present, it also should be reported as a
25. Companies should disclose, generally in the notes, the total R&D cost charged to
expense during each period for which they present an income statement.
LECTURE OUTLINE
This chapter can be covered in two or three class sessions. Students generally do not have
difficulty in understanding the accounting procedures related to the capitalization of intangibles
and their subsequent amortization. However, the accounting for impairments does cause some
confusion.
A. Intangible Asset Issues.
1. (L.O. 1) Characteristics.
2. Valuation.
a. Purchased intangibles are recorded at cost.
(1) Includes purchase price, legal fees, and other incidental expenses.
b. Internally-created intangibles.
3. Amortization of Intangibles.
a. Limited-life intangibles are amortized over their useful lives. Factors affecting
useful life are:
(1) Expected use of the asset.
b. Amortizable base is equal to cost less residual value; both must be assessed at
least annually.
(1) Residual value is assumed to be zero, unless
B. (L.O. 2) Types of Intangible Assets.
1. Marketing-related intangible assets—primarily used in the marketing or promotion of
products or services.
a. Trademarks and trade names.
(1) Considered indefinite-life intangibles, therefore, not amortized.
2. Customer-related intangible assets—result from interactions with outside parties.
a. Customer lists, order or production backlogs, and contractual or non-contractual
customer relationships.
3. Artistic-related intangible assets—ownership rights to plays, literary works, music,
pictures, photos, and video and audiovisual material.
4. Contract-related intangible assets—rights that arise from contractual arrangements.
a. Franchise—contractual arrangement under which the franchisor grants the franchisee
certain rights.
(1) Corporate.
5. Technology-related intangible assets—relate to innovations or technological advances.
a. Patents—exclusive right to use, manufacture, and sell a product or process for
6. (L.O. 3) Goodwill is measured as the excess of the cost of purchasing another
7. The accounting procedures for recording goodwill.
a. Internally created goodwill should not be capitalized in the accounts.
b. Purchased goodwill is recorded when an entire business is purchased.
(1) IASB requires that the excess be recognized as a gain by the purchaser.
C. (L.O. 4) Impairment of Intangible Assets.
1. Limited-life intangibles—are subject to the same rules of impairment as property,
plant and equipment.
a. Review annually for impairment.
b. Perform impairment test, if impairment is indicated.
(1) Compare carrying value amount to recoverable amount.
c. Reversal of impairment loss
(1) Occurs in subsequent years if recoverable amount is higher than the carrying
amount.
2. Indefinite-life intangibles other than goodwill.
3. Goodwill
a. Must test for impairment annually.
b. Impairment test is based on the cash-generating unit (CGU) to which the goodwill
is assigned.
D. (L.O. 5) Research and Development Costs.
1. Definitions of research and development costs.
a. Research—original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding. For example,
2. Accounting for research and development costs.
a. Research costs are expensed as incurred.
b. Development costs are expensed as incurred unless they meet all of the following
criteria, in which case they are capitalized:
(1) The project achieves technical feasibility of completing the intangible asset so
that it will be available for use or sale,
(2) The company intends, and has the ability, to complete the intangible asset and
use or sell it,
3. Research performed under contract by the reporting company for others is accounted
for differently. Thus, if firm A does research under contract for firm B, the former may
capitalize those costs (as a receivable) while the latter expenses them.
4. Other costs similar to R&D costs.
a. Start-up costs. Expensed as incurred.
E. Presentation of Intangibles and Related Items.
1. Intangibles are usually reported at their unamortized cost.
a. All intangibles other than goodwill should be reported as a separate item.
2. R&D costs: the footnotes should disclose the total R&D costs charged to expense in
each period for which an income statement is presented.