What are the two main characteristics of intangible assets?
Lack of physical existence
They are not a financial instrument
How do intangible assets derive their value?
Value of intangible assets derived from the rights and privileges granted to the company using them. Ex-Coca Cola formula
Why are financial instruments not intangible assets?
Financial instruments get their value from the right to receive cash or cash equivalents in the future.
How are intangible assets typically classified?
Typically classified as a long term asset because they provide benefit over a period of years.
How should intangibles purchased from another company be accounted for?
Should be recorded at cost, which includes all expenditures to make the intangible asset ready for its intended use.
What are typical costs associated with a purchased intangible?
Purchase price, legal fees, and other incidental expenses.
How is an intangible accounted for when exchanged for stock or other assets?
The cost of the intangible is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.
How should an intangible be accounted for in basket purchases?
The company should allocate the costs based on fair values.
How are costs for internally created intangibles treated?
Companies capitalize only the direct costs incurred in developing the intangible, such as legal costs and expense the rest.
What is amortization?
The allocation of costs of intangible assets in a systematic way
What are the two classifications of intangibles for amortization?
How are limited-life intangibles amortized?
Amortized over their useful life, which should reflect the periods in which the asset will contribute to cash flows.
What factors are used to determine useful-life?
Expected useful life
Legal, regulatory, or contractual provisions
Any provisions that that enable renewal or extension of life
Effects of obsolescence
Level of maintenance expenditures required
How should the amount of amortization expense be determined for a limited-life intangible?
The amount of amortization expense for a limited-life intangible asset should reflect the pattern in which the company consumes up the asset, if a pattern can be determined.
How should an intangible be amortized if a pattern of production or consumption cannot be determined?
Use the straight line method
What amount of an intangible asset should be amortized?
The cost less the residual value. The residual value is assumed to be zero unless at the end of its useful life the tangible asset has value to another company.
When should impairment of an intangible be recognized?
Should evaluate limited-life intangibles for impairment on a regular basis and recognize impairment if the carrying amount is not recoverable and its carry value exceeds fair value.
What is an indefinite-life intangible?
An intangible asset that has no factors that limit the useful life of the asset.
What does indefinite-life mean?
There is no foreseeable limit on the period of time over which the intangible is expected to provide cash flows.
How often should companies test indefinite-life intangibles for impairment?
Test at least annually
What impairment test is used for indefinite-life intangibles?
Fair value test is used but no recoverability test
What are the 6 major categories of intangibles?
What are marketing related intangibles?
Assets used in the marketing or promotion of products or services. Examples are trademarks or trade names.
What are trademarks or trade names?
A word, phrase, or symbol that distinguishes or identifies a particular company or product.
How is the life of a trademark or trade name determined?
Registration with the US Patent and Trademark Office provides legal protection for an indefinite number of renewals for periods of 10 years each. This allows for an indefinite life and therefore does not amortize costs.
How are costs treated if a company purchases a trademark or trade name?
Costs are capitalized at the purchase
How are costs treated if a company develops a trademark or trade name?
Capitalize costs related to securing it, such as attorney fees, registration fees, design costs, consulting fees, and successful legal defense costs.
What are customer related intangible assets?
Results from interactions with outside parties. Examples include customer lists, order or production backlogs, and both contractual and noncontractual customer relationships.
What are artistic related intangible assets?
Involve ownership rights to plays, literacy works, musical works, pictures, photographs, and video, and audiovisual material. Copyrights protect the ownership rights.
What is a copyright?
A federally granted right that all authors, painters, musicians, sculptors, and other artists have in creations and expressions.
How long is a copyright?
Granted for the life of the creator plus 70 years.
What are contract-related intangible assets?
Represents the value of rights that arise from contractual arrangements. Examples are franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.
What is a franchise?
A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products or services, to use certain trademarks or trade names, or to perform certain functions, usually in a designated geographical area.
What are the lengths of franchise agreement?
Can either be for a definite or indefinite amount of time
How should the cost of a franchise with a limited life be accounted for?
A company should amortize costs of a franchise with a limited life as an operating expense over the life of the franchise.
What are technology-related intangible assets?
Relates to innovations or technological advances. Examples are patented technologies and trade secrets granted by the US Patent and Trademark Office.
What is a patent?
Gives the holder the exclusive right to use, manufacture, and sell a product or process for a period of 20 years.
What are the 2 kinds of patents?
What is a product patent?
Patent that covers actual physical products
What is a process patent?
Patent that governs the process of making a product
How is a purchased patent treated?
The cost of the purchase and costs incurred to secure the patent, as well as attorney fees and other unrecovered costs of a successful legal suit to protect a patent can all be capitalized.
How are costs of a patent developed by a company treated?
Must expense costs as incurred for research and development costs related to the development of the product, process, or idea that it subsequently patents.
What time frames should be used to amortize a patent?
Either the legal or useful life, whichever is shorter.
What should be done if a patent becomes impaired?
The asset should be written down or off immediately
What is goodwill?
The excess costs of the purchase over the fair value of the identifiable net assets. Referred to as gap filler or master valuation account.
How can goodwill be sold?
The only way to sell goodwill is to sell the business
What is internally created goodwill?
Goodwill created internally should not be capitalized in the account.
What is the master valuation approach?
Assumes goodwill covers all the values that cannot be specifically identified with any identifiable tangible or intangible asset.
When should a company adjust the carrying value of goodwill?
Companies should adjust the carrying value of goodwill only when impaired.
What is a bargain purchase?
When a business combination pays less than the fair value of the identifiable net assets. Excess amount as recorded as gain by purchaser.