PDF Kieso Intermediate Accounting chapter 12

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1. Intermediate Accounting
I F R S Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 12
Intangible Assets
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.

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Learning Objectives
After studying this chapter, you should be able to:
L O 1 Discuss the characteristics, valuation, and amortization of
intangible assets.
L O 2 Describe the accounting for various types of intangible assets.
L O 3 Explain the accounting issues for recording goodwill.
L O 4 Identify impairment procedures and presentation
requirements for intangible assets.
L O 5 Describe the accounting and presentation for research and
development and similar costs.

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PREVIEW OF CHAPTER 12

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Learning Objective 1
Discuss the characteristics, valuation,
and amortization of intangible assets.
L O 1

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Intangible Asset Issues
Characteristics
• Identifiable.
•Lack physical existence.
•Not monetary assets.
Normally classified as non-current asset.
Common types of intangibles:
1.Marketing-related.
2.Customer-related.
3.Artistic-related.
4.Contract-related.
5.Technology-related.
6.Goodwill.
Christian Dior’s (F R A) most
important asset is its brand
image, not its store fixtures.
L O 1

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Intangible Asset Issues
Valuation for Purchased Intangibles
•Recorded at cost.
•Includes all acquisition costs plus expenditures to make
the intangible asset ready for its intended use.
•Typical costs include:
oPurchase price.
oLegal fees.
oOther incidental expenses.
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Intangible Asset Issues
Valuation for 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.
•I F R S identifies several specific criteria that must be met
before development costs are capitalized.
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Internally Created Intangibles
Research and Development Stages
ILLUSTRATION 12.1
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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.
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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.
L O 1

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Accounting Treatment for Intangibles
ILLUSTRATION 12.2
L O 1

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Learning Objective 2
Describe the accounting for various
types of intangible assets.
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Types of Intangible Assets
Six Major Categories:
1.Marketing-related.
2.Customer-related.
3.Artistic-related.
4.Contract-related.
5.Technology-related.
6.Goodwill.
L O 2

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Types of Intangible Assets
Marketing-Related Intangible Assets
•Examples:
oTrademarks 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.
•No amortization.
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Types of Intangible Assets
Customer-Related Intangible Assets
•Examples:
oCustomer lists, order or production backlogs, and both
contractual and non-contractual customer relationships.
•Capitalize acquisition costs.
•Amortized to expense over useful life.
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Customer-Related Intangible Assets
Illustration
Green Market AG acquires the customer list of a large newspaper for
€6,000,000 on January 1, 2022. 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
2022
Customer List 6,000,000
Cash6,000,000
Dec. 31
2022
2023
2024
Amortization Expense 2,000,000
Customer List *2,000,000
* or Accumulated Customer List Amortization
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Types of Intangible Assets
Artistic-Related Intangible Assets
•Examples:
oPlays, 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.
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Types of Intangible Assets
Contract-Related Intangible Assets
•Examples:
oFranchise 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.
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Types of Intangible Assets
Technology-Related Intangible Assets
•Examples:
oPatented 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.
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What Do The Numbers Mean? Patent
Battles
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Amortization of Patent
Illustration
Harcott Co. incurs $180,000 in legal costs on January 1, 2022, to
successfully secure 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 2022 as follows.
Jan. 1Patents 180,000
Cash 180,000
Dec. 31Patent Amortization Expense 18,000
Patents (or Accumulated Patent Amortization) 18,000
Patent Amortization Expense =($180,000 ÷ 10) = $18,000
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Learning Objective 3
Explain the accounting issues for
recording goodwill.
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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.
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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 S A. The illustration presents the statement of
financial position of Tractorling S A.
ILLUSTRATION 12.4
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Recording Goodwill
Illustration
Feng investigates Tractorling’s underlying assets to determine their
fair values.
ILLUSTRATION 12.5
Tractorling Company decides to accept Feng’s offer of $400,000. What is the
value of the goodwill, if any?
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Determination of Goodwill
ILLUSTRATION 12.6
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Recording Goodwill
Feng records this transaction as follows.
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Goodwill Write-Off and Bargain
Purchase
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.
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Learning Objective 4
Identify impairment procedures and
presentation requirements for intangible
assets.
L O 4

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Impairment of 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).
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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.
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.
L O 4

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Impairment of Limited-Life Intangibles
Illustration
Lerch S E has a patent on how to extract oil from shale rock, with a
carrying value of €5,000,000 at the end of 2021. 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.
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Impairment of Limited-Life Intangibles
Impairment Loss Computation
Lerch makes the following entry to record the impairment.
Loss on Impairment3,000,000
Patents3,000,000
The loss on impairment is reported in the Other income and
expense section of the income statement.
L O 4

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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 (€2,000,000 ÷ 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
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Impairment of Limited-Life Intangibles
Journal Entry for Reversal of Impairment Loss
Early in 2023, 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 with the following entry.
Patents (€1,750,000 − €1,600,000) 150,000
Recovery of Impairment Loss150,000
The recovery of the impairment loss is reported in the Other income
and expense section of the income statement. The carrying value of
the patent is now €1,750,000 (€1,600,000 + €150,000). Assuming
the remaining life of the patent is four years, Lerch records €437,500
(€1,750,000 ÷ €4) of amortization expense in 2023.
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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,
ocompare the recoverable amount of the intangible asset
with the asset’s carrying value.
oIf the recoverable amount is less than the carrying amount,
the company recognizes an impairment.
L O 4

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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
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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.
oCash-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.
L O 4

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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
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Impairment of Goodwill
Illustration
Kohlbuy determines the recoverable amount for the Pritt Division
to be €2,800,000, based on a value-in-use estimate.
Because the fair value of the division exceeds the carrying amount
of the net assets, Kohlbuy does not recognize any impairment.
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Impairment of Goodwill
New Recoverable Amount
Assume that the recoverable amount for the Pritt Division is
€1,900,000 instead of €2,800,000.
Kohlbuy makes the following entry to record the impairment.
Loss on Impairment500,000
Goodwill500,000
Following this entry, the carrying value of the goodwill is €400,000.
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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.
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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.
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Presentation of Intangible Assets
Example
The reporting of intangible assets is similar to the reporting of
property, plant, and equipment.
ILLUSTRATION 12.12
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Learning Objective 5
Describe the accounting and presentation
for research and development and similar
costs.
L O 5

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Research and Development Costs
Research and development (R&D) costs are not in themselves
intangible assets.
Frequently results in the development of patents or
copyrights (such as a new product, process, idea, formula,
composition, or literary work) that may provide future value.
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Research and Development Costs
Examples
Companies spend considerable sums on research and
development.
ILLUSTRATION 12.13
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Research and Development Costs
Basic Rules
•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 probably flow to the company (the project is
economically viable).
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Identifying R&D Activities
ILLUSTRATION 12.14
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Accounting for R&D Activities
Costs Associated with R&D Activities:
•Materials, equipment, and facilities.
•Personnel.
•Purchased intangibles.
•Contract Services.
•Indirect Costs.
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Type of Expenditure and Accounting
Treatment
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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.
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Research and Development Costs
Exercise
E12.17: Compute the amount to be reported as research and development
expense.
Cost of equipment acquired that will have
alternative uses in future R&D projects over
the next 5 years (uses straight-line
depreciation)
Materials consumed in R&D projects
Consulting fees paid to outsiders for R&D
projects
Personnel costs involved in R&D projects
Indirect costs reasonably allocable to R&D
projects
Materials purchased for future R&D projects
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Presentation of R&D Costs
Companies should disclose the total R&D costs charged to expense
each period.
ILLUSTRATION 12.16
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Learning Objective 6
Compare the accounting for intangible
assets under I F R S and G A A P.
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Global Accounting Insights
Similarities
•Like I F R S, under U.S. G A A P intangible assets (1) lack physical
substance and (2) are not financial instruments.
•Under I F R S, an intangible asset is identifiable. To be
identifiable, an intangible asset must either be separable from
the company or it arises from contractual or legal right from
which economic benefits will flow to the company.
•As in I F R S, U.S. G A A P assesses goodwill for impairment at least
annually.
•As in I F R S, under U.S. G A A P the costs associated with research
and development are segregated into the two components.
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Global Accounting Insights
Differences
•U.S. G A A P does not permit the revaluation basis of accounting.
•U.S. G A A P requires expensing of all costs associated with internally
generated intangibles. I F R S permits some capitalization of internally
generated intangible assets if it is probable there will be a future
benefit and the amount can be reliably measured.
•Under U.S. G A A P, companies may capitalize legal costs incurred to
protect rights under a patent, copyright, or trademark if the company
is successful in the legal proceedings.
•Under U.S. G A A P, impairment losses cannot be reversed for assets to
be held and used; the impairment loss results in a new cost basis for
the asset.
•Under U.S G A A P, all development costs are expensed as incurred.
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Global Accounting Insights
Illustration of Differences between I F R S and U.S. G A A P
To illustrate the effect of differences in the accounting for brands,
consider the following disclosure by (G B R) in a recent annual
report. Note that GlaxoSmithKline would report lower income by
£1.3 billion if it accounting for its brands under U.S. G A A P.
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