CH 12

CHAPTER 12
Intangible Assets
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics
Questions
1.
Intangible assets;
concepts, definitions;
items comprising
intangible assets.
1, 2, 3, 4, 5, 6,
7, 8, 9, 10, 11,
12, 13, 14
2.
Patents; franchise;
organization costs;
trade name.
9, 10, 11, 25
3.
Goodwill.
4.
Brief
Exercises
Exercises
Concepts
Problems for Analysis
1, 2, 3,
5, 6
1, 2, 3, 4
1, 2, 3
1, 2, 3, 4,
7, 12, 13
4, 5, 6, 7,
8, 9, 10,
11, 13
1, 2, 3,
4, 6
1, 2
12, 13, 14, 18
5, 7, 8
6, 12,
13, 15
5, 6
Impairment of
intangibles.
15, 16, 17, 18
6, 7, 8
14, 15
5.
Research and
development costs
and similar costs.
19, 20, 21,

22, 23, 24
9, 10, 11, 12
4, 16, 17
1, 2, 3
*6.
Computer software
costs.
26, 27, 28
14
18, 19
3, 4, 5
*This material is covered in an Appendix to the chapter.
Copyright 20132012 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 1514/e Instructors Manual(For Instructor Use Only) 12-
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Brief
Exercises
Learning Objectives
Exercises
Problems
1.
Describe the characteristics of intangible assets.
1, 2, 3
2.
Identify the costs to include in the initial valuation

of intangible assets.
1, 2, 3, 4
5, 7, 9,
10, 11
1, 2, 3, 6
3.
Explain the procedure for amortizing intangible

assets.
1, 2, 3, 4,
12, 13
4, 5, 6, 7, 9,
10, 11, 13
1, 2, 3, 6
4.
Describe the types of intangible assets.
1, 2, 3
5.
Explain the conceptual issues related to goodwill.
12, 13
56. ExplainDescribe the accounting issuesprocedures

for recording goodwill.
12, 13, 15
5, 6
67. Explain the accounting issues related to intangibleasset impairments.
6, 7, 8
14, 15
5, 6
78. Identify the conceptual issues related to research

and development costs.
5, 9
89. Describe the accounting for research and

development and similar costs.
9, 10, 11, 12
910. Indicate the presentation of intangible assets

and related items.
12, 13
*11.
Understand the accounting treatment for computer

software costs.
14
4, 6, 8,
16, 17
4, 6
18, 19
12-2
Only)
Copyright 20132012 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 1514/e Instructors Manual(For Instructor Use
ASSIGNMENT CHARACTERISTICS TABLE
It
e
m
Description
Level of
Difficu
lty
Time
(minut
es)
E12-1
Classification issuesintangibles.
Moderate
1520
E12-2
Classification issuesintangibles.
Simple
1015
E12-3
Classification issuesintangible asset.
Moderate
1015
E12-4
Intangible amortization.
Moderate
1520
E12-5
Correct intangible asset account.
Moderate
1520
E12-6
Recording and amortization of intangibles.
Simple
1520
E12-7
Accounting for trade name.
Simple
1015
E12-8
Accounting for organization costs.
Simple
1015
E12-9
Accounting for patents, franchises, and R&D.
Moderate
1520
E12-10
Accounting for patents.
Moderate
2025
E12-11
Moderate
1520
E12-12
Accounting for goodwill.
Moderate
2025
E12-13
Accounting for goodwill.
Simple
1015
E12-14
Copyright impairment.
Simple
1520
E12-15
Goodwill impairment.
Simple
1520
E12-16
Accounting for R&D costs.
Moderate
1520
E12-17
Moderate
1015
*E12-18
Accounting for computer software costs.
Moderate
1015
*E12-19
Accounting for computer software costs.
Moderate
1520
P12-1
Correct intangible asset account.
Moderate
1520
P12-2
Moderate
2030
P12-3
Accounting for franchise, patents, and trade name.
Moderate
2030
P12-4
Moderate
1520
P12-5
Goodwill, impairment.
Complex
2530
P12-6
Comprehensive intangible assets.
Moderate
3035
CA12-1
Accounting for pollution expenditure.
Moderate
2530
CA1212
Accounting for pre-opening costs.
Moderate
2025
CA1223
Moderate
2530
CA1234
Accounting for research and development costs.
Moderate
2530
CA1245
Accounting for research and development costs.
Moderate
2025
12-4
Only)
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6
7.
78.
89.
910.
*11.
Describe the characteristics of intangible assets.

Identify the costs to include in the initial valuation of intangible assets.
Explain the procedure for amortizing intangible assets.
Describe the types of intangible assets.
Explain the accountingconceptual issues for recordingrelated to goodwill.
6.
Describe the accounting procedures for recording goodwill.
Explain the accounting issues related to intangible-asset impairments.
Identify the conceptual issues related to research and development costs.
Describe the accounting for research and development and similar costs.
Indicate the presentation of intangible assets and related items.
Understand the accounting treatment for computer software costs.
CHAPTER REVIEW
*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.
1. Chapter 12 discusses the basic conceptual and reporting issues related to intangible assets.
Characteristics of Intangibles
Valuing and Amortizing Intangibles
2. (L.O. 1)The characteristics of intangible assets are: (1) they lack physical existence, and
(2) they are not a financial instrument. The most common types of intangibles reported are
patents, copyrights, franchises, licenses, trademarks, trade names, and goodwill.
Valuation of Intangibles
3. (L.O. 2)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 asset ready for its intended usefor example, purchase price, legal fees, and
other incidental expenses. When intangibles are acquired in exchange 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. Costs incurred to
create internally-created intangibles are generally expensed as incurred.
Amortization of Intangibles
4. (L.O. 3)Intangibles have either a limited (finite) useful life or an indefinite useful life. An
intangible asset with a limited life is amortized over its expected useful life.; A an
intangible asset with an indefinite life is not amortized.
Limited-Life Intangibles
5. The expiration of intangible assets is called amortization. Limited-life intangibles should
be amortized by systematic charges to expense over their respective useful lifelives. The
useful life should reflect the periods over which these assets will contribute to cash flows.
6. The amount of amortization expense for a limited-life intangible asset should reflect the
pattern in which the asset is consumed or used up, if that pattern can be readily
determined. If not, the straight-line method of amortization should be used. When intangible
assets are amortized, the charges should be shown as expenses, and the credits should
be made either to the appropriate asset accounts or to separate accumulated amortization
accounts. The amount of an intangible asset to be amortized should be its cost less
residual value.
Indefinite-Life Intangibles
12-6
Only)
7. If no legal, regulatory, contractual, competitive, or other factors limit the useful life of an
intangible asset, the useful life is considered indefinite. An intangible with an indefinite
life is not amortized, instead it is tested for impairment.
Marketing-Related Intangible Assets

8. (L.O. 4)Marketing-related intangible assets are those assets primarily used in the
marketing or promotion of products or services. Examples are trademarks or trade names,
newspaper masthead, Internet domain names, and noncompetition agreements.
9. A trademark or trade name is a word, phrase, or symbol that distinguishes or identifies
a particular company or product. The right to use a trademark or trade name, whether it is
registered or not, rests exclusively with the original user as long as the original user
continues to use it. Registration with the U.S. Patent and Trademark Office provides legal
protection for an indefinite number of renewals for a period of 10 years each. When the
total cost of a trademark or trade name is insignificant, it can be expensed rather than
capitalized. In most cases, the life of a trademark or trade name is indefinite, and therefore
its cost is not amortized.
Customer-Related Intangible Assets
10. Customer-related intangible assets occur as a result of interactions with outside parties.
Examples are customer lists, order or production backlogs, and both contractual and
noncontractual customer relationships.
Artistic-Related Intangible Assets
11. Artistic-related intangible assets involve ownership rights to plays, literary works,
musical works, pictures, photographs, and video and audiovisual material. These ownership
rights are protected by copyrights. A copyright is a federally granted right that all authors,
painters, musicians, sculptors, and other artists have in their creations and expressions.
A copyright is granted for the life of the creator plus 70 years, and is not renewable.. It
gives the owner, or heirs, the exclusive right to reproduce and sell an artistic or published
work. Copyrights are not renewable. Generally, the useful life of the copyright is less than
its legal life (life of the creator plus 70 years). Costs of defending a copyright are
capitalized. The costs of the copyright should be allocated to the years in which the
benefits are expected to be received.
Contract-Related Intangible Assets
12. 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. They can have limited or indefinite lives.
12-8
Only)
The cost of a contract-related intangible with a limited life should be amortized as

operating expense over the life of the franchise; whereas those with an indefinite life
should be carried at cost and not amortized.
13. A One contract-related intangible asset is a franchise, is an 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
within a designated geographical area.
14. A license or permit is a contract the arrangement commonly entered into by a
governmental body and a business enterprise that uses public property. Franchises and
licenses can have limited or indefinite lives. The cost of a franchise (or license) with a
limited life should be amortized as operating expense over the life of the franchise;
whereas those with an indefinite life should be carried at cost and not amortized.
Technology-Related Intangible Assets

1315. 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
interference or infringement by others. If a patent is purchased from an inventor (or other
owner), the purchase price represents its cost. Research and development costs related
to the development of the product, process, or idea that is subsequently patented must be
expensed as incurred. All unrecovered legal fees and other costs incurred in successfully
defending & patent are charged to the patent account. The costs of the patent should be
amortized over its legal life or its useful life, whichever is shorter.
Goodwill
1416. (L.O. 5 and 6)Goodwill is the excess of cost over fair value of the identifiable net assets
acquired when purchasing a business. 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 capitalized in the accounts it is recorded only when
an entire business is purchased. To record goodwill, the fair value of the net tangible and
identifiable intangible assets are compared with the purchase price of the acquired
business.. Goodwill is considered to have an indefinite life and therefore should not be
amortized.
17. A bargain purchase results when the fair value of the net assets acquired is higher than
the purchase price of the assets. The FASB requires that the excess be recognized as a
gain and that the nature of the gain be disclosed.
Impairments of Limited-Life Intangibles
1518. (L.O. 67) The rules that apply to impairments of property, plant, and equipment also
apply to limited-life intangibles. When the carrying amount of a long-lived asset
(property, plant, and equipment or intangible assets) is not recoverable, a write-off of the
impairment is needed. To determine if property, plant, or equipmentthe asset is has been
impaired, a recoverability test is used. The first step of the test requires, an estimate of the
future net cash flows expected from the use of that asset and its eventual disposition are
to be determined. If the sum of the expected future net cash flows (undiscounted) is less
than the carrying amount of the asset, an impairment has occurred. The company then
uses the fair value test to measure the impairment loss If an impairment loss has been
incurred, it is the amount by whichby comparing the carrying amount of the asset exceeds
with its fair value. The impairment loss is reported as part of income from continuing
operations, generally in the Other expenses and losses section.
Impairments of Indefinite-Life Intangibles
1619. The rules that apply to impairments of property, plant, and equipment also apply to
limited-life intangibles. Indefinite-life intangibles other than goodwill should be tested for
impairment at least annually using the fair value test. This test compares the fair value of
the intangible asset with the assets carrying amount. If the fair value of the intangible
asset is less than the carrying amount, impairment is recognized.
12-10
Only)
Impairment of Goodwill
1720.
The impairment rule for goodwill is a two-step process. First, the fair value of the
reporting unit should be compared to its carrying amount including goodwill. If the fair
value of the reporting unit is greater than the carrying amount, goodwill is considered not
to be impaired, and the company does not have to do anythingmakes no adjustment.
However, if the fair value is less than the carrying amount of the net assets, then the
second step compares the fair value of the goodwill to its carrying amount and the
impairment is the difference between the carrying amount and the fair value.
11
1821. Once an impairment loss is recorded, the reduced carrying amount of an asset held for
use becomes its new cost basis and is not changed except for depreciation or
amortization in future periods or for additional impairments. Even if the fair value of an
impaired asset increases, a company may not recognize restoration of the previously
recognized impairment loss.
19. Even if the fair value of an impaired asset increases, a company may not recognize
restoration of the previously recognized impairment loss.
Research and Development Costs
2022. (L.O. 78)Research activities consist of Planned planned research or critical
investigation aimed at discovery of new knowledge.
are research activities.
Development activities consist of tTranslation of research findings or other knowledge
into a plan or design for a new product or process or for a significant improvement to an
existing product or process whether intended for sale or use. are development activities.
In general, all research and development costs are to be charged to expense when
incurred.
2123. (L.O. 89) 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
inventory and allocate as consumed; or capitalize and depreciate as used.
b. Personnel.Salaries, wages, and other related costs of personnel engaged in R&D
should be expensed as incurred.
c. Purchased Intangibles.Recognize and measure at fair value. After initial recognition, account for in accordance with their nature (either limited-life or indefinite-life
intangibles).
d. Contract Services.The costs of services performed by others in connection with the
reporting companys R&D should be expensed as incurred.
e. Indirect Costs.A reasonable allocation of indirect costs shall be included in R&D
costs, except for general and administrative cost, which must be clearly related in
order to be included and expensed.
2224. Start-up costs, initial operating costs, and advertising costs are also expensed as
incurred. Computer software costs are discussed on the books companion website.
Presentation of Intangibles and Related Items
2325. (L.O. 910)On the balance sheet, all intangible assets other than goodwill should be
grouped together and reported as a separate line item. If goodwill is present, it also should
be reported as another separate line item.
12-12
Only)
26. On the income statement, amortization expense and impairment losses for intangible assets
other than goodwill should be presented as part of continuing operations. Goodwill
impairment losses should also be presented as a separate line item in the continuing
operations section, unless the goodwill impairment is associated with a discontinued
operation.
2427. 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.
13
Accounting for Computer Software Costs

*25. (L.O. 11)Costs incurred in creating a computer software product that is to be sold, leased ,
or otherwise marketed to third parties should be charged to research and development
expense when incurred until technological feasibility has been established for the product.
Technological feasibility is established upon completion of a detailed program design or
working model.
*26. If software is purchased and it has alternative future uses, then it may be capitalized.
*27. When software costs are capitalized companies are required to use the greater of (1) the
ratio of current revenues to current and anticipated revenues (percent-of-revenue
approach), or (2) the straight-line method over the remaining useful life of the asset
(straight-line approach) as a basis for amortization.
*28. Capitalized software costs should be valued at the lower of unamortized cost or net
realizable value. If net realizable value is lower, then the capitalized software costs should
be written down to this value. Once written down, they may not be written back up.
12-14
Only)
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 may cause
some confusion.
A. Intangible Asset Issues.
TEACHING TIP
TEACHING TIP
Illustration 12-1 can be used to provide an overview of valuation and amortization topics.
1. (L.O. 1)Characteristics of intangible assets.
a. They lack physical existence.
b. They are not financial instruments.
2. (L.O. 2)Valuation of intangible assets.
a. Purchased intangibles are recorded at cost.
(1)
Includes purchase price, legal fees, and other incidental expenses.
(2)
If acquired for by exchanging stock or other assets, the cost is the fair value of
the consideration given or the fair value of the intangible received, whichever is
more clearly evident.
b. Internally created intangibles.

(1)
Only direct costs incurred in developing the intangible are capitalized, e.g.,
legal costs. In general, costs of internally created intangibles are recognized as
expenses when incurred.
3. (L.O. 3)Amortization of Intangibles.
15
TEACHING TIP
Illustration 12-1 can be used to provide an overview of the accounting treatment of

intangible assets.
a. Limited-life intangibles are amortized over their useful lives. Factors affecting
useful life are:
12-16
Only)
(1)
Expected use of the asset.
(2)
Expected useful life of a related asset.
(3)
Any legal, regulatory, or contractual provisions that may limit the useful life.
(4)
Provisions that enable renewal or extension of the assets legal or contractual

life without substantial cost.
(5)
The effects of obsolescence, demand, competition, and other economic factors.
(6)
The level of maintenance expenditure required to obtain the expected future

cash flows from the asset.
b. Amortizable base is equal to cost less residual value.

(1)
Residual value is assumed to be zero, unless the intangible has value to

another company at the end of its useful life.
(2)
The intangible has value to another company at the end of its useful life.
c. Indefinite-life intangibles are not amortized, but are tested for impairment annually.
B. (L.O. 4)Types of Intangible Assets.
TEACHING TIP
Use Illustration 12-2 to discuss the different types of intangibles, their legal lives, and
amortization.
1.
Marketing-related intangible assets. Pprimarily used in the marketing or promotion

of products or services.
a. Trademarks and trade names.
(1)
Considered to be indefinite-life intangibles, and therefore, not amortized.
(2)
If insignificant cost, it is usually expensed.
b. Company names.
c. Domain names.
2.
Customer-related intangible assets. Rresult from interactions with outside parties.

a. Customer lists, order or production backlogs, and contractual or noncontractual
customer relationships.
17
b. Amortized over the assets useful life.

c. Residual value is assumed to be zero, unless the assets useful life is less than the
economic life and reliable evidence exists about the residual value.
3.
Artistic-related intangible assets. Oownership rights to plays, literary works,

musical works, pictures, photographs, and video and audiovisual material.
a. Copyrights are granted for the life of the creator plus 70 years.
b. Useful life is usually less than legal life.
c. Costs of defending a copyright are capitalized.
12-18
Only)
4. Contract-related intangible assets. rights Rights that arise from contractual

arrangements.
a. Franchise. Ccontractual arrangement under which the franchisor grants the
franchisee certain rights.
(1)
Corporate.
(2)
Governmental. Licenses or permits.
(3)
Limited-life franchises should be amortized over the term of the contract.
(4)
Indefinite-life franchises should be carried at cost and not amortized.
(5)
Annual payments under franchise agreements are recognized as operating

expenses in the period incurred.
5. Technology-related intangible assets. Rrelate to innovations or technological

advances.
a. Patents. Eexclusive rights to use, manufacture, and sell a product or process for
20 years.
b. Amortized over the useful life or legal life, whichever is shorter.
c. Legal fees and other costs incurred in successfully defending a patent suit are
capitalizable.
6. (L.O. 5)Goodwill. Represents the future economic benefits arising from the other
assets acquired in a business combination that are not individually identified and
separately recognized.
a.
It is only recorded when an entire business is purchased because goodwill is a going

concern valuation and cannot be separated from the business as
a whole.
b.
ab. Internally generated goodwill is not recordedcapitalized.
bc. Purchased goodwill is recorded as the excess of the purchase price (cost) of an
acquired business over the fair value of the identifiable net assets acquired , often
referred to an a residual amount.
c.d.
Goodwill is the residual amountthe excess of cost over the fair value of
identifiable net assets acquiredIdentifiable assets and liabilities are revalued and
recorded at fair value.
19
TEACHING TIP
Illustration 12-3 provides a numerical example showing how goodwill is recognized
calculated and accounted for. and recorded as the excess of cost over the fair value of
identifiable net assets.
12-20
Only)
d. Goodwill write-off.
(1)
Goodwill is considered an indefinite-life intangible, and therefore is not subject

to amortization.
(2)
Goodwill is only adjusted if it has been impaired.
e. A bargain purchase. Ooccurs when fair value of net assets acquired is greater
than the purchase price.
(1)
FASB requires that the excess be recognized as a gain by the purchaser.
(2)
FASB also requires companies to disclose the nature of the gain.
C. (L.O. 6)Impairment of Limited-Life Intangibles.

TEACHING TIP
TEACHING TIP
Illustration 12-4 provides a flowchart of the accounting process for impairments. Discuss
with students the various events which may result in an impairment and also the accounting
for assets held for use.
TEACHING TIP
TEACHING TIP
Illustration 12-5 provides a numerical example showing how the recoverability test and
impairment loss are determined and the subsequent entry to recognize an impairment loss.
1.
Impairment occurs when the expected future net cash flows (undiscounted) of an asset
is less than the assets carrying value.
a. Review events for possible impairment.
b. Apply the recoverability test to determine if impairment has occurred.
2.
If impairment has occurred, recognize an impairment loss for the amount by which the
carrying value of the asset exceeds the fair value of the asset.
3.
If Because the impaired asset is held for use, the new cost basis of the asset is the
reduced carrying amount. The cost basis is not written up, even if the fair value of the
asset increases in future years.
21
a. Amortization is taken based on the new cost basis over the assets remaining useful
life, or legal life, whichever is shorter.
4.
Impairment losses and restoration of losses are recognized in the other gains and
losses section of the income statement.
12-22
Only)
D. (L.O. 7)Impairment of Indefinite-Life Intangibles.

1.
Intangibles other than Goodwill.

TEACHING TIP
TEACHING TIP
Illustration 12-6 provides a numerical example of the accounting for this type of impairment. of
indefinite-life intangibles other than goodwill.
a. Should be tested for impairment at least annually.
c.
b.
A one-step test is performedthe (fair value test).
(1)
(1) If the fair value of the intangible is less than its carrying amount, an
impairment has occurred and must be recognized.
c.
2.
Restoration of impairment losses is not allowed.
Goodwill.
TEACHING TIP
TEACHING TIP
Illustration 12-7 provides a numerical example of the accounting for impairment losses on
goodwill.
a. Involves a two-step process.
(1)
If the fair value of the reporting unit is less than its carrying amount including
goodwill, then the second step is performed.
(2)
In the second step, the fair value (implied value) of the goodwill must be
determined and compared to its carrying amount.
(i) Implied value of goodwill = Fair value of reporting unit carrying value of
net assets (excluding goodwill).
(ii) If implied goodwill is less than the carrying amount of goodwill, an
impairment loss has occurred and must be recognized.
E. (L.O. 87)Conceptual Issues Related to Research and Development Costs.
23
TEACHING TIP
TEACHING TIP
Illustration 12-8 provides an overview of various R&D costs and their accounting treatment.
12-24
Only)
1.
Discuss definitions of research and development and examples of each.

a. Includes expenditures to discover new knowledge, products, processes, and
techniques. Includes construction of pilot plants and prototypes.
b. Does not include legal work, routine improvements, or periodic retooling. Excludes
research related to selling and administrative activities.
2F. (L.O. 89)Accounting for research and development costs.

1. Costs associated with R&D activities.
a. Materials, equipment, and facilities.
(1)
Expense as incurred, unless they have alternative future uses.
(2)
If alternative future uses exist, carry costs as inventory and allocate as consumed,
or capitalize as tangible assets and depreciate as used.
b. Personnel costs.Expense as incurred.

c. Purchased intangibles.
(1)
Recognize and measure at fair value.
(2)
After initial recognition, account for them according to their nature.
d. Contract services.Expense as incurred.

e. Indirect costs.A reasonable allocation is included in R&D, and expensed as
incurred.
3. All R&D costs incurred internally should be expensed.
4. 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.
5. Costs similar to R&D costs.
a. Start-up costs.Expensed as incurred.
b. Initial operating losses.Do not capitalize.
c. Advertising costs.
(1)
Expensed as incurred, or
(2)
When the advertising first takes place.
25
d. Computer software costs.See bookthe texts companion websiteAppendix 12-A

below.
12-26
Only)
FG.
(L.O. 109)Presentation of Intangibles and Related Items.
1. Intangibles: are usually reported at their unamortized cost.

a. All intangibles other than goodwill should be combined together and reported as a
separate line item.
b. If goodwill is present, it should be reported as a separate line item.
c. The income statement should reflect:
(1)
Amortization expense and impairment losses for all intangibles other than
goodwill.
(2)
Goodwill impairment losses should be shown as a separate item in continuing

operations.
d. The notes to the financial statements should include:

(1)
Aggregate estimated amortization expense for each of next 5 years.
(2)
Changes in the carrying amount of goodwill during the period.
2. R&D costs:. Tthe footnotes should disclose the total R&D costs charged to expense in
each period for which an income statement is presented.
27
G. Appendix 12-A Accounting for Computer Software Costs.

1. Companies can purchase or create software for external use or for internal use.
a. Costs incurred creating a computer software product are expensed as R&D until
technological feasibility has been established.
b. Technological feasibility is established when a detailed program design or working
model has been completed.
2. Costs of software used internally.
a. Capitalize and amortize:
(1)
software used internally.
(2)
upgrading and enhancing computer programs.
b. Expense:
12-28
Only)
(1)
training costs.
(2)
costs of software that dont pan out.
3. Amortization of capitalized costs.

a. Use the greater of the:
(1)
ratio of current revenues to current and anticipated revenues (percent-ofrevenue approach), or
(2)
straight-line method over the remaining useful life of the asset (straight-line
approach).
b. These rules can result in the use of the percent-of-revenue approach one year and
the straight-line approach in another.
4. Reporting software costs.
a. Valued at the lower of unamortized cost or net realizable value.
(1)
Writedowns reduce the carrying value of the software costs.
(2)
There may not be any subsequent recoveries.
b. Disclosures include:
(1)
unamortized software costs, and
(2)
the total amount charged to expense and amounts, if any, written down to net
realizable value.
29
*H. (L.O. 10) IFRS Insights

1.
There are some significant differences between IFRS and GAAP in the accounting for
both intangible assets and impairments. IFRS related to intangible assets is presented
in IAS 38 (Intangible Assets). IFRS related to impairments is found in IAS 36
(Impairment of Assets).
2.
Relevant facts
RELEVANT FACTS
a. Similarities
(1) Like GAAP, under IFRS intangible assets (1) lack physical substance and (2)
are not financial instruments. In addition, under IFRS an intangible asset is
identifiable. To be identifiable, an intangible asset must either be separable
from the company (can be sold or transferred) or it arises from a contractual or
legal right from which economic benefits will flow to the company. Fair value is
used as the measurement basis for intangible assets under IFRS, if it is more
clearly evident.
(2) With issuance of a recent converged statement on business combinations
(IFRS 3 and SFAS No. 141Revised), IFRS and GAAP are very similar for
intangibles acquired in a business combination. That is, companies recognize
an intangible asset separately from goodwill if the intangible represents
contractual or legal rights or is capable of being separated or divided and sold,
transferred, licensed, rented, or exchanged. In addition, under both GAAP and
IFRS, companies recognize acquired in-process research and development
(IPR&D) as a separate intangible asset if it meets the definition of an intangible
asset and its fair value can be measured reliably.
(3) As in GAAP, under IFRS the costs associated with research and development
are segregated into the two components. Costs in the research phase are
always expensed under both IFRS and GAAP.
b. Differences
(1) IFRS permits revaluation on limited-life intangible assets. Revaluations are not
permitted for goodwill and other indefinite-life intangible assets.
12-30
Only)
(2) IFRS permits some capitalization of internally generated intangible assets (e.g.,
brand value) if it is probable there will be a future benefit and the amount can
be reliably measured. GAAP requires expensing of all costs associated with
internally generated intangibles.
(3) IFRS requires an impairment test at each reporting date for long-lived assets
and intangibles, and records an impairment if the assets carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of the
assets fair value less costs to sell and its value-in-use. Value-in-use is the
future cash flows to be derived from the particular assets, discounted to present
value. Under GAAP, impairment loss is measured as the excess of the carrying
amount over the assets fair value.
(4) IFRS allows reversal of impairment losses when there has been a change in
economic conditions or in the expected use of limited-life intangibles. Under
GAAP, impairment losses cannot be reversed for assets to be held and used;
the impairment loss results in a new cost basis for the asset. IFRS and GAAP
are similar in the accounting for impairments of assets held for disposal.
(5) Under IFRS, costs in the development phase of an research and development
project are capitalized once technological feasibility (referred to as economic
viability) is achieved.
(6)
(7) Like GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not
financial instruments. In addition, under IFRS an intangible asset is identifiable. To be
identifiable, an intangible asset must either be separable from the company (can be sold or
transferred) or it arises from a contractual or legal right from which economic benefits will
flow to the company. Fair value is used as the measurement basis for intangible assets
under IFRS, if it is more clearly evident.
(8) With issuance of a recent converged statement on business combinations (IFRS 3 and
SFAS No. 141Revised), IFRS and GAAP are very similar for intangibles acquired in a
business combination. That is, companies recognize an intangible asset separately from
goodwill if the intangible represents contractual or legal rights or is capable of being
separated or divided and sold, transferred, licensed, rented, or exchanged. In addition,
under both GAAP and IFRS, companies recognize acquired in-process research and
development (IPR&D) as a separate intangible asset if it meets the definition of an
intangible asset and its fair value can be measured reliably.
(9) As in GAAP, under IFRS the costs associated with research and development are
segregated into the two components. Costs in the research phase are always expensed
31
under both IFRS and GAAP. Under IFRS, however, costs in the development phase are
capitalized once technological feasibility (referred to as economic viability) is achieved.
(10)
IFRS permits revaluation on limited-life intangible assets. Revaluations are not
permitted for goodwill and other indefinite-life intangible assets.
(11)
IFRS permits some capitalization of internally generated intangible assets (e.g.,
brand value) if it is probable there will be a future benefit and the amount can be reliably
measured. GAAP requires expensing of all costs associated with internally generated
intangibles.
(12)
IFRS requires an impairment test at each reporting date for long-lived assets and
intangibles and records an impairment if the assets carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of the assets fair value less
costs to sell and its value-in-use. Value-in-use is the future cash flows to be derived from
the particular assets, discounted to present value. Under GAAP, impairment loss is
measured as the excess of the carrying amount over the assets fair value.
(13)
IFRS allows reversal of impairment losses when there has been a change in
economic conditions or in the expected use of limited-life intangibles. Under GAAP,
impairment losses cannot be reversed for assets to be held and used; the impairment loss
results in a new cost basis for the asset. IFRS and GAAP are similar in the accounting for
impairments of assets held for disposal.
(14)
With issuance of a recent converged statement on business combinations (IFRS 3
and SFAS No. 141Revised), IFRS and GAAP are very similar for intangibles acquired in
a business combination. That is, companies recognize an intangible asset separately from
goodwill if the intangible represents contractual or legal rights or is capable of being
separated or divided and sold, transferred, licensed, rented, or exchanged. In addition,
under both GAAP and IFRS, companies recognize acquired in-process research and
development (IPR&D) as a separate intangible asset if it meets the definition of an
intangible asset and its fair value can be measured reliably.
12-32
Only)
ILLUSTRATION 12-1
ACCOUNTING TREATMENT OF INTANGIBLES
33
ILLUSTRATION 12-2
TYPES OF INTANGIBLE ASSETS
12-34
Only)
ILLUSTRATION 12-3
RECORDING GOODWILL
35
ILLUSTRATION 12-3 (continued)
12-36
Only)
37
ILLUSTRATION 12-4
ACCOUNTING FOR IMPAIRMENT OF LIMITED-LIFE INTANGIBLES
12-38
Only)
39
ILLUSTRATION 12-5
CALCULATING AND RECORDING AN IMPAIRMENT LOSS
FOR PATENTS
12-40
Only)
ILLUSTRATION 12-6
IMPAIRMENT OF INDEFINITE-LIFE INTANGIBLESOTHER
THAN GOODWILL
41
ILLUSTRATION 12-7
IMPAIRMENT OF GOODWILL
12-42
Only)
ILLUSTRATION 12-8
RESEARCH AND DEVELOPMENT COSTS
43

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CHAPTER 12

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

12, 13, 14, 18

15, 16, 17, 18

19, 20, 21,

*This material is covered in an Appendix to the chapter.

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Describe the characteristics of intangible assets.

Identify the costs to include in the initial valuation

Explain the procedure for amortizing intangible

Describe the types of intangible assets.

Explain the conceptual issues related to goodwill.

56. ExplainDescribe the accounting issuesprocedures

67. Explain the accounting issues related to intangibleasset impairments.

78. Identify the conceptual issues related to research

89. Describe the accounting for research and

910. Indicate the presentation of intangible assets

Understand the accounting treatment for computer

*This material is covered in an Appendix to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE

Classification issuesintangible asset.

Correct intangible asset account.

Recording and amortization of intangibles.

Accounting for trade name.

Accounting for organization costs.

Accounting for patents, franchises, and R&D.

Accounting for patents.

Accounting for patents.

Accounting for goodwill.

Accounting for goodwill.

Accounting for R&D costs.

Accounting for R&D costs.

Accounting for computer software costs.

Accounting for computer software costs.

Correct intangible asset account.

Accounting for patents.

Accounting for franchise, patents, and trade name.

Accounting for R&D costs.

Comprehensive intangible assets.

Accounting for pollution expenditure.

Accounting for pre-opening costs.

Accounting for patents.

Accounting for research and development costs.

Accounting for research and development costs.

Describe the characteristics of intangible assets.

*This material is covered in an Appendix to the chapter.

Marketing-Related Intangible Assets

The cost of a contract-related intangible with a limited life should be amortized as

Technology-Related Intangible Assets

Accounting for Computer Software Costs

Includes purchase price, legal fees, and other incidental expenses.

b. Internally created intangibles.

3. (L.O. 3)Amortization of Intangibles.

Illustration 12-1 can be used to provide an overview of the accounting treatment of

Expected use of the asset.

Expected useful life of a related asset.

Provisions that enable renewal or extension of the assets legal or contractual

The effects of obsolescence, demand, competition, and other economic factors.

The level of maintenance expenditure required to obtain the expected future

b. Amortizable base is equal to cost less residual value.

Residual value is assumed to be zero, unless the intangible has value to

Marketing-related intangible assets. Pprimarily used in the marketing or promotion

Considered to be indefinite-life intangibles, and therefore, not amortized.