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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.


3. Explain the accounting issues for recording goodwill.
4. Identify impairment issues and presentation requirements for intangible assets.

5. Describe the accounting and presentation for research and development and similar
costs.

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS, 3/e, Instructor’s Manual 12-1
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
intangibles reported are patents, copyrights, franchises, licenses, trademarks, trade names,
and goodwill.

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
asset ready for its intended use—for example, purchase price, legal fees, and other
incidental expenses. When intangibles are acquired for consideration other than cash, the
cost of the intangible is the fair market value of the consideration given or the intangible
asset received, whichever is more clearly evident. For internally created intangibles, all
costs incurred in the research phase are expensed as incurred. Certain development
costs are capitalized once economic viability criteria are met.

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
unless the intangible asset has value to another company at the end of its useful life.
IFRS requires companies to assess the estimated residual values and useful lives of
intangible assets at least annually. Companies must also evaluate intangibles annually for
impairment. If there is an indication of impairment, an impairment test is performed. An
impairment loss should be recognized for the amount that the carrying amount of the
intangible is less than the recoverable amount.

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-
life intangibles are not amortized. Instead, they are tested for impairment, annually. An
impairment loss should be recognized for the amount that the carrying amount of the
indefinite-life intangible asset is greater than the recoverable amount.

Types of Intangibles

6. (L.O. 2) 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 mastheads, Internet domain names, and non-competition agreements.

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
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.

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8. 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
non-contractual customer relationships.

9. 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 right granted by a government body
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. 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 in being plus 70 years). The costs of the copyright (acquisition and
successfully defending the copyright) should be allocated to the years in which the
benefits are expected to be received. All research costs are expensed and any
development costs not meeting recognition criteria that lead to a copyright are expensed
as incurred.

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
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. A license or permit is 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.

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
interference or infringement by others. If a patent is purchased from an inventor (or other
owner), the purchase price represents its cost. Other costs included in the cost of a
patent include costs incurred in securing a patent, such as attorney’s fees and the cost of
successfully defending a patent. However, companies must expense all research costs
and any development costs incurred before achieving economic viability related to the
development of the product or process that it subsequently patents.

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
Accumulated Amortization account. If modifications or additions are made to the product
or process that result in a new patent, the unamortized costs of the old patent can be
added to the cost of the new patent. If the patent becomes impaired due to a drop in
demand for the product, the asset should be written down or written off to expense
immediately.

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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
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 asset is
compared with the purchase price of the acquired business. The difference is goodwill.
Goodwill is considered to have an indefinite life and therefore should not be amortized. A
bargain purchase results when the fair value of the net assets acquired is higher than the
purchase price of the assets. The IASB requires that the excess be recognized as a gain
and that the nature of the gain be disclosed.

Impairment of Intangibles

14. (L.O. 4) 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. A review is performed of
the asset’s cash-generating ability through use or sale. If the carrying amount is higher
than the recoverable amount, the difference is an impairment loss.

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
limited-life intangible asset for impairment. This involves considering internal factors, such
as physical damage or adverse changes in performance, and external factors, such as
adverse changes in business environment or technological developments. If there is an
indication of impairment, the company performs an impairment test.

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
flows expected from the future use and eventual sale of the asset. If the carrying value
exceeds the recoverable amount, the difference is an impairment loss. The loss is reported
in the “Other income and expense” section of the income statement.

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
loss recognized in a prior year may be reversed or recovered. The amount of the
recovery is the difference between the recoverable amount and the carrying amount and
is recorded as Recovery of Impairment Loss. It cannot exceed the carrying value
amount that would result if the impairment had not occurred, and is reported in the “Other
income and expense” section of the income statement.

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,
compare the recoverable amount of the intangible asset to its carrying value amount. If
the recoverable amount is less than the carrying value amount, the company recognizes
an impairment loss.

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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
goodwill to the cash-generating unit that is expected to benefit from the synergies and
other benefits arising from the business combination. Because there is rarely a market for
cash-generating units, estimation of the recoverable amount for goodwill impairments is
usually based on value-in-use estimates. If the recoverable amount is less than the
carrying value amount of the cash-generating unit, an impairment loss is recorded.
Goodwill impairment loss recoveries are not permitted.

Research and Development Costs

20. (L.O. 5) Planned research or critical investigation aimed at discovery of new knowledge
are research activities. Translation 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.

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;

b. The company intends, and has the ability, to complete the intangible asset and use or
sell it;

c. The intangible asset will generate probable future economic benefits (there is a
market for the asset or the output of the asset);

d. The company has adequate technical, financial, and other resources to complete the
development of the intangible asset; and

e. The company can measure reliably the development costs associated with the
intangible asset to be developed.

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
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.

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c. Purchased Intangibles. Recognize and measure at fair value. After initial recogni-
tion, 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 company’s 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.

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
separate item. On the income statement, amortization expense and impairment losses and
reversals 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.

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.

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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.

a. They are identifiable.

b. They lack physical existence.

c. They are not monetary assets.

2. Valuation.

a. Purchased intangibles are recorded at cost.

(1) Includes purchase price, legal fees, and other incidental expenses.

(2) If acquired for stock or other assets, 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) All research phase costs are expensed is incurred.

(2) Development phase costs are expensed as incurred, unless certain criteria are
met, in which case, they are capitalized.

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.

(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 of extension of the asset’s legal or contractual
life without substantial cost.

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(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; both must be assessed at
least annually.

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

(2) The intangible has value to another company at the end of its useful life.

c. Must be assessed annually for impairment.

d. Indefinite-life intangibles are not amortized, but must be tested annually for
impairment.

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) If insignificant cost, it is usually expensed.

b. Company names.

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.

b. Amortized over the asset’s useful life.

c. Residual value is assumed to be zero, unless the useful life is less than the
economic life and reliable evidence exists about the residual value.

3. Artistic-related intangible assets—ownership rights to plays, literary works, music,


pictures, photos, 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.

4. Contract-related intangible assets—rights that arise from contractual arrangements.

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a. Franchise—contractual 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. Technology-related intangible assets—relate to innovations or technological advances.

a. Patents—exclusive right 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
capitalized.

6. (L.O. 3) Goodwill is measured as the excess of the cost of purchasing another


business over the fair value of the identifiable net assets purchased. It is sometimes
referred to as a plug, a gap filler, or a master valuation account.

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) It is the excess of cost over fair value of the identifiable net assets acquired.

(2) The master valuation approach assumes goodwill covers all the values that
cannot be specifically identified with any identifiable tangible or intangible
asset.

(3) Goodwill is often identified on the statement of financial position as the


excess of cost over the fair value of the net assets acquired.

c. Goodwill is considered to have an indefinite life and therefore is not subject to


amortization.

d. Goodwill’s carrying value is only adjusted when it is impaired.

e. A bargain purchase—occurs when fair value of net assets acquired is greater than
the purchase price.

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(1) IASB requires that the excess be recognized as a gain by the purchaser.

(2) IASB also requires companies to disclose the nature of the gain.

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.

(1) Internal factors—physical damage or adverse changes in performance.

(2) External factors—adverse changes in business environment or technology.

b. Perform impairment test, if impairment is indicated.

(1) Compare carrying value amount to recoverable amount.

(2) Recoverable amount is higher of fair value less costs to sell or value-in-use.

(3) Value-in-use is the present value of the cash flows expected from future use
and eventual sale of the asset.

(4) If carrying amount is greater than recoverable amount, an impairment loss


has occurred.

(5) Loss reported under “Other income and expense” section of income statement.

c. Reversal of impairment loss

(1) Occurs in subsequent years if recoverable amount is higher than the carrying
amount.

(2) Amount of recovery limited to the carrying value amount that would result if
the impairment had not occurred.

2. Indefinite-life intangibles other than goodwill.

a. The same impairment test as that used for limited-life intangibles must be performed
annually, not just when there is an impairment indicator.

b. Apply the same rules concerning recovery of prior impairment loss.

3. Goodwill

a. Must test for impairment annually.

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b. Impairment test is based on the cash-generating unit (CGU) to which the goodwill
is assigned.

c. Recoverable amount is based on value-in-use estimates because usually no market


for CGU.

d. Recovery of prior impairment losses not permitted.

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,
laboratory research.

b. Development—application of research findings or other knowledge to a plan or


design for the production of new or substantially improved materials, devices,
products, processes, systems, or services before the start of commercial production
or use. Examples include formulation or design of possible products or processes,
construction of prototypes, and operation of pilot plants.

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) The intangible asset will generate probable future economic benefits (there is a
market for the asset or the output of the asset),

(4) The company has adequate technical, financial, and other resources to complete
the development of the intangible asset, and

(5) The company can measure reliably the development costs associated with the
intangible asset to be developed.

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.

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4. Other costs similar to R&D costs.

a. Start-up costs. Expensed as incurred.

b. Initial operating losses. Do not capitalize.

c. Advertising 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.

b. If goodwill is present, it should be reported as a separate 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.

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.

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