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 Intangible Asset Types of Intangible Assets
6 Major Categories:
Characteristics
◆ Identifiable. 1- 1- Examples:
◆ Lack physical existence. Marketing- ► Trademarks or trade names, newspaper
◆ Not monetary assets. Related mastheads, Internet domain names, and
Intangible non-competition agreements.
Normally classified as non-current asset
Assets 2- Under common law, the right to use a
Valuation trademark or trade name rests exclusively
Purchased Intangibles Internally Created Intangibles with the original user as long as the original
user continues to use it.
◆ Recorded at cost. ◆ Might include patents,
3- Capitalize purchase price.
◆ Includes all computer software, 4- No amortization.
acquisition costs plus copyrights, and trademarks. 2- 1- Examples:
expenditures to make ◆ Companies expense all Customer- ► Customer lists, order or production backlogs,
the intangible asset research phase costs and some Related and both contractual and non-contractual
ready for its intended development phase costs. Intangible customer relationships.
use. ◆ Certain development costs are Assets 2- Capitalize acquisition costs.
◆ Typical costs include: capitalized once economic 3- Amortized to expense over useful life
► Purchase price. viability criteria are met. 3- 1- Examples:
► Legal fees. ◆ IFRS identifies several Artistic- ► Plays, literary works, musical works,
► Other incidental specific criteria that must be Related pictures, photographs, and video and
expenses met before development costs Intangible audiovisual material.
are capitalized. Assets 2- Copyright granted for the life of the creator
plus 70 years.
3- Capitalize costs of acquiring and defending.
4- Amortized to expense over useful life if less
than the legal life.
4- 1- Examples:
Contract- ► Franchise and licensing agreements,
Related construction permits, broadcast rights, and
Intangible service or supply contracts.
Assets 2- Franchise (or license) with a limited life
Amortization of Intangibles should be amortized as operating expense
1- Limited-Life Intangibles over the life of the franchise.
◆ Amortize by systematic charge to expense over useful 3- Franchise with an indefinite life should be
life. carried at cost and not amortized.
◆ Amortization expense should reflect the pattern in 5- 1- Examples:
Technology- ► Patented technology and trade secrets
which the company consumes or uses up the asset.
Related granted by a government body.
◆ Credit asset account or accumulated amortization. Intangible 2- Patent gives holder exclusive use for a
◆ Amortization should be cost less residual value. Assets period of 20 years.
◆ Companies must evaluate the limited-life intangibles 3- Capitalize costs of purchasing a patent.
annually for impairment. 4- Expense all R&D costs and any development
costs incurred before achieving economic
2- Indefinite-Life Intangibles viability.
◆ No foreseeable limit on time the asset is expected to 5- Amortize over legal life or useful life,
provide cash flows. whichever is shorter.
◆ No amortization. 6- 1- Conceptually, represents the future
◆ Must test indefinite-life intangibles for impairment at Goodwill economic benefits arising from the other
assets acquired in a business combination
least annually.
" Internally that are not individually identified and
created separately recognized.
goodwill 2- Only recorded when an entire business is
should not purchased.
be 3- Goodwill is measured as the ...
capitalized." " Excess of cost over the fair value of the
identifiable net assets (assets less liabilities)
acquired."
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 Customer-Related Intangible Assets " Example" Goodwill Write-Off
Illustration: Green Market AG acquires the customer list of a ◆ Goodwill considered to have an indefinite life.
large newspaper for €6,000,000 on January 1, 2019. Green ◆ Should not be amortized.
Market expects to benefit from the information evenly over a ◆ Only adjust carrying value when goodwill is impaired
three-year period. Record the purchase of the customer list and
the amortization of the customer list for each year on the Bargain Purchase
straight-line basis. ◆ Purchase price less than the fair value of net assets
: ‫الحل‬ acquired.
◆ Amount is recorded as a gain by the purchaser.
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 new
Technology-Related Intangible Assets " Example" ◆ product, ◆ formula,
Illustration: Harcott Co. incurs $180,000 in legal costs on ◆ process, ◆ composition, or
January 1, 2019, to successfully defend a patent. The patent’s ◆ idea, ◆ literary work.
useful life is 10 years, amortized on a straight-line basis. • Research costs must be expensed as incurred.
Harcott records the legal fees and the amortization at the end of • Development costs may or may not be expensed as
2019 as follows. incurred.
:‫الحل‬ • Capitalization begins when the project is far enough
along in the process such that the economic benefits of
the R&D project will flow to the company (the project is
economically viable).
Identifying R & D Activities
Research Activities Development Activities
Original and planned Application of research findings or other
investigation knowledge to a plan or design for the
Goodwill " Example" undertaken with the production of new or substantially
Illustration: Feng, Inc. decides that it needs a parts division to prospect of gaining improved materials, devices, products,
supplement its existing tractor distributorship. The president of new scientific or processes, systems, or services before
Feng is interested in buying Tractorling SA. technical knowledge the start of commercial production or
▪ Feng investigates Tractorling’s underlying assets to and understanding. use.
determine their fair values 350,000. Examples Examples
▪ Tractorling Company decides to accept Feng’s offer of Laboratory research Conceptual formulation and design of
$400,000. aimed at discovery of possible product or process alternatives;
• What is the value of the goodwill, if any? new knowledge; construction of prototypes and operation
searching for of pilot plants.
:‫الحل‬ applications of new
There is goodwill , because the fair values is less than the cost research findings
Goodwill = 400,000-350,000 = 50,000 Accounting for R & D Activities
Costs Associated with R&D Activities:
: ‫قيد تسجيل عملية االستحواذ على الشركة‬ ◆ Materials, equipment, and facilities.
Property, Plant, and Equipment 205,000 ◆ Personnel.
Patents 18,000 ◆ Purchased intangibles.
Inventory 122,000 ◆ Contract Services.
Accounts Receivables 35,000 ◆ Indirect Costs.
Cash 25,000
Goodwill 50,000
Liabilities 55,000
Cash 400,000

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Illustration 12.15 Assume that Next Century Incorporated Costs Similar to R & D Costs
develops, produces, and markets. lists the types of ◆ Start-up costs for a new operation.
expenditures related to its laser-machine activities, along with ◆ Initial operating losses.
the recommended accounting treatment.
◆ Advertising costs.
Type of Expenditure Accounting Treatment
1. Construction of long-range 1. Capitalize and These costs are expensed as incurred, similar to the accounting
research facility for use in depreciate as R&D for R&D costs.
current and future projects expense.
E12.17:
(three-story, 400,000-square-foot
Compute the amount to be reported as research and
building).
development expense
2. Acquisition of R&D equipment 2. Expense
R&D Expense
for use on current project only. immediately as 330,000/5=
Cost of equipment acquired that $330,000
R&D.
will have alternative uses in
3. Acquisition of machinery for use 3. Capitalize and $66,000
future R&D projects over the
on current and future R&D depreciate as R&D
next 5 years (uses straight-line
projects. expense
depreciation)
4. Purchase of materials for use on 4. Inventory and Materials consumed in R&D 59,000 59,000
current and future R&D projects. allocate to R&D projects
projects; expense as Consulting fees paid to outsiders 100,000 100,000
consumed. for R&D projects
5. Salaries of research staff 5. Expense Personnel costs involved in 128,000 128,000
designing new laser bone immediately as R&D projects
scanner. R&D. Indirect costs reasonably 50,000 50,000
6. Research costs incurred under 6. Record as a allocable to R&D projects
contract with New Horizon, Inc., receivable. Materials purchased for future 34,000 0
and billable monthly. R&D projects

7. Material, labor, and overhead 7. Expense Presentation of R&D Costs

costs of prototype laser scanner immediately as
(economic viability not R&D. Companies should disclose the total R&D costs charged to
achieved). expense each period.
8. Costs of testing prototype and 8. Expense
design modifications (economic immediately as
viability not achieved). R&D.

9. Legal fees to obtain patent on 9. Capitalize as patent

new laser scanner. and amortize to
overhead as part of
cost of goods
manufactured.
10. Executive salaries. 10. Expense as
operating expense.
11. Cost of marketing research to 11. Expense as
promote new laser scanner. operating expense.
12. Engineering costs incurred to 12. Capitalize as R&D.
advance the laser scanner to full
production stage (economic
viability achieved).
13. Costs of successfully defending 13. Capitalize as patent
patent on laser scanner. and amortize to
overhead as part of
cost of goods
manufactured.
14. Commissions to sales staff 14. Expense as
marketing new laser scanner. operating expense.
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