Chapter-05

Intangible Assets [IAS-38]

1. What is an intangible asset in accounting?
In accounting, intangible assets are non-physical assets that have value because they provide
rights or advantages to a business. Unlike tangible assets like buildings or machinery,
intangible assets cannot be seen or touched, but they still contribute to a company's earning
power.

Common Examples:

 Goodwill (when one company acquires another for more than the fair value of its net
assets)
 Patents
 Trademarks
 Copyrights
 Franchise agreements
 Software (developed or purchased)
 Customer lists or relationships

2. Characteristics intangible assets

Intangible assets have two main characteristics.

1. They lack physical existence. Tangible assets such as property, plant, and equipment have
physical form. Intangible assets, in contrast, derive their value from the rights and privileges
granted to the company using them.
2. They are not financial instruments. Assets such as bank deposits, accounts receivable,
and long-term investments in bonds and stocks also lack physical substance. However,
financial instruments derive their value from the right (claim) to receive cash or cash
equivalents in the future. Financial instruments are not classified as intangibles.

In most cases, intangible assets provide benefits over a period of years. Therefore, companies
normally classify them as long-term assets.

3. Valuation of Intangibles

Purchased Intangibles
 Recorded at cost.
 Includes all costs necessary to make the intangible asset ready for its intended
use.
 Typical costs include:
► Purchase price.
► Legal fees.
► Other incidental expenses.
Internally Created Intangibles
 Generally expensed.
 Only capitalize direct costs incurred in developing the intangible, such as legal
costs.
4. Amortization of Intangibles

Limited-Life Intangibles
 Amortize by systematic charge to expense over useful life.
 Credit asset account or accumulated amortization.
 Useful life should reflect the periods over which the asset will contribute to
cash flows.
 Amortization should be cost less residual value.
 Companies should evaluate the limited-life intangibles for impairment.
Indefinite-Life Intangibles
 No foreseeable limit on time the asset is expected to provide cash flows.
 Must test indefinite-life intangibles for impairment at least annually.
 No amortization.

5. TYPES OF INTANGIBLE ASSETS

Six Major Categories:
(1) Marketing-related-Trademarks or trade names, newspaper mastheads, Internet
domain names, and non-competition agreements.

(2) Customer-related- Customer lists, order or production backlogs, and both

contractual and non-contractual customer relationships.
(3) Artistic-related - Plays, literary works, musical works, pictures, photographs, and
video and audiovisual material.

Mickey Mouse;
(4) Contract-related- Franchise and licensing agreements, construction permits,
broadcast rights, and service or supply contracts.
 (5) Technology-related- Patented technology and trade secrets granted by the U.S.
Patent and Trademark Office.

(6) 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 of the purchase over the FMV of the identifiable net assets (assets less liabilities)
purchased.
Internally created goodwill should not be capitalized.

6. 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.

7. Negative goodwill
In accounting, the opposite of goodwill is commonly referred to as negative goodwill or
more formally, a bargain purchase gain.

Here's what it means:

 Goodwill arises when a company pays more than the fair value of another company's
net identifiable assets in an acquisition.
 Negative goodwill (bargain purchase gain) arises when a company pays less than the
fair value of the net assets of the acquired company.

Why does this happen?

This usually indicates that:
 The seller is under financial distress.
 The buyer negotiated a very favorable deal.
 There may be errors in asset valuation.

Accounting Treatment:
 Under IFRS and US GAAP, negative goodwill is not recorded as a liability.
  Instead, it's recognized as a gain in the income statement at the time of acquisition.

8. Impairment of Goodwill
Two Step Process:
Step 1: If fair value is less than the carrying amount of the net assets (including
goodwill), then perform a second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill (implied value of goodwill) and
compare to carrying amount.

Practical Problem (Page 365)

Sky Co., organized in 2014, provided you with the following information:
1. Purchased a license for Tk. 20,000 on July 1, 2014. The license gives Sky exclusive
rights to sell its services in the tri-state region and will expire on July 1, 2022.
2. Purchased a patent on January 2, 2015, for Tk. 40,000. It is estimated to have a 5-year
life.
3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2015,
were Tk. 45,000. The process has an indefinite life.
4. On April 1, 2015, Sky Co. purchased a small circuit board manufacturer for Tk.
350,000. Goodwill recorded in the transaction was Tk. 90,000.
5. On July 1, 2015, legal fees for successful defense of the patent purchased on January 2,
2015, were Tk. 11,400.
6. Research and development costs incurred as of September 1, 2015, were Tk. 75,000.
Instructions
a. Prepare the journal entries to record all the entries related to the patent during 2015.
b. At December 31, 2015, an impairment test is performed on the license purchased in
2014. It is estimated that the net cash flows to be received from the license will be Tk.
13,000, and its fair value is Tk. 7,000. Compute the amount of impairment, if any, to
be recorded on December 31, 2015.
c. What is the amount to be reported for intangible assets on the balance sheet at
December 31, 2014? At December 31, 2015?

E12-4 (Intangible Amortization)

Presented below is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for Tk. 1,000,000 on January 1, 2012.
The patent is being amortized over its remaining legal life of 10 years, expiring on
January 1, 2022. During 2014, Alatorre determined that the economic benefits of the
patent would not last longer than 6 years from the date of acquisition. What amount
should be reported in the balance sheet for the patent, net of accumulated
amortization, at December 31, 2014?
 2. Alatorre bought a franchise from Alexander Co. on January 1, 2013, for Tk. 400,000.
The carrying amount of the franchise on Alexander’s books on January 1, 2013, was
Tk. 500,000. The franchise agreement had an estimated useful life of 30 years.
Because Alatorre must enter a competitive bidding at the end of 2015, it is unlikely
that the franchise will be retained beyond 2022. What amount should be amortized for
the year ended December 31, 2014?
3. On January 1, 2014, Alatorre incurred organization costs of Tk. 275,000. What
amount of organization expense should be reported in 2014?
4. Alatorre purchased the license for distribution of a popular consumer product on
January 1, 2014, for Tk. 150,000. It is expected that this product will generate cash
flows for an indefinite period of time. The license has an initial term of 5 years but by
paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-
year terms. What amount should be amortized for the year ended December 31, 2014?
Instructions
Answer the questions asked about each of the factual situations.

E12-9 (Accounting for Patents)

During 2010, George Winston Corporation spent Tk. 170,000 in research and development
costs. As a result, a new product called the New Age Piano was patented. The patent was
obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years.
Legal costs of Tk. 18,000 related to the patent were incurred as of October 1, 2010.
Instructions
a. Prepare all journal entries required in 2010 and 2011 as a result of the transactions
above.
b. On June 1, 2012, Winston spent Tk. 9,480 to successfully prosecute a patent
infringement suit. As a result, the estimate of useful life was extended to 12 years
from June 1, 2012. Prepare all journal entries required in 2012 and 2013.
c. In 2014, Winston determined that a competitor’s product would make the New Age
Piano obsolete and the patent worthless by December 31, 2015. Prepare all journal
entries required in 2014 and 2015.