12-1

PREVIEW OF CHAPTER 12

Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
12-2
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of 6. Explain the accounting issues related to

intangible assets. intangible asset impairments.

2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.

3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.

4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
and related items.
5. Explain the accounting issues for recording
goodwill.

12-3
 INTANGIBLE ASSET ISSUES

Characteristics Coca-Cola Company’s

(USA) success comes
1. Identifiable. from its secret formula
for making Coca-Cola,
2. Lack physical existence. not its plant facilities.

3. Not monetary assets.

Normally classified as non-current asset.

Common types of intangibles:
 Patent  Trademark or trade name
 Copyright  Customer list
 Franchise or license  Goodwill
12-4 LO 1
  E12-2 (Classification Issues—  Property, plant, and equipment
Intangibles) Presented below is  Investments in associated
selected account information companies
related to Matt Perry Inc. as of  Internet domain name
December 21, 2015. All these  Organization costs
accounts have debit balances.
 Land
 Cable television franchises
 Film contract rights
 Instructions
 Music copyrights
 Identify which items should be
 Customer lists
classified as an intangible asset.
 Research and development costs For those items not classified as
 Prepaid expenses an intangible asset, indicate
 Goodwill where they would be reported in
 Covenants not to compete the financial statements.
 Cash
 Brand names
 Accounts receivable
 Notes receivable
12-5
  Solution
 The following items would be classified as an
intangible asset:
 Cable television franchises
 Film contract rights
 Music copyrights
 Customer lists
 Goodwill
 Covenants not to compete
 Internet domain name
 Brand names

12-6
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.

2. Identify the costs to include in the 7. Identify the conceptual issues related to
initial valuation of intangible assets. research and development costs.

3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.

4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
and related items.
5. Explain the accounting issues for recording
goodwill.

12-7
 INTANGIBLE ASSET ISSUES

Valuation
Purchased Intangibles
 Recorded at cost.
 Includes all acquisition costs plus expenditures to make
the intangible asset ready for its intended use.
 Typical costs include:
► Purchase price.
► Legal fees.
► Other incidental expenses.

12-8 LO 2
 INTANGIBLE ASSET ISSUES

Valuation
Internally Created Intangibles
 Companies expense all research phase costs and some
development phase costs.
 Certain development costs are capitalized once economic
viability criteria are met.
 IFRS identifies several specific
criteria that must be met before
development costs are capitalized.

12-9 LO 2
 INTANGIBLE ASSET ISSUES

Internally Created Intangibles ILLUSTRATION 12-1

Research and
Development Stages

12-10 LO 2
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.

3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.

4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
and related items.
5. Explain the accounting issues for recording
goodwill.

12-11
 INTANGIBLE ASSET ISSUES

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 must evaluate the limited-life intangibles
annually for impairment.

12-12 LO 3
 INTANGIBLE ASSET ISSUES

Amortization of Intangibles
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.

12-13 LO 3
 INTANGIBLE ASSET ISSUES

Amortization of Intangibles ILLUSTRATION 12-2

Accounting Treatment
for Intangibles

12-14 LO 3
  BE12-1 and 12-2
 1- Celine Dion Corporation purchases a patent from Salmon
Company on January 1, 2015, for $54,000. The patent has a
remaining legal life of 16 years. Celine Dion feels the patent
will be useful for 10 years.
 Instruction
 Prepare Celine Dion’s journal entries to record the purchase of
the patent and 2015 amortization.
 2- Assume that on January 1, 2017, the carrying amount of the
patent on Celine Dion’s books is $43,200. In January, Celine
Dion spends $24,000 successfully defending a patent suit.
Celine Dion still feels the patent will be useful until the end of
2024.
 Instruction
 Prepare the journal entries to record the $24,000 expenditure
and 2017 amortization.
12-15
  Solution
 1- Patents......................................................... 54,000
 Cash.................................................... 54,000
 Patent Amortization Expense...................... 5,400
 Patents ($54,000 X 1/10 = $5,400)....... 5,400
 2- Patents...................................................... 24,000
 Cash...................................................... 24,000
 Patent Amortization Expense......................... 8,400
 Patents [($43,200 + $24,000) X 1/8 = $8,400]...... 8,400

12-16
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.
3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.

4. Describe the types of intangible 9. Indicate the presentation of intangible assets

assets. and related items.

5. Explain the accounting issues for recording

goodwill.
12-17
 TYPES OF INTANGIBLE ASSETS

Six Major Categories:

(1) Marketing-related. (4) Contract-related.

(2) Customer-related. (5) Technology-related.

(3) Artistic-related. (6) Goodwill.

12-18 LO 4
 TYPES OF INTANGIBLE ASSETS

Marketing-Related Intangible Assets

 Examples:
► Trademarks or trade names, newspaper
mastheads, Internet domain names, and non-
competition agreements.
 In the United States trademarks or trade names have
legal protection for indefinite number of 10 year
renewal periods.
 Capitalize purchase price.
 No amortization.

12-19 LO 4
 KEEP YOUR HANDS OFF
MY INTANGIBLE!
Companies go to great extremes to trade name when Apple introduced
protect their valuable intangible assets. its hot new phone in 2007. Not so
Consider how the creators of the highly fast, said Cisco, which had held the
successful game Trivial Pursuit iPhone trade name since 2000 and
protected their creation. First, they was using it on its own Voice over
copyrighted the 6,000 questions that Internet Protocol (VoIP) products.
are at the heart of the game. Then they The two companies came to an
shielded the Trivial Pursuit name by agreement for joint use of the name.
applying for a registered trademark. As It was not disclosed what Apple paid
a third mode of protection, they for this arrangement, but it is not
obtained a design patent on the playing surprising why Apple would want to
board’s design as a unique graphic settle—to avoid a costly delay to the
creation. launch of its highly anticipated
Another example is the iPhone iPhone.
trade name. Cisco Systems (USA)
Source: Nick Wingfield, “Apple, Cisco Reach Accord
sued Apple (USA) for using the iPhone Over iPhone,” Wall Street Journal Online (February 22,
2007).

12-20 LO 4
 TYPES OF INTANGIBLE ASSETS

Customer-Related Intangible Assets

 Examples:
► Customer lists, order or production backlogs, and both
contractual and non-contractual customer relationships.
 Capitalize acquisition costs.
 Amortized to expense over useful life.

12-21 LO 4
 TYPES OF INTANGIBLE ASSETS

Illustration: Green Market Inc. acquires the customer list of a large

newspaper for €6,000,000 on January 1, 2015. 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 at the end of each year.

Jan. 1 Customer List 6,000,000

2015
Cash 6,000,000

Dec. 31 Amortization Expense 2,000,000

2015
Customer List * 2,000,000
2016
2017

12-22 * or Accumulated Amortization LO 4

 TYPES OF INTANGIBLE ASSETS

Artistic-Related Intangible Assets

 Examples:
► Plays, 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.

and Mickey
Mouse

12-23 LO 4
 TYPES OF INTANGIBLE ASSETS

Contract-Related Intangible Assets

 Examples:
► Franchise 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.

12-24 LO 4
 TYPES OF INTANGIBLE ASSETS

Technology-Related Intangible Assets

 Examples:
► Patented 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 any R&D costs in developing a patent.
 Amortize over legal life or useful life, whichever is shorter.

12-25 LO 4
 TYPES OF INTANGIBLE ASSETS

Illustration: Harcott Co. incurs $180,000 in legal costs on January

1, 2015, to successfully defend a patent. The patent’s useful life is
20 years, amortized on a straight-line basis. Harcott records the
legal fees and the amortization at the end of 2015 as follows.

Jan. 1 Patents 180,000

Cash 180,000

Dec. 31 Patent Amortization Expense 9,000

Patents (or Accumulated Amortization)
9,000
Patent Amortization Expense = ($180,000 ÷ 20) = $9,000

12-26 LO 4
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.
3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.
4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
and related items.
5. Explain the accounting issues for
recording goodwill.

12-27
 TYPES OF INTANGIBLE ASSETS

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 fair value of the identifiable net
assets (assets less liabilities) purchased.

Internally created goodwill should not be capitalized.

12-28 LO 5
 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 Company. The illustration presents
the statement of financial position of Tractorling Company.
ILLUSTRATION 12-4

12-29 LO 5
 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?

12-30 LO 5
 RECORDING GOODWILL

Illustration: Determination of Goodwill.

ILLUSTRATION 12-6

12-31 LO 5
 RECORDING GOODWILL

Illustration: Feng records this transaction as follows.

Property, Plant, and Equipment 205,000

Patents 18,000
Inventory 122,000
Accounts Receivables 35,000
Cash 25,000
Goodwill 50,000
Liabilities 55,000
Cash 400,000

12-32 LO 5
 RECORDING GOODWILL

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.

12-33 LO 5
  E12-13 (Accounting for Goodwill)
 On July 1, 2015, Brandon Corporation purchased Mills Company by
paying €250,000 cash and issuing a €150,000 note payable. On July 1,
2015, the statement of financial position of Mills Company was as follows.
 Buildings (net) € 75,000 Equity €235,000
 Equipment (net) 70,000 Accounts payable 200,000
 Trademarks 10,000 €435,000
 Land 40,000
 Inventory 100,000
 Accounts receivable 90,000
 Cash 50,000
 €435,000
 The recorded amounts all approximate current values except for land (fair
value of €80,000), inventory (fair value of €125,000), and trademarks (fair
value of €15,000).
 Instructions (a) Prepare the July 1 entry for Brandon Corporation to record
the purchase. (b) Prepare the December 31 entry for Brandon Corporation
to record amortization of intangibles. The trademarks have an estimated
12-34 useful life of 4 years with a residual value of €3,000
  Solution
 a) Buildings.................................................................... 75,000
Equipment...................................................................... 70,000
Trademarks.................................................................... 15,000
Land................................................................................. 80,000
Inventory........................................................................ 125,000
Receivables....................................................................... 90,000
Cash.................................................................................. 50,000
Goodwill.......................................................................... 95,000*
 Accounts Payable.............................................
200,000
 Notes Payable..................................................
150,000
 Cash..................................................................
250,000
 *$400,000 – [$235,000 + $40,000 + $25,000 + $5,000]

 b) Trademark Amortization Expense.......................... 1,500


12-35 Trademarks ([$15,000 – $3,000] X 1/4 X 6/12)...... 1,500
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related

assets. to intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.
3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.
4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
5. Explain the accounting issues for recording and related items.
goodwill.

12-36
 IMPAIRMENT OF INTANGIBLE ASSETS

Impairment of Limited-Life Intangibles

The impairment loss is the carrying amount of the asset less the
recoverable amount of the impaired asset.
ILLUSTRATION 11-15

12-37 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Illustration: Lerch, Inc. has a patent on how to extract oil from shale
rock, with a carrying value of €5,000,000 at the end of 2014.
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.
.

12-38 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Calculate the impairment loss (based on value-in-use).

€3,000,000 Impairment Loss

ILLUSTRATION 11-15
€5,000,000 €2,000,000

Unknown €2,000,000

12-39 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Calculate the impairment loss (based on value-in-use).

€3,000,000 Impairment Loss

ILLUSTRATION 11-15
€5,000,000 €2,000,000

Lerch makes the following entry to record the impairment.

Loss on Impairment 3,000,000
Patents Unknown
3,000,000 $2,000,000

12-40 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Reversal of Impairment Loss

Illustration: The carrying value of the patent after impairment is
€2,000,000. Lerch’s amortization is €400,000 (€2000,000 ÷ 5) over
the remaining five years of the patent’s life. The amortization expense
and related carrying amount after the impairment is shown below:
ILLUSTRATION 12-8

12-41 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Reversal of Impairment Loss

Early in 2016, 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.

Patents (€1,750,000 - €1,600,000) 150,000

Recovery of Impairment Loss 150,000

12-42 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

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,
► compare the recoverable amount of the intangible
asset with the asset’s carrying value.
► If the recoverable amount is less than the carrying
amount, the company recognizes an impairment.

12-43 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

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
Computation of Loss on
Impairment of Broadcast License

12-44 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

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.
► Cash-generating unit = smallest identifiable group of
assets that generate cash flow.
 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.

12-45 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Illustration: Kohlbuy Corporation 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

12-46 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Kohlbuy determines the recoverable amount for the Pritt Division to

be €2,800,000, based on a value-in-use estimate.

ILLUSTRATION 11-15
$2,400,000 $2,800,000

No
Impairment

Unknown $2,800,000
12-47 LO 6
 IMPAIRMENT OF INTANGIBLE ASSETS

Assume that the recoverable amount for the Pritt Division is

€1,900,000 instead of €2,800,000.

$500,000 Impairment Loss

ILLUSTRATION 11-15
$2,400,000 $1,900,000

Unknown $1,900,000
12-48 LO 7
6
 IMPAIRMENT OF INTANGIBLE ASSETS

Assume that the recoverable amount for the Pritt Division is

€1,900,000 instead of €2,800,000.

$500,000 Impairment Loss

ILLUSTRATION 11-15
$2,400,000 $1,900,000

Kohlbuy makes the following entry to record the impairment.

Loss on Impairment 500,000
Goodwill 500,000
Unknown $1,900,000
12-49 LO 7
6
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related
valuation of intangible assets. to research and development costs.
3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.
4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
5. Explain the accounting issues for recording and related items.
goodwill.

12-50
  E12-14 (Copyright Impairment)
 Presented below is information related to copyrights owned by Botticelli
Company on December 31, 2015.
 Cost $8,600,000
 Carrying amount 4,300,000
 Recoverable amount 3,400,000
 Assume that Botticelli Company will continue to use this copyright in the
future. As of December 31, 2015, the copyright is estimated to have a
remaining useful life of 10 years.
 Instructions
 (a) Prepare the journal entry (if any) to record the impairment of the asset
on December 31, 2015. The company does not use accumulated
amortization accounts.
 (b) Prepare the journal entry to record amortization expense for 2016
related to the copyrights.
 (c) The fair value of the copyright on December 31, 2016, is $3,500,000.
Prepare the journal entry (if any) necessary to record the increase in fair
value.
12-51
  Solution
 (a) December 31, 2015
 Loss on Impairment........................................ 900,000*
 Copyrights........................................................ 900,000
 *Carrying amount......................... $4,300,000
 Recoverable amount..................... (3,400,000)
 Loss on impairment................... $ 900,000
 (b) Amortization for 2016
 Copyright Amortization Expense........................ 340,000*
 Copyrights........................................................ 340,000
 *New carrying amount................ $3,400,000
 Useful life....................................... ÷ 10 years
 Amortization per year................ $ 340,000
 (c) Recovery of impairment loss on December 31, 2016
 Copyright ($3,500,000) – ($3,400,000 – $340,000)…... 440,000
 Recovery of Impairment Loss............................ 440,000
12-52
 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

 product,  formula,
 process,  composition, or
 idea,  literary work.

12-53 LO 7
 RESEARCH AND DEVELOPMENT COSTS

Companies spend considerable sums on research and

development. ILLUSTRATION 12-12
R&D Outlays, as a
Percentage of Sales

12-54 LO 7
 RESEARCH AND DEVELOPMENT COSTS

 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 flow to the company
(the project is economically viable).

12-55 LO 7
 RESEARCH AND DEVELOPMENT COSTS

Identifying R & D Activities ILLUSTRATION 12-13

Research Activities versus
Development Activities

Research
Research Activities
Activities Examples
Examples
Original
Original and
and planned
planned investigation
investigation Laboratory
Laboratory research
research aimed
aimed at
at discovery
discovery of
of
undertaken
undertaken with
with the
the prospect
prospect of
of gaining
gaining new
new knowledge;
knowledge; searching
searching for
for applications
applications of
of
new
new scientific
scientific or
or technical
technical knowledge
knowledge new
new research
research findings.
findings.
and understanding.
and understanding.

Development
Development Activities
Activities Examples
Examples
Application
Application of
of research
research findings
findings or
or other
other Conceptual
Conceptual formulation
formulation and
and design
design of
of
knowledge
knowledge to to a
a plan
plan or
or design
design for
for the
the possible
possible product
product or or process
process alternatives;
alternatives;
production
production ofof new
new or
or substantially
substantially construction
construction of
of prototypes
prototypes and
and
improved
improved materials,
materials, devices,
devices, products,
products, operation
operation of
of pilot
pilot plants.
plants.
processes,
processes, systems,
systems, oror services
services before
before
the
the start of commercial production or
start of commercial production or
use.
use.

12-56 LO 7
 GLOBAL R&D INCENTIVES

Research and development investments are the lifeblood of product and process
developments that lead to future cash flows and growth. Countries around the world
understand this and as a result provide significant incentives in the form of tax credits,
“superdeductions” (deductions greater than 100%), and corporate tax rate reductions,
including “patent box” rates for companies that own and use patents registered in that country.
Here is a summary for seven major economies.

Source: L. Cutler, D. Sayuk, and Camille Shoff, “Global R&D Incentives Compared,” Journal of
12-57 Accountancy (June 2013). LO 7
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.
3. Explain the procedure for amortizing 8. Describe the accounting for research
intangible assets. and development and similar costs.
4. Describe the types of intangible assets. 9. Indicate the presentation of intangible assets
5. Explain the accounting issues for recording and related items.
goodwill.

12-58
 RESEARCH AND DEVELOPMENT COSTS

Accounting for R & D Activities

Costs Associated with R&D Activities:
 Materials, equipment, and facilities.
 Personnel.
 Purchased intangibles.
 Contract Services.
 Indirect Costs.

12-59 LO 8
 RECOGNITION OF R&D AND INTERNALLY
GENERATED INTANGIBLES

The requirement that companies expense immediately all R&D costs (as well as start-up costs)
incurred internally is a practical solution. It ensures consistency in practice and uniformity
among companies. But the practice of immediately writing off expenditures made in the
expectation of benefiting future periods is conceptually incorrect.
Proponents of immediate expensing contend that from an income statement standpoint,
long-run application of this standard frequently makes little difference. They argue that because
of the ongoing nature of most companies’ R&D activities, the amount of R&D cost charged to
expense each accounting period is about the same, whether there is immediate expensing or
capitalization and subsequent amortization.
Others criticize this practice. They believe that the statement of financial position should
report an intangible asset related to expenditures that have future benefit. To preclude
capitalization of all R&D expenditures removes from the statement of financial position what
may be a company’s most valuable asset. Indeed, research findings indicate that capitalizing
R&D costs may be helpful to investors.
The current accounting for R&D and other internally generated intangible assets represents
one of the many trade-offs made among relevance, faithful representation, and cost-benefit
considerations. The FASB and IASB have completed some limited-scope projects on the
accounting for intangible assets, and the Boards have contemplated a joint project on the
accounting for identifiable intangible assets (i.e., excluding goodwill). (See
[Link] Intangible-Assets/Pages/Intangible-
[Link].)

12-60 Source: See page 24 of the text. LO 8

 RESEARCH AND DEVELOPMENT COSTS

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.

12-61 LO 8
 RESEARCH AND DEVELOPMENT COSTS
E12-17: Compute the amount to be reported as research and
development expense.
$330,000 / 5 = $66,000 R&D
Expense
Cost of equipment acquired that will have alternative
uses in future R&D projects over the next 5 years. $330,000 $66,000

Materials consumed in R&D projects 59,000 59,000

Consulting fees paid to outsiders for R&D projects 100,000 100,000

Personnel costs of persons involved in R&D projects 128,000 128,000

Indirect costs reasonably allocable to R&D projects 50,000 50,000
Materials purchased for future R&D projects 34,000 0

$403,000

12-62 LO 8
 RESEARCH AND DEVELOPMENT COSTS
E12-1: Indicate how items on the list below would generally be reported in
the financial statements.

Item
Item Classification
Classification
1. Investment in a subsidiary company. 1. Long-term investments
2. Timberland. 2. PP&E
3. Cost of engineering activity required to 3. R&D expense
advance the design of a product to the
manufacturing stage.
4. Lease prepayment (6 months’ rent). 4. Prepaid rent
5. Cost of equipment obtained. 5. PP&E
6. Cost of searching for applications of 6. R&D expense
new research findings.
12-63 LO 8
 RESEARCH AND DEVELOPMENT COSTS

Item
Item Classification
Classification

7. Cost incurred in the formation of a 7. Expense

corporation.
8. Operating losses incurred in the 8. Operating loss
start-up of a business.
9. Training costs incurred in start-up of 9. Expense
new operation.
10. Purchase cost of a franchise. 10. Intangible
11. Goodwill generated internally. 11. Not recorded
12. Cost of testing in search of product 12. R&D expense
alternatives.

12-64 LO 8
 RESEARCH AND DEVELOPMENT COSTS

Item
Item Classification
Classification
13. Goodwill acquired in the purchase of 13. Intangible
a business.
14. Cost of developing a patent (before 14. R&D expense
achieving economic viability).
15. Cost of purchasing a patent from an 15. Intangible
inventor.
16. Legal costs incurred in securing a 16. Intangible
patent.
17. Unrecovered costs of a successful legal 17. Intangible
suit to protect the patent.

12-65 LO 8
 RESEARCH AND DEVELOPMENT COSTS

Item
Item Classification
Classification
18. Cost of conceptual formulation of 18. R&D expense
possible product alternatives.
19. Cost of purchasing a copyright. 19. Intangible
20. Development costs incurred after 20. Intangible
achieving economic viability.
21. Long-term receivables. 21. Long-term investment
22. Cost of developing a trademark. 22. Expense
23. Cost of purchasing a trademark. 23. Intangible

12-66 LO 8
 BRANDED

For many companies, developing a strong brand image is as important as developing the products
they sell. Now more than ever, companies see the power of a strong brand, enhanced by significant
and effective advertising investments. As the following chart indicates, the value of brand
investments is substantial. Coca-Cola (USA) heads the list with an estimated brand value of about $78
billion. Companies from around the globe are represented in the top 20 brands.
Occasionally, you may find the value of a brand included in a company’s financial statements under
goodwill. But generally you will not find the estimated values of brands recorded in companies’
statements of financial position. The reason? The subjectivity that goes into estimating a brand’s value.
In some cases, analysts base an estimate of brand value on opinion polls or on some multiple of ad
spending. For example, in estimating the brand values shown above, Interbrand Corp. (USA)
estimates the percentage of the overall future revenues the brand will generate and then discounts the
net cash flows, to arrive at a present value. Some analysts believe that information on brand values is
relevant. Others voice valid concerns about the reliability of brand value estimates due to subjectivity
in the estimates for revenues, costs, and the risk component of the discount rate.

12-67
Source: Interbrand Corp., Best Global Brands Report (October 2, 2012). LO 8
 12 Intangible Assets

LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the characteristics of intangible 6. Explain the accounting issues related to

assets. intangible asset impairments.
2. Identify the costs to include in the initial 7. Identify the conceptual issues related to
valuation of intangible assets. research and development costs.
3. Explain the procedure for amortizing 8. Describe the accounting for research and
intangible assets. development and similar costs.
4. Describe the types of intangible assets. 9. Indicate the presentation of
5. Explain the accounting issues for recording intangible assets and related items.
goodwill.

12-68
 PRESENTATION OF INTANGIBLES

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 may not normally shown for intangibles.

12-69 LO 9
 PRESENTATION OF INTANGIBLES

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.

12-70 LO 9
 PRESENTATION OF INTANGIBLES

Presentation of Intangible Assets

ILLUSTRATION 12-15
Nestlé’s Intangible Asset
Disclosures

12-71 LO 9
 PRESENTATION OF INTANGIBLES

Presentation of Research and Development

Costs
Companies should disclose the total R&D costs charged to
expense each period.
ILLUSTRATION 12-16
R&D Reporting

12-72 LO 9
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to intangible assets.
Similarities
• Like U.S. 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.

12-73
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• With the issuance of a recently converged statement on business
combinations (IFRS 3 and SFAS No. 141—Revised), IFRS and U.S. 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 U.S. 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.

12-74
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• As in U.S. 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 U.S. GAAP.
Differences
• IFRS permits revaluation on limited-life intangible assets. Revaluations are
not permitted for goodwill; revaluation of other indefinite-life intangible
assets are rare because revaluations are not allowed unless there is an
active market for the intangible asset.

12-75
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• 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. U.S. GAAP requires expensing of all
costs associated with internally generated intangibles.
• IFRS requires an impairment test at each reporting date for long-lived
assets and intangibles, and records an impairment if the asset’s carrying
amount exceeds its recoverable amount. The recoverable amount is the
higher of the asset’s 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 asset,
discounted to present value. Under U.S. GAAP, impairment loss is
measured as the excess of the carrying amount over the asset’s fair value.
12-76
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• U.S. GAAP gives companies the option to perform a qualitative assessment
to determine whether it is more likely than not (i.e., a likelihood of more than
50 percent) that an indefinite-life intangible asset (including goodwill) is
impaired. If the qualitative assessment indicates that the fair value of the
reporting unit is more likely than not to be greater than the carrying value
(i.e., the asset is not impaired), the company need not continue with the fair
value test.

12-77
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• IFRS allows reversal of impairment losses when there has been a change in
economic conditions or in the expected use of limited-life intangibles and
indefinite-life intangibles other than goodwill. Under U.S. 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 U.S. GAAP are
similar in the accounting for impairments of assets held for disposal.
• Under IFRS, costs in the development phase of a research and
development project are capitalized once technological feasibility (referred
to as economic viability) is achieved. Under U.S. GAAP, all development
costs are expensed as incurred.

12-78
 GLOBAL ACCOUNTING INSIGHTS

About The Numbers

To illustrate the effect of differences in the accounting for brands, consider the
following disclosure by GlaxoSmithKline (GBR) in a recent annual report.
Note that GlaxoSmithKline would report lower income by £1.3 billion if it
accounted for its brands under U.S. GAAP.

12-79
 GLOBAL ACCOUNTING INSIGHTS

On the Horizon
The IASB has identified a project, in a very preliminary stage, which would
consider expanded recognition of internally generated intangible assets. As
indicated, IFRS permits more recognition of intangibles compared to U.S.
GAAP. Thus, it will be challenging to develop converged standards for
intangible assets, given the long-standing prohibition on capitalizing internally
generated intangible assets and research and development in U.S. GAAP.
Learn more about the timeline for the intangible asset project at the IASB
website: [Link]
Assets/Pages/[Link].

12-80
 COPYRIGHT

Copyright © 2014 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.

12-81