Intermediate

Accounting
13th Canadian Edition, Volume 1
Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Chapter 12

Intangible Assets & Goodwill

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Copyright ©2022 John Wiley & Sons, Canada, Ltd.

Characteristics of Intangible Assets
Intangible assets are identifiable nonmonetary
assets that lack physical substance.

• Intangible assets must have these three characteristics:

o Identifiability
o Non-physical existence
o Non-monetary in nature
• Examples: patents, copyrights, franchises or licensing
agreements, trademarks or trade names, secret
formulas, computer software, technological know-how,
prepayments, and some development costs

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Intangible Assets--Identifiability
• For an intangible assets to be identifiable—it should
have at least one of the following characteristics:
o It results from contractual or other legal rights
o It can be separated from the entity and sold, transferred,
licensed, rented, or exchanged, either by itself or in
combination with another contract, identifiable asset, or
liability
• To recognize these items as assets, the company has to
be able to control access to the future benefits and
restrict others’ access
• Intangibles that have similar characteristics are grouped
and recognized together
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Intangible Assets—Non-Physical
Existence
• Intangible assets lack physical substance—the value
comes from the rights and privileges granted to the
company using them
• Tangible or intangible?
o If an intangible component is needed for a physical
component to work, it is treated as an item of PP&E (e.g.,
computer software to run a specific machine)
o If the intangible component is not an integral part of the
physical object, then it is classified separately as an
intangible asset

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Intangible Assets—Nonmonetary
• Intangible assets are nonmonetary—they do not contain
any right or claim to receive fixed or determinable
amounts of money in the future
• Items that meet the definition of an intangible asset
provide economic benefits over a period of years.
o The benefits may be in the form of revenue from selling
products or services, a reduction in future costs, or other
economies
• They are normally classified as long-term assets

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Recognition and Measurement of
Intangible Assets at Acquisition
• Recognition criteria is the same as for PP&E
• Probable future economic benefit
o The asset can be reliably measured
• Measured at cost at acquisition
• More uncertainty about the future benefits than with
tangible capital assets
• Intangible assets may be
o Purchased outright
o Acquired as part of a business combination
o Developed internally
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Cost of Purchased Intangibles
• Includes the acquisition cost and all expenditures directly
associated with making the intangible ready for its
intended use (e.g., purchase price, legal fees)
• Costs not capitalized
o those related to product introduction and promotion and
conducting business in a new location or with new types of
customers
o administration and general overhead
o initial operating losses
o expenditures incurred after the asset is ready for use as
intended
• Direct costs incurred after acquisition are capitalized as
additions or replacements (not very common)
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Other Costs of Purchased Intangibles
• Delayed payment terms—interest is recognized as a
financing cost
• Acquired for shares
o Cost is equal to the intangible’s fair value if it can be
reliably measured; otherwise fair value of the shares
• Nonmonetary assets
o Based on more reliable of fair value of what is given up or
fair value of what is received; if transaction has
commercial substance
• Government grant—asset’s fair value
o IFRS permits zero or nominal dollar cost

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Intangibles Purchased in a Business
Combination
• Basket purchase
o Several intangibles bought together
o Cost allocated based on relative fair values
•Business combination
o One entity acquires control: by purchasing the net assets or
acquiring equity interests
o Intangibles that are identifiable can be recognized separately at
fair value
o Even those internally generated (e.g., brand names, patents, in-
process research and development)
o All others are recognized as goodwill

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Recognition and Measurement of
Internally Developed Intangible Assets
• Companies incur costs internally to create intangibles
(such as patents and brand names)
• Internally developed intangibles present significant
challenges:
o Recognition: When to recognize? Is there probability of
future cash flows?
o Measurement: What costs to capitalize versus expense?
How to reliably measure the costs?
•Recognize costs of internally generated intangibles
o IFRS (and ASPE)—capitalize if they meet criteria
o ASPE—can choose to recognize all as expense
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Identifying Research and Development
Phase Activities
• To deal with recognition and measurement uncertainties with
internally generated intangibles, the process of generating
the intangible assets is broken down into two phases:

Research Development
Planned investigation Translation of research
undertaken with the hope of findings or other knowledge
gaining new scientific or into a plan or design for new
technical knowledge and or substantially improved
better understanding; which materials, devices, products,
may or may not be directed processes, systems or
towards a specific project services

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Examples of Research and
Development Phase Activities
Activities in the Research Stage Activities in the Development Stage
Obtaining new knowledge Designing, constructing, and testing prototypes
and models prior to production or use
Searching for, evaluating, and selecting ways to Designing tools, jigs, moulds, and dies involving
use research findings or knowledge new technology
Investigating possible alternatives for existing Designing, constructing, and operating pilot
materials, products, processes, systems, and plants that are not economically feasible for
services commercial production
Formulating, designing, evaluating, and Designing, constructing, and testing chosen
choosing possible alternatives for new or alternatives for new or improved materials,
improved materials, products, processes, products, processes, systems, and services
systems, and services

• If there is uncertainty about which phase a particular activity

relates to, it would be classified as a research phase activity

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Accounting for Research and
Development Phase Costs
Research Phase Costs Development Phase Costs
Costs incurred for research or during the Intangible asset recognized if technical and
research phase of an internal project do not financial feasibility is demonstrated (meets six
meet the criteria for recognition as an criteria) and only when the future benefits are
intangible asset reasonably certain
Costs are recognized as expenses when they Projects may be quite far in development before
are incurred all six criteria are met—but only then can costs
be capitalized
Buildings, labs, and equipment used for general No expenses incurred prior to meeting the
research can be capitalized as PP&E criteria can be added to the capital cost

Research performed under contract is Costs incurred that cannot be distinguished

considered reimbursable (receivable) from general business development costs are
excluded: brands, mastheads, publishing titles,
customer lists

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Criteria for Development Phase Costs
• An intangible asset can be recognized from the
development stage of an internal project if the company
can meet all six of the following conditions—
o Technical feasibility of completion
o Intention to complete for use or sale
o Ability to use or sell it
o Availability of resources to complete it, use it, or sell it
o Show how future economic benefits will be generated—
existence of a market or usefulness to the company
o Ability to reliably measure costs

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 Development Costs Included and
Excluded
• Development costs begin to accumulate after all six criteria
are met
• Include all directly attributable costs needed to create,
produce and prepare the asset for use
Costs Included Costs Excluded
o Materials and services used or o Selling, administrative, general overhead
consumed not directly linked to the process
o Direct costs of personnel o Costs to train employees
o Fees needed to register a legal o Initial operating losses
right o Legal and other costs of incorporation
o Amortization of other intangibles o Pre-opening costs
needed to generate the new asset o Relocation and reorganization costs
o Interest of borrowing costs o Advertising and promotional activities

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Recognition and Measurement of
Intangible Assets after Acquisition
• Two models for measuring intangible assets after
acquisition (same as for PP&E; see Chapter 10)
o Cost model (CM)—most widely used; only method under
A SPE
o Revaluation model (RM)—applied only to assets that
have a fair value determined in an active market
• When revaluation model is used
o All assets in the same class must apply the same method
o If there is no active market, cost model is applied
o No requirement for annual revaluation as long as its
reported carrying amount is close to fair value
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Limited-Life Intangible Assets
• Factors to consider in determining useful life
o Expected use of the asset; expected useful life of others
that impact the intangible asset
o Legal, regulatory, or contractual provisions governing
useful life and renewability/extension
o Obsolescence, demand, competition, economic factors
o Level of expenditure to maintain future cash flows
• Amortization amount is carrying amount less residual
value
• Residual value for intangibles is uncertain; often
assumed to be zero

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Accounting Treatment for Intangible
Assets with a Limited Life
• Same as for most PP&E assets
Transaction or Event Accounting Treatment
Amortization begins… …when the asset is in the location and condition to
be able to be used as management intends
Amortization stops… …at the earlier of when it is derecognized or
classified as held for sale
Review of useful life and ASPE: at least annually
amortization method IFRS: at least at the end of each financial year
Change in estimate of useful life, Accounted for prospectively—as a change in
residual value, amortization accounting estimate
method

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Indefinite-Life Intangible Assets
• An indefinite-life intangible is not amortized
• Management must review whether events and
circumstances continue to support the assessment of an
indefinite life
o IFRS: required every accounting period
o ASPE: when circumstances indicate possible impairment
• Any changes resulting from review are treated as change
in estimate—does not affect past results

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Marketing-Related Intangible Assets
• Used in marketing and promotion of product and
services
• Derive value from contractual or legal rights
• Types of market-related intangible assets
o Trademarks or trade names--is a word, symbol, or design,
or combination of these, that is used to distinguish the
goods or services of one person or entity from those of
others
o Newspaper mastheads
o Internet domain names
o Non-competition agreement

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Customer-Related Intangible Assets
• Result from interactions with outside parties
• Derive value from legal-contractual rights or because
they can be sold separately
• Types of customer-related intangible assets
o Customer lists
o Order or production backlogs
o Customer contracts
o Non-contractual relationships

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Artistic-Related Intangible Assets
• Ownership rights to artistic works--value comes from
legal-contractual nature of rights
o Protected by copyrights
• The exclusive right to copy a creative work or allow
someone else to do so
• Automatically created or can be registered
• The right is granted for the life of the creator + 50 years;
owners/heirs have the exclusive rights; not renewable
• Useful life is often shorter than legal life
• Types of artistic-related intangible assets
o Plays, literary works, musical works
o Pictures, photographs
o Videos and audio-visual material
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Contract-Based Intangible Assets
• The value of rights that come from contractual
arrangements (e.g., franchises, licencing agreements,
permits, favourable leases)
o Franchises and licences may be granted
• For a definite period of time; amortized over the lesser of
its legal or useful life
• With an indefinite life; is not amortized
• In perpetuity; is only amortized if its useful life is deemed
to be limited
• Annual franchise fees paid under a franchise agreement
are recorded as operating expenses

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Technology-Based Intangible Assets
• Relate to innovations or technological advances (e.g.,
patents, computer software)
o Patents are granted for products and processes that are
new, workable, or ingenious
• Gives the holder the right to exclude others from making,
selling, or using a product or process for a period of 20
years
• The cost of a patent is amortized over its legal life or its
useful life to the entity, whichever is shorter
• Small modifications may lead to a new patent or an
extension of the life of an old one
• Costs associated with a successful defence of a patent
are capitalized as part of the asset’s cost
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Impairment of Limited-Life Intangibles
• Impairment of limited-life intangibles is covered by the
same impairment models and standards as long-lived
tangible assets
• Potential impairment is assessed
o Under ASPE, when events or circumstances indicate that
carrying value may not be recoverable
o Under IFRS, at the end of each reporting period
• Two impairment models are:
o Cost recovery impairment model (ASPE)
o Rational entity impairment model (IFRS)

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Summary of Impairment Models
For Limited-Life Intangible Assets
Cost Recovery (ASPE) Rational Entity (IFRS)
Concept Assumes carrying amount is recoverable Assumes management will use the asset or
through undiscounted cash flows from dispose of it –whichever results in the higher
future use and sale return
Recoverability Impaired if carrying amount > undiscounted Impaired if carrying amount > the higher of
cash flows the two options (recoverable amount)*
Loss on Carrying amount – fair value; fair value is a The difference between the carrying amount
Impairment discounted cash flow, market-based concept and recoverable amount*
Reversal of loss Not permitted Reversal of loss if estimates underlying
recoverable amount has changed. Reversal
amount is limited.
Subsequent Review depreciable amount, useful life and Review depreciable amount, useful life and
amortization amortization: determine new periodic amortization: determine new periodic
amortization charge amortization charge

* Recoverable amount is measured as higher of value in use (present

value of future net cash flows) and fair value less cost to sell

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Impairment of Indefinite-Life
Intangibles
Under ASPE: Under IFRS:
Needs to be tested only when Needs to be tested on an annual basis
circumstances indicate there might be whether there is any indication of
impairment impairment or not
Impairment test (fair value test): Tested by comparing the carrying
Impairment if fair value < carrying amount amount and recoverable value
Recoverability test based on undiscounted Stronger standard because no
cash flows is invalid because the expense is being charged against
undiscounted cash flows over a long period income for such assets on a regular
of time are considerably higher than the basis
present value, so they are
not comparable

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Derecognition
• Intangibles are derecognized when
o The intangible is disposed of
o Continuing use or disposal is not expected to generate
future economic benefits
• Gain or loss is recognized, equal to the difference
between the carrying amount and the proceeds on
disposal
• Gain or loss on disposal is recognized in income in the
period of disposal

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Presentation and Disclosure--Overview
• For each class of intangible asset, and separately for
internally generated intangibles, disclose
o Whether their lives are indefinite or finite (limited), useful
life, methods and rates of amortization
o The carrying amount of intangible assets with an
indefinite life
o A reconciliation of the opening and ending balances of
their carrying amount and accumulated amortization and
losses on impairment
o Losses on impairment and reversals of losses on
impairment

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Additional Disclosures
• For each material loss on impairment recognized or
reversed
o The circumstances, the amount, the nature of the CGU,
how the recoverable amount was determined
• For each CGU or group of units with significant goodwill
o How the recoverable amount was determined
• Intangible assets using the revaluation model
o Carrying amounts (with and without the model), date of
revaluation, amount of surplus and changes in the
account, methods and assumptions for fair value
• There are many more—refer to the standards

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Analysis
• Financial accounting does not capture and report many
assets that contribute to future cash flows
o The missing values belong to unrecognized, internally
developed intangible assets known as knowledge assets
or intellectual capital
o Companies increasingly disclose more of this “soft”
information outside the financial statements
• Other intangibles are recognized, but with a relatively
high level of measurement uncertainty
• Care must be taken when analyzing financial statement
information related to earnings and total assets

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IFRS/ASPE Comparison
• There are significant differences between ASPE and
IFRS regarding intangible assets and goodwill
ASPE IFRS
Accounting treatment of costs Entities can choose to Costs are capitalized
incurred in the development capitalize or expense
phase of internally generated the costs
intangible assets that meet the six
stringent criteria for capitalization
Impairment models applied The cost recovery The rational entity model
model is used is used
Reversal of impairment losses Not allowed for Allowed for intangible
intangible assets or for assets, but not for
goodwill goodwill

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