Chapter 12 Intangible Assets

By Ernest Ramos,2014-06-27 22:57
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Chapter 12 Intangible Assets ...

    Chapter 12 Intangible Assets

Lack physical substance

    (patents, copyrights, franchises, licenses, trademarks, trade names, goodwill)

They are NOT financial instruments

    (A/R, notes and bonds receivable,….ect.)


    Record at cost (everything necessary to make asset

    ready for intended use).

    For internally-generated intangibles, only direct

    costs are capitalized (e.g., legal costs for patent).

    If insignificant cost, then usually expensed.


    Limited-life intangiblesover useful life.

    Amortizable base equals cost minus residual value.

    Indefinite-life intangiblesdo NOT amortize.

* Usually decrease the value of the asset directly, can use a contra-

    account: Accum. Amort.

    Accounting 302 Chapter 12 (Intangibles) -1-

    ―Types‖ of Intangible Assets

     Legal Amortization

     life Period


    Trademark Indefinate,

    Company name renewable Not amortized


    Customer lists None Lesser of useful or

     economic life.


    Copyrights Life of creator Lesser of useful or

     plus 70 years economic life.


    Franchises Length of Length of

    Licences contract or contract or

    Permits indefinite not amortized


    Patents 20 years Less of useful

     or legal life.

    Goodwill: None Not amortized

Accounting 302 Chapter 12 (Intangibles) -2-

    Recording Goodwill

Duncun Corp. purchased the Fran Company for

    $300,000 on December 31, 2003. The balance sheet

    of Fran Company just prior to acquisition and

    appraisal of the fair values of identifiable net assets is listed below:

    Fran Company


    December 31, 2003

    ASSETS Carrying Fair Increase

    Values Values (decrease) Cash $15,000 $15,000 -0- Receivables 10,000 10,000 -0- Inventories (LIFO) 50,000 70,000 $20,000 PPE 80,000 130,000 50,000

    Total Assets $155,000 $225,000

    Net Assets = $130,000 $200,000

    EQUITIES Current liabilities $25,000 $25,000 -0- Capital stock 100,000 Retained Earn. 30,000

    Total Equities $155,000

    Accounting 302 Chapter 12 (Intangibles) -3-

    Acquisition Journal entry:

Cash $ 15,000

    Receivables 10,000

    Inventories 70,000

    PPE 130,000

    Goodwill (plug) 100,000

     Current Liabilities 25,000

     Cash 300,000

All identifiable net assets acquired are recorded at

    FairV and Goodwill is plugged for the difference

    between purchase price and FairV of identifiable

    net assets acquired.

Goodwill is not amortized.

* Must annually check for impairment.

If the FairV of net assets acquired is greater than

    the purchase price then you have negative

    goodwill (or badwill)FASB requires that the

    excess be recognized as an extraordinary gain.

    Accounting 302 Chapter 12 (Intangibles) -4-

    Impairments of Intangibles

Two questions:

    (1) Has an impairment occurred?

    (2) How much impairment loss?

Three different approaches:

    (1) Limited-life intangiblessame 2-step test as

    for PPE.

    (2) Indefinite-life intangibles (except goodwill)

    one-step test. Loss is the excess of CV over


    (3) Goodwilltwo-step test (different than above)

Accounting 302 Chapter 12 (Intangibles) -5-

Limited-life IntangiblesImpairment

Recoverability Test:

    Are expected future undiscounted net cash flows less

    than carrying value? If yes, then go on to determine

    the amount of impairment loss.

Impairment Loss:

    Assets held for use Assets held for disposal Loss = CV FairV Loss = CV NRV Amortize new cost basis No amortization

    No restoration of loss Restoration of loss


    Accounting 302 Chapter 12 (Intangibles) -6-

    Impairment of Limited-life Intangiblesexample

Example: Patent

Carrying value $60,000,000

    Undiscounted future net cash flows 35,000,000

    Fair value (mkt. value) 20,000,000

Recoverability Test: (yes/no)

    Carrying value $60,000,000

    Undiscounted future net cash flows -35,000,000 Impairment $25,000,000

Impairment Loss:

    Carrying value $60,000,000

    Fair value (mkt. value) 20,000,000 Impairment loss $40,000,000

Journal Entry

     Loss on impairment 40,000,000

     Patents 40,000,000

[reported in the other gains and losses section of the income


    Accounting 302 Chapter 12 (Intangibles) -7-

Impairment of Indefinite-life Intangibles

    (except Goodwill)

Test at least annually

    One-step test (fair value test)

If FairV < CV then impairment has occurred and

    impairment loss = CV FairV


Fair Value Test

    Carrying value of broadcast license $2,000,000

    Fair value 1,500,000

     Impairment loss $ 500,000

    …………………………………………………… Journal entry

     Loss on impairment 500,000

     Broadcast license 500,000

    Accounting 302 Chapter 12 (Intangibles) -8-

Impairment of Goodwill

Two-step process:

    (1) Is FairV of unit less than carrying value? If yes,

    then impairment has occurred.

    (2) Is FairV (implied) of unit’s goodwill less than

    the CV? If yes, than impairment of CV FairV.

    However, if no, then no impairment!

    This is like a two-step for recoverability test.

    Accounting 302 Chapter 12 (Intangibles) -9-

Impairment of Goodwillexample.

CV of assets other than goodwill $2,000,000

    CV of goodwill 900,000

    CV of payables 500,000

    FV of reporting division 1,900,000

    FV of net assets (except good will) 1,600,000

(1) Has impairment occurred?

    CV of unit’s net assets $2,400,000

    FV of unit -1,900,000

     Impairment $ 500,000

(2) Amount of impairment loss?

    FV of unit $1,900,000

    FV of net assets (exclude goodwill) 1,600,000

     FV (implied) goodwill $ 300,000

    CV of goodwill $ 900,000

    FV goodwill (implied) 300,000

     Impairment loss $ 600,000

Journal entry

    Loss on impairmentGoodwill $ 600,000

     Goodwill 600,000

    Accounting 302 Chapter 12 (Intangibles) -10-

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