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ACC 318 Chapter 12 Fall 2006


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What are intangible assets?
They are assets that have no physical substance and carry a high degree of uncertainty regarding Future benefits
What two characteristics do intangible assets have?
1. They lack physical existence
2. They are not financial instruments
What are financial instruments?
They derive their value from the right to receive cash or cash equivalents in the future.
What are some examples of intangible assets?
Patents, copyrights, trademarks, Franchises or licenses, and goodwill
How are intangibles purchased from another party recorded?
They are recorded at cost
(cost includes all costs of acquisition and expenditures necessary to make the intangible asset ready for its intended use)
How are intangible assets purchased with stock recorded?
The asset is recorded at its own fair market value, or the fair market value of the stock, whichever is more clear.
How should intangibles in a basket (lump sum) purchas be recorded?
the cost should be allocated on the basis of fair values.
How are the costs with internally-created intangibles recorded?
They are expensed as incurred.
Are any costs related to internal intangibles capitilized?
Yes only the direct costs incurred in obtaining the intangible such as legal fees.
An intangible with a limited life is ____________.
An intangible with a indefinite life is ____________.
not amortized.
The expiration of intangible assets is called ___________.
How should limited life intangibles be amortized?
by systematic charges to expense over their useful life.
When intangible assets are amortized what is the journal entry?
Debit to Amortization Expense
Credit to Accumulated Amortization or directly to the intangible
What happens if a limited-life intangible asset's useful life is changed?
the remaining carrying amount should be amortized over the remaining useful life.
Limited Life intangibles should be continually evaluated for _________.
When should an impairment loss be recognized for a limited life intangible?
if the carrying amount of the intangible is not recoverable and its carrying amount exceeds its fair value.
what is a Indefinite life intangible asset?
An asset with no legal, contractual, competitive, or any other factors that limit the useful life of an intangible asset. There is no forseeable limit on the period of time its expected to provide cash flows.
Indefinitie life Intangible Assets should be tested for ________ at least annually.
Indefinite life intangible impairment test compares....
the fair vale of an intangible asset with its carrying amount.
How is the impairment test different for a indefinite life intangible from a limited life intangible?
There is no recoverability test related to indefinite life intangibles, only the fair value test.
What are the six major categories of intangibles?
1. Marketing-related
2. Customer related
3. Artistic Related
4. Contract related
5. technology related
6. Goodwill
Examples of Marketing Related intangible assets?
trademarks, tradenames, newspaper mastheads, internet domain names, and noncompete agreements.
A trademark or tradename is?
a word, phrase, or symbal that distinguisehes or identifies a particular enterprise or product
How long is a trademark?
The right to use a trademark rest exclusively with the original owner aslong as the original owner continues to use it.
If a trdemark or tradename is purchased its capitalizable cost is?
The purchase price
If a trdemark or tradename is devloped by the enterprise itself, its capitalizable cost is?
any attorney fees, registration fees, design costs, consulting fees, sucessful legal defense costs, and other expenditures directly related to securing it (excluding R&D)
Are most trademarks amortized?
No they usually have indefinite lives.
Examples of Customer related intangible assets....
customer lists, order or production backlogs, and both contractual and non contractual customer relationships.
Examples of Artistic-related intangible assets....
involve ownership rights to play, literary works, musical works, pictures, photographs, and video and audiovisual material. These ownership rights are protected by copyrights.
What is a copyright?
its a federally granted right that all authors,painters, musicians, sculpters, and other artisits have in their creations and expressions.
How long is a copyright granted?
for the life of the creator plus 70 years. Not renewable.
What copyright costs may be capitilized?
the costs of acquiring and defending a copyright, any R&D must be expensed.
examples of contract related intangible assets....
represent the value of rights that arise from contractual arrangments. Franchises, Licensing agreements, construction permits, broadcast rights, and service or supply contracts.
What is a franchise
a contractual arrangement under which the franchisor grants the franchisee the right to sell certain products or services, to use certain trademarks, or to perform certain functions.
A franchise with an limited life should be...
amortized as operating expenseover the life of the franchise.
Technology related intangible asset relate to....
innovations or technological advances
Examples of technology related assets...
patented technology and trade secrets
gives the holder exclusive right to use, manufacture, and sell a product or process for a period of 20 years. Product patents and process patents
A patent should be _____ over its legal life or useful life, whichever is ______.
amortized, shorter.
In a business combination, the cost (purchase price) is assigned where possible to the identifiable tangible and intangible net assets, and the remainder is recorded in goodwill
_______ is often referred to as the most intangible of the intangibles.
________ generated internally should not be ....
Goodwill, capitilized in the accounts.
When is goodwill recorded?
when an entire business is purchased.
How do you record goodwill?
the fair market value of the net tangible and identifiable intangible assets are compared with the purchase price of the acquired business. The difference is considered goodwill.
Does goodwill have a definite or indefinite life? Should it be amortized?
Indefinite, no it should not be amortized.
How do you treat value in goodwill?
by testing it for impairment and if it is impaired charge it to the income statement.
What is Negative Goodwill?
the fair value of the assets is greater than the purchase price of the assets. excess should be recorded as negative goodwill or bargain purchase.
the carrying amount of a long lived asset is not recoverable, and therefore a write off is needed.
When do we review Limited Life intangible assets for impairment?
The same as tangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable (recoverability test)
Describe Impairment of Limited Life Intangibles process.
first you perform the recoverability test if there is an impairment you perform the fair value test.
describe the recoverability test?
estimate the future cash flows expected to result from the asset and any disposal value (undiscounted) and if is less than the carrying amount the asset is impaired.
Future Net Cash Flows < Carrying Amount = Impairment
Describe the Fair Value Test?
The amount that the carrying amount is greater than the future net cash flows is the loss on impairment.
How is a loss on a limited life intangible recorded?
as income from continuing operations in the other expenses and losses. the journal entry would be a debit to Loss on Impairment
credit to Indefinite Life Intangible
After the loss is taken what happens now to amortization on limited Life Intangibles?
The new carrying Value is the basis for amortization with the remaining useful life.
How do you test Indefinite life intangibles for impairment?
With 1 step; the fair value test.
Fair Value of the Asset vs. Carrying Amount
1st step to calculate impairment on goodwill
Fair Value Test;
Fair Value of Biz Unit vs. Carrying Amount.
If FV < BV a possible impairment occurred and you must perform step 2
What is step 2 to test goodwill for a impairment?
1. Fair Value of Biz Unit - Goodwill= FMV of Net Assets
2. FMV of Biz Unit - FMV of Net Assets (w/o goodwill)= implied goodwill
3. BV of goodwill - implied value of goodwill= amount to write down goodwill (loss on impairment)
What happens to Research & Development Costs?
They are expensed when thet occur.

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