12.01 Intangible Assets

Question 1

What is an intangible asset?

Answer 1

Intangible assets refer to a company’s assets that lack physical substance and provide economic benefits through the rights and privileges associated with their possession. They may have finite or indefinite lives.

Question 2

What is a finite-lived asset?

Answer 2

Finite-lived assets have an identifiable useful life or, in some situations, a specific legal life.

Question 3

What is an indefinite-lived asset?

Answer 3

Indefinite-lived assets have no legal, regulatory, contractual, competitive, or other limits on their life. Indefinite means that there is no foreseeable limit on the period of time over which the intangible is expected to provide cash flows.

Question 4

What type of intangible asset is amortized?

Answer 4

Only finite-lived intangibles are amortized.

Question 5

What are examples of finite-lived intangible assets?

Answer 5

Patents, copyrights, franchises.

Question 6

What is a patent?

Answer 6

Protection for product and process ideas resulting from R&D.

Question 7

What is the life of a patent?

Answer 7

Maximum 20-year life; amortized over shorter of useful or legal life.

Question 8

What is a copyright?

Answer 8

Protection of artistic works, including books, recordings, and computer software.

Question 9

What is the life of a copyright?

Answer 9

Life of the creator plus 70 years; amortized over useful life.

Question 10

What is a franchise?

Answer 10

Operation of a business unit under contractual arrangements with another party.

Question 11

What is the life of a franchise?

Answer 11

Amortized over useful life of related contract.

Question 12

When is an acquired intangible capitalized?

Answer 12

An acquired intangible is capitalized if either: the benefit of the asset is obtained through contractual or other legal rights (as in a patent), or, the intangible is otherwise separable (i.e. can be sold, transferred, etc.) (e.g. customer list)

Question 13

What is the initial carrying amount of an intangible asset?

Answer 13

In general, the initial carrying amount (i.e. capitalized cost) is determined similarly for all acquired intangible assets: purchase price plus legal and administrative expenditures associated with obtaining them and successfully protecting them against infringement. If a legal defense of an intangible asset is unsuccessful, all costs should be expensed since no legal benefit exists in that case.

Question 14

How are internally developed intangibles recorded?

Answer 14

Internally developed intangibles are expensed immediately if they are not specifically identifiable, have indeterminate values, or are inherent in a continuing business. Firms must expense the amount of internal expenditures devoted to the development of intangibles. The only costs related to internally developed intangibles that are capitalized are registration fees and legal costs paid to outsiders.

Question 15

What is impairment?

Answer 15

A decline in the recorded value of the asset.

Question 16

When are intangibles evaluated for impairment?

Answer 16

If events or conditions indicate a likelihood of impairment. If there is no indication, no further testing is required. If, however, events or conditions indicate that it is likely that the asset is impaired, the recoverability test is applied to determine if (but not by how much) impairment has occurred.

Question 17

What is the recoverability test?

Answer 17

The recoverability test compares an asset’s undiscounted expected future net cash flows with its carrying amount. If the carrying amount is higher than expected future net cash flows, the intangible asset is impaired. The impairment loss to be recorded is the excess amount of the asset’s carrying value over its fair value.