Chapter 11 - Intangible Assets Flashcards
What are the characteristics of Intangible Assets? (2)
- They lack physical existence.
Intangible assets derive their value from the rights and privileges granted to the company using them. - They are not financial instruments.
Assets such as bank deposits, AR, and long-term investments in bonds and stocks also lack physical substance. However, financial instruments derive their value from the right (claim) to receive cash or cash equivalents in the future. Financial instruments are not classified as intangibles.
The amount of an intangible asset to be amortized should be its cost less residual value. What is the residual value?
The residual value is assumed to be zero unless at the end of its useful life the intangible asset has value to another company.
Ex. If Company A commits to purchasing an intangible asset from Company B at the end of the asset’s useful life, Company B should reduce the cost of its intangible asset by the residual value. Similarly, Company B should consider fair values, if reliably determined, for residual values.
A company does not amortize an intangible asset with an indefinite life. How does a company know if an intangible asset has an indefinite life?
If no factors (legal, regulatory, contractual, competitive, or other) limit the useful life of an intangible asset, a company considers its useful life indefinite.
There is no foreseeable limit on the period of time over which the intangible asset is expected to provide cash flows.
What are the six major categories of intangible assets? (My Casseroles Are Cooking Tonight, Grandma)
- Marketing-related
- Customer-related
- Artistic-related
- Contract-related
- Technology-related
- Goodwill
What is a Marketing-Related Intangible Asset?
Intangible assets used in marketing or promotion of products or services.
Ex. trademarks or trade names, newspaper mastheads, Internet domain names, and noncompetition agreements.
What is a Customer-Related Intangible Asset?
Customer-related intangible assets result from interactions with outside parties.
Ex. customer lists, order or production backlogs, and both contractual and noncontractual customer relationships.
In regards to Intangible Assets, what costs can be capitalized? (3)
Costs associated with the purchase of the intangible asset from a third party.
Internal costs once the project reaches technological feasibility, otherwise costs are expensed.
Legal and application costs associated with ownership e.g., patent application
What are Artistic-related intangible assets?
These involve ownership rights to plays, literary works, musical works, pictures, photographs, and visual and audiovisual material. Copyrights protect these ownership rights.
What are Contract-related intangible assets?
These represent the value of rights that arise from contractual arrangement.
Ex. Franchise & licensing agreements, construction permits, broadcast rights, and service or supply contracts
How should a company handle the cost of a franchise or license?
Amortize the cost of a franchise w/a limited life an an operating expense over the life of the franchise.
It should not amortize a franchise with an indefinite life nor a perpetual franchise; the company should carry such franchises at cost
What are Technology-related intangible assets?
These relate to innovations or technological advances.
Ex. Patented technology and trade secrets granted by the US Patent & Trademark Office
How does IFRS compare to GAAP in regards to R&D expenses from intangible assets?
IFRS require capitalization of some development costs. GAAP doesn’t allow any.
How should a company handle the cost of a patent?
Amortize the cost of a patent over its legal life or it’s useful life, whichever is shorter.
What is an impairment?
A write off when the carrying amount of a long-lived asset (PPE or intangible asset) is not recoverable.
What is a Recoverability Test?
Determines if a PPE or an intangible asset needs to recognize an impairment loss.
In performing this test, the company estimates the future cash flows expected from use of the asset and its eventual disposal. If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount, the company measures & recognizes an impairment loss. To measure the impairment, the company uses the fair value test.
