Prepared by Coby Harmon University of California, Santa Barbara Westmont College 12-1 Intangible Assets CHAPTER 12 LEARNING OBJECTIVES After studying this chapter, you should be able to: Discuss the characteristics, valuation, and amortization of intangible assets Describe the accounting for various types of intangible assets Explain the accounting issues for recording goodwill 12-2 Identify impairment procedures and presentation requirements for intangible assets Describe the accounting and presentation for research and development and similar costs PREVIEW OF CHAPTER 12 12-3 Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield Intangible Asset Issues Characteristics Identifiable Lack physical existence LEARNING OBJECTIVE Discuss the characteristics, valuation, and amortization of intangible assets Not monetary assets Normally classified as non-current asset Common types of intangibles: 12-4 Christian Dior’s (FRA) most important asset is its brand image, not its store fixtures Marketing-related Contract-related Customer-related Technology-related Artistic-related Goodwill LO Intangible Asset Issues Valuation Purchased Intangibles 12-5 Recorded at cost Includes all acquisition costs plus expenditures to make the intangible asset ready for its intended use Typical costs include: ► Purchase price ► Legal fees ► Other incidental expenses LO Valuation Internally Created Intangibles 12-6 Might include patents, computer software, copyrights, and trademarks Companies expense all research phase costs and some development phase costs Certain development costs are capitalized once economic viability criteria are met IFRS identifies several specific criteria that must be met before development costs are capitalized LO Intangible Asset Issues Internally Created Intangibles ILLUSTRATION 12.1 Research and Development Stages 12-7 LO Intangible Asset Issues Amortization of Intangibles Limited-Life Intangibles 12-8 Amortize by systematic charge to expense over useful life Amortization expense should reflect the pattern in which the company consumes or uses up the asset Credit asset account or accumulated amortization Amortization should be cost less residual value Companies must evaluate the limited-life intangibles annually for impairment LO Intangible Asset Issues Amortization of Intangibles Indefinite-Life Intangibles 12-9 No foreseeable limit on time the asset is expected to provide cash flows No amortization Must test indefinite-life intangibles for impairment at least annually LO Intangible Asset Issues Amortization of Intangibles ILLUSTRATION 12.2 Accounting Treatment for Intangibles 12-10 LO Presentation of Intangible Assets Income Statement Companies should report amortization expense and impairment losses and reversals for intangible assets other than goodwill separately in net income (usually in the operating section) Notes to the financial statements should include the amortization expense for each type of asset 12-42 LO Presentation of Intangible Assets The reporting of intangible assets is similar to the reporting of property, plant, and equipment ILLUSTRATION 12.12 Nestlé’s Intangible Asset Disclosures 12-43 Unknown $1,900,000 LO LEARNING OBJECTIVE Describe the accounting and presentation for research and development and similar costs Research and Development Costs Research and development (R&D) costs are not in themselves intangible assets Frequently results in the development of patents or copyrights such as new 12-44 product, formula, process, composition, or idea, literary work LO Research and Development Costs Companies spend considerable sums on research and development 12-45 ILLUSTRATION 12.13 R&D Outlays, as a Percentage of Sales LO Research and Development Costs 12-46 Research costs must be expensed as incurred Development costs may or may not be expensed as incurred Capitalization begins when the project is far enough along in the process such that the economic benefits of the R&D project will flow to the company (the project is economically viable) LO Research and Development Costs Identifying R & D Activities ILLUSTRATION 12.14 Research Activities versus Development Activities Research Research Activities Activities Examples Examples Original Original and and planned planned investigation investigation undertaken undertaken with with the the prospect prospect of of gaining gaining new new scientific scientific or or technical technical knowledge knowledge and and understanding understanding Laboratory Laboratory research research aimed aimed at at discovery discovery of of new new knowledge; knowledge; searching searching for for applications applications of of new new research research findings findings Development Development Activities Activities Examples Examples Application Application of of research research findings findings or or other other knowledge knowledge to to a a plan plan or or design design for for the the production production of of new new or or substantially substantially improved improved materials, materials, devices, devices, products, products, processes, processes, systems, systems, or or services services before before the start of commercial production the start of commercial production or or use use 12-47 Conceptual Conceptual formulation formulation and and design design of of possible possible product product or or process process alternatives; alternatives; construction construction of of prototypes prototypes and and operation operation of of pilot pilot plants plants LO Research and Development Costs Accounting for R & D Activities Costs Associated with R&D Activities: 12-48 Materials, equipment, and facilities Personnel Purchased intangibles Contract Services Indirect Costs LO Accounting for R & D Activities Illustration 12.15 Sample R&D Expenditures and Their Accounting Treatment Type Typeof ofExpenditure Expenditure Accounting AccountingTreatment Treatment Construction of long-range research facility for use in current and future projects (three-story, 400,000-squarefoot building) Capitalize and depreciate as R&D expense Acquisition of R&D equipment for use on current project only Expense immediately as R&D Acquisition of machinery for use on current and future R&D projects Capitalize and depreciate as R&D expense 12-49 LO Accounting for R & D Activities Type Typeof ofExpenditure Expenditure Accounting AccountingTreatment Treatment Purchase of materials for use on current and future R&D projects Inventory and allocate to R&D projects; expense as consumed Salaries of research staff designing new laser bone scanner Expense immediately as R&D Research costs incurred under contract with New Horizon, Inc., and billable monthly Record as a receivable Material, labor, and overhead costs of prototype laser scanner (economic viability not achieved) Expense immediately as R&D 12-50 LO Accounting for R & D Activities Type Typeof ofExpenditure Expenditure Accounting AccountingTreatment Treatment Costs of testing prototype and design modifications (economic viability not achieved) Expense immediately as R&D Legal fees to obtain patent on new laser scanner Capitalize as patent and amortize to overhead as part of cost of goods manufactured 10 Executive salaries 10 Expense as operating expense 11 Cost of marketing research to promote new laser scanner 11 Expense as operating expense 12-51 LO Accounting for R & D Activities Type Typeof ofExpenditure Expenditure Accounting AccountingTreatment Treatment 12 Engineering costs incurred to advance the laser scanner to full production stage (economic viability achieved) 12 Expense as operating expense Capitalize as R&D 13 Costs of successfully defending patent on laser scanner 13 Capitalize as patent and amortize to overhead as part of cost of goods manufactured 14 Commissions to sales staff marketing new laser scanner 14 Expense as operating expense 12-52 LO Research and Development Costs Costs Similar to R & D Costs Start-up costs for a new operation Initial operating losses Advertising costs These costs are expensed as incurred, similar to the accounting for R&D costs 12-53 LO Research and Development Costs E12.17: Compute the amount to be reported as research and development expense $330,000 / = $66,000 Cost of equipment acquired that will have alternative uses in future R&D projects over the next years (uses straight-line depreciation) R&D Expense $330,000 $66,000 59,000 59,000 Consulting fees paid to outsiders for R&D projects 100,000 100,000 Personnel costs involved in R&D projects 128,000 128,000 50,000 50,000 34,000 Materials consumed in R&D projects Indirect costs reasonably allocable to R&D projects Materials purchased for future R&D projects $403,000 12-54 LO Presentation of R&D Costs Companies should disclose the total R&D costs charged to expense each period ILLUSTRATION 12.16 R&D Reporting 12-55 LO COPYRIGHT Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 12-56 ... intangible assets Describe the accounting and presentation for research and development and similar costs PREVIEW OF CHAPTER 12 12-3 Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ●... characteristics, valuation, and amortization of intangible assets Describe the accounting for various types of intangible assets Explain the accounting issues for recording goodwill 12-2 Identify impairment... Asset Issues Amortization of Intangibles ILLUSTRATION 12.2 Accounting Treatment for Intangibles 12-10 LO LEARNING OBJECTIVE Describe the accounting for various types of intangible assets Types of