consideration given or the intangible asset received, whichever is
more clearly evident.
Costs incurred to create internally-created intangibles are
generally expensed as incurred.
3. Amortization of intangible assets
Introduction: Chapter 12 discusses the identification, measurement, and Amortization is the process of systematically charging the cost of
disposition of intangible assets. These assets provide the entity that owns them intangible assets to expense.
with some kind of preferred position because of certain rights or special
privileges they are allowed. Intangible assets are valued at their cost and Factors to be considered for amortization:
generally are adjusted downward to reflect their future benefit to the entity as of o Amortizable cost: Cost minus estimated residual value which
the end of each fiscal period. usually is zero.
1. The characteristics and classification of intangible assets o Estimated useful life: Choose the shortest of (1) legal life (if
applicable); (2) economic life (which can be much shorter than
The characteristics of an intangible asset are: its legal life; or (3) 40 years.
o they lack physical existence, o Amortization method: Usually the “straight-line method.”
o they are not a financial instrument, and (This method is required for income tax purposes).
o they are long-term in nature and subject to amortization.
Entries to record the amortization
Classification of Intangible Assets Dr. Amortization expense
o Separately identifiable intangible assets:
Cr. Intangible assets/accumulated amortization
o Impairments of intangibles: When an intangible asset ceases to provide
Trademarks and trade names
future service potential to an enterprise, its cost should be removed
Franchises and licenses
from the accounting records.
Non-separately identifiable intangible assets: o Intangible assets are normally shown in financial statements at cost less
Goodwill total amortization taken to date. The financial statements should
disclose the method of amortization, but a separate Accumulated
2. Accounting for acquisition of intangible assets Amortization account need not be presented.
Cost is the appropriate basis for recording purchased intangible
Like tangible assets, cost includes acquisition price and all other
expenditures necessary in making the asset ready for its intended
When intangibles are acquired for consideration other than cash,
the cost of the intangible is the fair market value of the
4. Description of Several Intangible Assets o Even though the life of a trademark or trade name may be unlimited, its
cost must be amortized over the periods benefited or 40 years,
4.1 Patents whichever is shorter.
A patent gives the holder an exclusive right to use, manufacture, and 4.4 Franchises and Licenses
sell a product or process for a period of 20 years.
o Product patents, which cover actual physical products. o A franchise provides an entity with the right to conduct a particular
o Process patents, which relate to the process by which business or sell a particular product, usually in a designated
products are made. geographical area.
Amortization is recorded over the legal life or useful life, whichever o A license is granted by a government entity for the use of public
is shorter. property or a service.
Any legal costs incurred to successfully defend a patent suit may be o Franchises and licenses may be for a definite period of time, for an
charged to the Patents account and amortized over the remaining useful indefinite period of time, or perpetual.
life. o Franchise or license costs that benefit future periods should be recorded
Research and development costs related to the development of a in a Franchise or License account. These costs are amortized over the
product, process, or idea that is subsequently patented must be life of the franchise or license or 40 years, whichever is less.
expensed as incurred. o Continuing periodic franchise and license payments are expenses of the
period and do not represent assets associated with future periods.
o A copyright is a federally granted right that authors and other artists
have in their creations. o Goodwill is recorded only when an entire business is purchased
o A copyright is granted for the life of the creator plus 50 years. During because goodwill is a "going concern" valuation and cannot be
this time the owner or heirs have the exclusive right to reproduce and separated from the business as a whole.
sell an artistic or published work. o Goodwill is measured in a business purchase by computing the
o Normally, the useful life of a copyright is less than its legal life, but, in difference between acquisition cost of the investment and the fair
any case, amortization should not exceed 40 years. market value of the net assets of the acquired company.
o Goodwill is not amortized. However, periodic valuation should be taken
4.3 Trademarks or Trade Names to see if the value of goodwill is impaired. A loss must be recorded to
write down goodwill if it is impaired.
o A trademark or trade name is a word, phrase, or symbol that
distinguishes or identifies a particular enterprise product.
o A company that registers a trademark or trade name with the U.S. Patent
Office may renew it for an unlimited number of 20 year periods. Thus,
a company establishing a trademark or trade name can consider it to
have an unlimited life. The cost to be capitalized for a trademark or
trade name is the acquisition cost if purchased, or all associated
expenditures (other than research and development costs) if the item is
developed by the company.
5. Research and Development
o Goodwill can be measured in a business purchase by discounting the
o The expenditure for research and development is designed to develop extra earning potential of an enterprise and determining the present
new products or processes, improve existing processes, and discover value of this extra inflow.
o FASB Statement No. 2 requires that all research and development (R &
o The factors necessary to compute goodwill under this approach are: (a)
D) costs be charged to expense when incurred.
the normal rate of return for the enterprise, (b) an estimate of the
o The reasons for this treatment include problems associated with (a)
future earnings of the enterprise, (c) the discount rate that should be
identifying the costs associated with particular activities, projects, or
applied to excess profits, and (d) the number of periods over which
achievements and (b) determining the magnitude of future benefits and
excess profits should be discounted.
length of time over which such benefits may be realized. The
following is a description of the recommended treatment of the costs
associated with R & D activities:
a. Materials, Equipment, and Facilities. Expense the entire
costs, unless the items have alternative future uses (in other
R & D projects or otherwise), then carry as inventory and
allocate as consumed or capitalize and depreciate as used.
b. Personnel. Salaries, wages, and other related costs of
personnel engaged in R & D should be expensed as
c. Purchased Intangibles. Expense the entire cost, unless the
items have alternative future uses (in other R & D projects
or otherwise), then capitalize and amortize.
d. Contract Services. The costs of services performed by
others in connection with the reporting company's R & D
should be expensed as incurred.
e. Indirect Costs. A reasonable allocation of indirect costs
should be included in R&D costs, except for general and
administrative cost, which must be clearly related to be
included and expensed.
6. Valuing Goodwill and Determining Purchase Price