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					                                                                                                               consideration given or the intangible asset received, whichever is
                      CHAPTER 12                                                                       
                                                                                                               more clearly evident.
                                                                                                               Costs incurred to create internally-created intangibles are
                                                                                                               generally expensed as incurred.
                      Intangible Assets
                                                                                             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
                Patents
                Copyrights
                                                                                                 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
               assets.
              Like tangible assets, cost includes acquisition price and all other
               expenditures necessary in making the asset ready for its intended
               use.
              When intangibles are acquired for consideration other than cash,
               the cost of the intangible is the fair market value of the



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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.
4.2 Copyrights
                                                                                             4.5 Goodwill
    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.




                                                                                      12-2
12-3
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.
      new knowledge.
   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
                  incurred.
             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


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