Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 12 Intangible Assets This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Describe the characteristics, valuation, and amortization of intangible assets Describe the accounting for various types of intangible assets Explain the accounting issues for recording goodwill Explain impairment procedures and presentation requirements for intangible assets Describe accounting and presentation for research and development and similar costs Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter (1 of 2) Intangible Asset Issues Types of Intangibles • Characteristics • Marketing-related • Valuation • Customer-related • Amortization • Artistic-related • Contract-related • Technology-related • Goodwill Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter (2 of 2) Impairment of Intangibles and Presentation Research and Development Costs • Limited-life intangibles • Identifying R&D • Indefinite-life intangibles other than goodwill • Accounting for R&D • Goodwill • Presentation Similar costs Presentation Copyright â2019 John Wiley & Sons, Inc LO 1: Discuss the Characteristics, Valuation, and Amortization of Intangible Assets Copyright ©2019 John Wiley & Sons, Inc Intangible Asset Issues (1 of 7) Characteristics Lack physical existence Not financial instruments Normally classified as long-term asset Copyright ©2019 John Wiley & Sons, Inc Intangible Asset Issues (2 of 7) Common types of intangibles: • Patents • Copyrights • Franchises or licenses • Trademarks or trade names • Goodwill The Coca-Cola Company's success comes from its secret formula for making Coca-Cola, not its plant facilities Copyright ©2019 John Wiley & Sons, Inc Intangible Asset Issues (3 of 7) Valuation Purchased Intangibles • Recorded at cost • Includes all costs necessary to make the intangible asset ready for its intended use • Typical costs include:  Purchase price  Legal fees  Other incidental expenses Copyright ©2019 John Wiley & Sons, Inc Intangible Asset Issues (4 of 7) Valuation Internally Created Intangibles • Recorded at cost • Generally expensed • Only capitalize direct costs incurred in developing intangible, such as legal costs Underlying Concepts The controversy surrounding the accounting for R&D expenditures reflects a debate about whether such expenditures meet the definition of an asset If so, then an "expense all R&D costs" policy results in overstated expenses and understated assets Copyright ©2019 John Wiley & Sons, Inc Intangible Asset Issues (5 of 7) Amortization of Intangibles Limited-Life Intangibles • Amortize to expense over useful life • Credit asset account or accumulated amortization • Useful life should reflect the periods over which the asset will contribute to cash flows • Amortization should be cost less residual value • Companies should evaluate the limited-life intangibles for impairment Copyright ©2019 John Wiley & Sons, Inc 10 Presentation of Research and Development Costs Blank Merck & Co., Inc (in millions) Sales Costs, expenses and other Materials and production Marketing and administrative Research and development Restructuring costs Other (income) expense, net Blank Years Ended December 31 2017 2016 2015 $40,122 $39,801 $ 3,498 12,775 9,830 10,208 776 12 $33,601 Copyright ©2019 John Wiley & Sons, Inc 13,891 9,762 10,124 651 720 $35,148 14,934 10,313 6,704 619 1,527 $34,097 59 LO 6: Compare the Accounting for Intangible Assets Under GAAP and IFRS Copyright ©2019 John Wiley & Sons, Inc 60 IFRS Insights (1 of 12) Relevant Facts Similarities • Like GAAP, under IFRS intangible assets (1) lack physical substance and (2) are not financial instruments In addition, under IFRS an intangible asset is identifiable To be identifiable, an intangible asset must either be separable from the company (can be sold or transferred) or it arises from a contractual or legal right from which economic benefits will flow to the company Fair value is used as the measurement basis for intangible assets under IFRS, if it is more clearly evident Copyright ©2019 John Wiley & Sons, Inc 61 IFRS Insights (2 of 12) Relevant Facts Similarities • With issuance of a converged statement on business combinations (IFRS and SFAS No 141—Revised), IFRS and GAAP are very similar for intangibles acquired in a business combination That is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged In addition, under both GAAP and IFRS, companies recognize acquired inprocess research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can Copyright be measured reliably ©2019 John Wiley & Sons, Inc 62 IFRS Insights (3 of 12) Relevant Facts Similarities • As in GAAP, under IFRS the costs associated with research and development are segregated into the two components Costs in the research phase are always expensed under both IFRS and GAAP Diferences • IFRS permits revaluation on limited-life intangible assets Revaluations are not permitted for goodwill and other indefinitelife intangible assets Copyright ©2019 John Wiley & Sons, Inc 63 IFRS Insights (4 of 12) Relevant Facts Diferences • IFRS permits some capitalization of internally generated intangible assets (e.g., brand value) if it is probable there will be a future benefit and the amount can be reliably measured GAAP requires expensing of all costs associated with internally generated intangibles Copyright ©2019 John Wiley & Sons, Inc 64 IFRS Insights (5 of 12) Relevant Facts Diferences • IFRS requires an impairment test at each reporting date for longlived assets and intangibles, and records an impairment if the asset’s carrying amount exceeds its recoverable amount The recoverable amount is the higher of the asset’s fair value less costs to sell and its value-in-use Value-in-use is the future cash flows to be derived from the particular assets, discounted to present value Under GAAP, impairment loss is measured as the excess of the carrying amount over the asset’s fair value Copyright ©2019 John Wiley & Sons, Inc 65 IFRS Insights (6 of 12) Relevant Facts Diferences • IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of limitedlife intangibles (Reversals of goodwill impairments are not allowed.) Under GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for the asset IFRS and GAAP are similar in the accounting for impairments of assets held for disposal • Under IFRS, costs in the development phase of a research and development project are capitalized once technological feasibility (referred to as economic viability) is achieved Copyright ©2019 John Wiley & Sons, Inc 66 IFRS Insights (7 of 12) IFRS Self-Test Question Research and development costs are: a expensed under GAAP b expensed under IFRS c expensed under both GAAP and IFRS d None of the above Copyright ©2019 John Wiley & Sons, Inc 67 IFRS Insights (8 of 12) IFRS Self-Test Question Research and development costs are: a expensed under GAAP b expensed under IFRS c expensed under both GAAP and IFRS d None of the above Copyright ©2019 John Wiley & Sons, Inc 68 IFRS Insights (9 of 12) IFRS Self-Test Question A loss on impairment of an intangible asset under I FRS is the asset’s: a carrying amount less the expected future net cash flows b carrying amount less its recoverable amount c recoverable amount less the expected future net cash flows d book value less its fair value Copyright ©2019 John Wiley & Sons, Inc 69 IFRS Insights (10 of 12) IFRS Self-Test Question A loss on impairment of an intangible asset under I FRS is the asset’s: a carrying amount less the expected future net cash flows b carrying amount less its recoverable amount c recoverable amount less the expected future net cash flows d book value less its fair value Copyright ©2019 John Wiley & Sons, Inc 70 IFRS Insights (11 of 12) IFRS Self-Test Question Recovery of impairment is recognized for all the following except: a patent held for sale b patent held for use c trademark d goodwill Copyright ©2019 John Wiley & Sons, Inc 71 IFRS Insights (12 of 12) IFRS Self-Test Question Recovery of impairment is recognized for all the following except: a patent held for sale b patent held for use c trademark d goodwill Copyright ©2019 John Wiley & Sons, Inc 72 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2019 John Wiley & Sons, Inc 73 ... characteristics, valuation, and amortization of intangible assets Describe the accounting for various types of intangible assets Explain the accounting issues for recording goodwill Explain impairment procedures... this inconsistency in accounting, noting that information about the value of a brand is important to investors in consumer-product companies Those supporting the difference in accounting cite the... to be carrying the day in support of the current accounting, under which only purchased brands and other intangible assets are recognized in accounting reports Source: “Untouchable Intangibles: