Accounting for Intangibles

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Information about Accounting for Intangibles

Published on January 19, 2018

Author: bsnavi123


ACCOUNTING FOR INTANGIBLES By Dr. B. S. Navi: ACCOUNTING FOR INTANGIBLES By Dr. B. S. Navi Overview: Overview Concept And importance of intangibles in corporate success Concept and objectives of Intangibles accounting Types of Intangible assets Methods of accounting Amortization practice with reference to goodwill, patents etc Brand Accounting –Brand as strategic assists Need and importance of brand accounting Methods of valuation of homegrown and acquired brands Brand accounting and Indian corporate practice s Introduction: Introduction According to Section 211 of the Companies Act 1956, Financial Statements must give a true and fair view of the state of the affairs of the company. All the matters which affect the financial position of the business should be disclosed. The assets and liabilities have to be properly valued so that balance sheet discloses true and fair view of the financial position The assets used in the business may be either tangible and intangible Valuation and accounting of tangible assets is simple and does not require special attention. Valuation and accounting of intangible assets need special attention as they differ from tangible assets in several respects. Accounting for intangible assets has gained prominence in the past few decades due to changes in the business environment Intangible assets: Intangible assets The Assets which have no physical existence Kohler- Intangible asset is a capital asset having no physical existence, its value being dependent on the rights that possession confers upon the owner. In other words an intangible asset is an identifiable non monetary asset, without physical substance, held for use in the production or supply of goods and services, for rental or for other administrative purpose. The intangible asset provides the specific rights or benefits to the holder over several future accounting years. The assets which cannot be seen touched and have non volume like tangibles but have right to future benfits . Definition: Definition Assets -- a. with future economic benefits, b. no physical substance, c. with high degree of uncertainty concerning the future benefit . Features: Features Non physical in nature Gives specific rights to the holder over several future years Increases the value when used Possible for multiple uses for the same time Identifiable non-monetary asset Has strong network effect Difficult to manage and control Cannot be measured directly Investment in intangible assets is typically more risky Creates future value. significance: significance They give specific right to the holders over several future years These assets are expected to benefit the firm beyond the current operating cycle of the business They help the business concern to grow and expand They help to maximise the sales by bringing good image to the business concern. They speak about the reputation of the firms They help the business concern to carry out operations with minimum capital investments Common Types of Intangibles: Common Types of Intangibles Patents, copyrights, franchises, start-up costs, trade names, trademarks, goodwill etc.. Dr. B. S. Navi 8 Valuation of Intangibles: Valuation of Intangibles Intangibles are recorded at cost and are also reported at cost at the end of an accounting period. Intangibles with limited life are subject to amortization and possible impairment test. Intangibles with indefinite life are only subject to impairment test at least annually. Dr. B. S. Navi 9 Costs of Intangibles: Costs of Intangibles Costs of Intangibles include acquisition costs plus any other expenditures necessary to make the intangibles ready for the intended uses (i.e., purchase price, legal fees, filing fees etc.; not including internal R&D). Essentially, the accounting treatment of valuation for intangibles closely parallels that followed by tangible assets. Dr. B. S. Navi 10 Examples: Examples 1. Issuance of stock to acquire intangibles. 2. Lump-sum purchase of intangibles. Costs will be allocated in accordance with the fair market value of each individual intangible. Dr. B. S. Navi 11 Intangibles Assets with Finite lives : Intangibles Assets with Finite lives Patents (20 years), copyrights (the life of the creator plus 70 years), franchise and license (the contractual life). The costs are subjected to amortization ( a process of cost allocation) over the shorter of the legal or useful life, not to exceed 40 years. Dr. B. S. Navi 12 Amortization of Intangibles: Amortization of Intangibles The impairment test needed only when events indicate that the book value may not be recoverable. Amortization Method: Straight-line method. Other method can be applied if it is more appropriate than the Straight line method. Residual value: Usually zero. Dr. B. S. Navi 13 Intangibles Assets with Indefinite Lives : Intangibles Assets with Indefinite Lives Trade names, trademarks, goodwill, in-process R&D. The costs are not subject to amortization. Impairment test is required at least annually. Dr. B. S. Navi 14 1. Patents: 1. Patents Granted by the U.S. Patent and Trademark Office for a period of 20 years. A patent gives the holder the exclusive right to produce, use and sell a product or process without interference or infringement from others. Dr. B. S. Navi 15 Patents (contd.): Patents (contd.) Cost of patent: If purchased from an inventor, the cost will include the purchase price plus any legal fees (to successfully protect the patent). In addition, any legal fees occur after the acquisition of a patent which successfully defend the right of the patent should also be capitalized. The cost of a patent should be amortized over the legal life or the useful life, whichever is shorter. Dr. B. S. Navi 16 Patents (contd.): Patents (contd.) If events indicate the book value of a patent may not be recoverable, an impairment test is required (see Chapter 11 for details) If a patent becomes worthless, the net value of the patent should be written off as loss. If a patent is internally developed, no cost can be capitalized. Most of the research and development (R&D) costs are expensed. Dr. B. S. Navi 17 2. Copyrights: 2. Copyrights A federally granted right to authors, sculptors, painters, and other artists for their creations. A copyright is granted for the life of the creator plus 70 years. It gives the creator and heirs an exclusive right to reproduce and sell the artistic work or published work. Dr. B. S. Navi 18 Copyrights (contd.): Copyrights (contd.) If purchased, the cost includes the purchase price plus any legal fees. If developed by the owner (the creator), no cost can be capitalized. Amortization: Straight-line method or a unit-of-production method. Impairment test needed only if events indicate that book value may not be recoverable. Dr. B. S. Navi 19 3. Franchise & License: 3. Franchise & License A franchise is a contractual agreement under which the franchiser grants the franchisee the right to sell certain products or service or to use certain trade names or trademarks. A license is a contractual agreement between a governmental body (i.e., city, state, etc.) and a private enterprise to use public property to provide services. Dr. B. S. Navi 20 Franchise & License (contd.): Franchise & License (contd.) Costs: Franchise fees plus any legal fees should be capitalized. Amortization: over the shorter of the contractual life or the useful life, not to exceed 40 years. Impairment test is needed only if events indicate that the book value may not be recoverable. Dr. B. S. Navi 21 4. Trademarks & Trade Names: 4 . Trademarks & Trade Names A word, a phrase, or a symbol that distinguishes a product or an enterprise from another (i.e., company names, XEROX,…) Cost: Similar to that of copyrights. Dr. B. S. Navi 22 Trademarks & Trade Names: Trademarks & Trade Names Life: register at the US Patent Office for 10 years life. The registration can be renewed every 10 years for unlimited times. Amortization: no amortization necessary. Impairment test is acquired at least annually. Dr. B. S. Navi 23 5. Start-Up Costs (including Organization Costs): 5 . Start-Up Costs (including Organization Costs) Start-up costs: Any costs incurred for the preparation of introducing a new product or new service or start business in a new territory. Org. Costs: Costs associated with the formation of a corporation including fees to underwriters (for stock issuance), legal fees, promotional expenditures, etc . These costs should be expensed as incurred. Dr. B. S. Navi 24 6. Research and Development: 6. Research and Development Prior to SFAS 2 (effective in 1974), the practice was to either expense or capitalize R&D related expenditures. SFAS 2 requires to expense and disclose all R&D costs if the results of R&D are for internal use. Dr. B. S. Navi 25 6. Research and Development: 6 . Research and Development R&D costs include salaries of personnel involved in R&D, costs of materials used, equipments , facilities and intangibles used in R&D activities. If equipment has an alternative usage , the equip. should be capitalized and only the depreciation expense will be included in the R&D expense. Dr. B. S. Navi 26 R & D Contracts: R & D Contracts Costs of R&D performed under contracts for others are capitalized as inventory or receivable. Income from these contracts can be recognized based on percentage-of completion or complete contract method as discussed for the long-term construction contracts. Dr. B. S. Navi 27 Purchased R&D: Purchased R&D When acquiring another company, the purchase price is allocated to tangible assets, intangibles (developed technology) and in-process R&D. The remaining will be the goodwill. The in-process R&D is expensed prior to 2009. Dr. B. S. Navi 28 Purchased R&D (Contd.): Purchased R&D (Contd.) The fair value of in-process R&D is capitalized as indefinite-life intangible asset for business acquisition made in fiscal years beginning on or after 12/15/2008 (SFAS 141 (revised)). The capitalized in-process R&D should not be amortized but is subject to impairment test. Dr. B. S. Navi 29 International Financial Reporting Standards – R&D (IAS 38): International Financial Reporting Standards – R&D (IAS 38) Research expenditures are expenses as incurred. Development expenditures meet certain criteria (i.e., development costs can be measured , the product is technically and commercially feasible and the economic benefits are probable) are capitalized as an intangible asset. Dr. B. S. Navi 30 7. COMPUTER SOFTWARE COSTS: 7. COMPUTER SOFTWARE COSTS Computer software costs including planning, designing, coding, testing, documentation and preparation of training materials. Expense most of the costs if the software is to be sold. SFAS 86 requires these costs be expensed as R & D expenses prior to the establishment of technological feasibility of the software. Dr. B. S. Navi 31 Costs Associated With a Software: Costs Associated With a Software Costs occurred after the establishment of technological feasibility but before the software is ready for general release are capitalized as an intangible asset . Costs occurred after the software is ready for general release and production are recognized as produce costs (will be expensed as CGS later ). Dr. B. S. Navi 32 8. Goodwill: 8. Goodwill Cannot be separated from the business. Can only be recognized if the whole business was purchased and the purchase price is greater than the market value of the net assets (i.e., market value of assets  market value of liabilities). Dr. B. S. Navi 33 Factors Contribute to Goodwill: Factors Contribute to Goodwill Superior management team. Outstanding sales organization. Favorable tax condition. Effective advertising. Good labor relations. Outstanding credit rating. Dr. B. S. Navi 34 THANK YOU: THANK YOU Dr. B. S. Navi 35

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