2. Intangible Assets
b. compare the financial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination;
f. describe the different amortisation methods for intangible assets with finite lives and calculate amortisation expense;
g. describe how the choice of amortisation method and assumptions concerning useful life and residual value affect amortisation expense, financial statements, and ratios;
What are intangible assets?
Intangible assets are identifiable nonmonetary resources controlled by firms. Examples include patents, copyrights, franchises, goodwill, trademarks, trade names, secret processes, property rights, and organization costs.
What is the accounting treatment for Intangible Assets Purchased in Situations Other than Business Acquisitions?
These are accounted for at acquisition costs. "Cost" includes purchase price, legal fees, and other expenses that make the intangibles ready for use. E.g. Capitalize fees paid for a franchise, and patents purchased from another party.
What is the accounting treatment for intangible assets developed internally?
- Generally, costs of R&D, patents, copyrights, brands, etc., are expensed in the period generated.
- There is an exception for R&D of products that are beyond the point of feasibility, which add risk and uncertain future economic benefits
- Managers have considerable discretion in making decisions on when to capitalize
What is the accounting treatment for Intangible Assets Acquired in a Business Combination (acquisition)?
Any excess of cost over fair value of net assets acquired is recorded as goodwill.
What is the accounting treatment for intangible assets with finite useful lives?
An intangible asset with a finite useful life is amortized over its useful life. The estimates required for amortization calculations are: original valuation amount, residual value at the end of useful life, and the length of useful life.