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Learn Intangible Assets In 1 Minute

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Learn Intangible Assets in 1 MinuteIntangible Asset is a not an easy subject in financial accounting. It is hard to be valued. On other hand, types of intangible been growing up rapidly. Consequently, accounting standard and rules are always become important [and contropersial] discussion. Amortization of goodwill no longer allowed, and on and on.   Learn Intangible Assets in 1 Minute” is rather simplified and aimed as a quick—study—reference only. Obviously, this is not a comprehensive guidelines. However, it should help in any points.

 

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General Characteristics Of Intangible Assets

  • Lack physical substance
  • Uncertain benefit period
  • Associated with legal rights

 

Initial Accounting Of Intangibles

  • Capitalize costs of purchasing intangibles
  • Expense costs of developing intangibles internally
  • Capitalize costs of preparing for use: Legal fees and Registration fees

 

Amortization Of Intangibles Assets [Except Goodwill]

  • Straight-line amortization
  • Amortized over shorter of: Legal life [or] Useful life
  • Units of sales amortization used if greater than straight-line
  • Tested for impairment when events suggest undiscounted future cash flow will be less than carrying value of intangible – written down to fair market value.
  • Intangibles with no clear legal or useful life (trademarks, perpetual franchises) tested annually for impairment and written down whenever fair market value is less than carrying value

 

Types of Intangible Assets and Its Treatment

[1]. Goodwill

Acquisition:
– Must be part of (purchase) business combination
– Excess of purchase price over fair value of underlying net assets

Internal costs:
– May incur development or maintenance costs
– All costs are expensed

Amortization:
– No amortization recorded
– Test annually for impairment of value
– Goodwill written down whenever fair market value less than carrying value

 

[2]. Leasehold Improvements

Amortize over shorter of
– Useful life 
– Remaining term of lease

 

[3]. Patents

Legal costs of defending a patent:
Successful – capitalize legal costs as addition to carrying value of patent
Unsuccessful – recognize legal costs as expense and consider writing down patent

 

[4]. Research and Development [R&D]

[a]. Research – aimed at discovery of new knowledge:
–  New product or process
– Improvement to existing product or process

[b]. Development – converting new knowledge into plan or design

[c]. R & D assets:
– Used for general R & D activities
– Capitalize
– Depreciate
– Charge to R & D expense

Used for specific project
– Charge to R & D expense

 

[5]. Startup Costs

Costs associated with startup of organization should be immediately expensed

 

[6]. Franchises

– Initial fee – generally capitalized and amortized
Subsequent payments – generally recognized as expense in period incurred

 

[7]. Software

Expense – cost up to technological feasibility

Capitalize and amortize – costs from technological feasibility to start of production
– Coding and testing
– Production of masters

Charge to inventory – costs incurred during production
Time line:

Cost Recognition Of Software 
Amortization of capitalized software costs – larger of:

[a]. Straight-line
Carrying value / Remaining useful life (= Current period + future periods)

;or

[b]. Ratio
Current revenues × Carrying value  / Estimated remaining revenues (= Current revenues + future revenues).

Additional amortization:

  • Carrying value (after amortization) > Net realizable value (based on future revenues)
  • Excess is additional amortization

1 Comment

1 Comment

  1. Steve

    Jun 7, 2010 at 10:24 pm

    Can anyone Please help with my question: I have form a new LLC to purchase a commercial property for 925K asking price which was already a discounted value. I offered equity positions to two partners who were thrilled and agreed to participate.
    1 partner paid $185k for 20% stake
    2nd partner pd $187k for 20% stake. Before accepting the partners capitol, I had solely negotiated the purchase price down to $800k and so my 60% stake required a cash contribution of only $428k instead of the anticipated $553K for the same 60% stake. I don’t want my new Partners to feel like their % stake should now be increased due to the lowered purchase price I earned by working my A… off. This value is something I earned by using my professional expertise thereby creating more earned valule. I also do not want the partners to feel the lesser purchase price somehow reduces the properties real or perceived value. I need to know how can I set up the initial books to show the total purchase value of this acquisition at 925k even though only 800k cash went in the bank account? Is there a way to allow me to show my cash capitol contribution of the 428k plus the $125k as good will? Is the Journal entry for this Accounting be set up by posting 25k credit to “goodwill from Professional services” / and then debit my capitol contribution account the same 125k? Can anyone show me a sample journal entry for the asset or liabilities and Owners capitol? Thanks you very much.

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