Download Intangible Assets - McGraw Hill Higher Education

10-1
Property, Plant, and Equipment
and Intangible Assets: Acquisition
and Disposition
Chapter 10
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
10-2
Types of Assets
Long-lived, Revenue-producing Assets
Expected to Benefit Future Periods
Tangible
Property, Plant,
Equipment & Natural
Resources
Intangible
No Physical
Substance
General Rule for Cost Capitalization
The initial cost of an asset includes the purchase price and all
expenditures necessary to bring the asset to its desired
condition and location for use.
10-3
Costs to be Capitalized
Equipment
 Net purchase price
 Taxes
 Transportation costs
 Installation costs
 Testing and trial runs
Land (not depreciable)
 Purchase price
 Real estate commissions
 Attorney’s fees
 Title search
 Title transfer fees
 Title insurance premiums
 Removing old buildings
10-4
Costs to be Capitalized
Land Improvements
Separately identifiable costs of
 Driveways
 Parking lots
 Fencing
 Landscaping
 Private roads
Buildings
 Purchase price
 Attorney’s fees
 Commissions
 Reconditioning
10-5
Costs to be Capitalized
Natural Resources
 Acquisition costs
 Exploration costs
 Development costs
 Restoration costs
Intangible Assets
 Patents
 Copyrights
 Trademarks
 Franchises
 Goodwill
The initial cost of an intangible
asset includes the purchase price
and all other costs necessary to
bring it to condition and location
for use, such as legal and filing
fees.
10-6
Intangible Assets ─ Patents



An exclusive right recognized by law and granted by the U.S.
Patent Office for 20 years.
Holder has the right to use, manufacture, or sell the
patented product or process without interference or
infringement by others.
R & D costs that lead to an internally developed patent are
expensed in the period incurred.
Torch Inc. has developed a new device. Research and
development costs totaled $30,000. Patent registration costs
consisted of $2,000 in attorney fees and $1,000 in federal
registration fees. What is Torch’s patent cost?
Torch’s cost for the new patent is $3,000. The
$30,000 R & D cost is expensed as incurred.
10-7
Intangible Assets
Copyrights



A form of protection given
by law to authors of literary,
musical, artistic, and similar
works.
Copyright owners have
exclusive rights to print,
reprint, copy, sell or
distribute, perform, and
record the work.
Generally, the legal life of a
copyright is the life of the
author plus 70 years.
Trademarks

A symbol, design, or logo
associated with a business.

If internally developed,
trademarks have no recorded
asset cost.

If purchased, a trademark is
recorded at cost.

Registered with U.S. Patent
Office and renewable
indefinitely in 10-year periods.
10-8
Intangible Assets
Franchise
A contractual arrangement where the franchisor
grants the franchisee exclusive rights to use the
franchisor’s trademark within a certain area for a
specified period of time.
Goodwill
Occurs when one
company buys
another company.
Goodwill is not
amortized.
Only purchased
goodwill is an
intangible asset.
The amount by which the
consideration exchanged exceeds
the fair value of net assets acquired.
10-9
Noncash Acquisitions




Issuance of equity securities
Deferred payments
Donated assets
Exchanges
The asset acquired is recorded at
the fair value of the consideration given
or
the fair value of the asset acquired,
whichever is more clearly evident.
10-10
Issuance of Equity Securities
 Asset acquired is recorded at the fair value of the asset or the
market value of the securities, whichever is more clearly
evident.
 If the securities are actively traded, market value can be easily
determined.
 If the securities given are not actively traded, the fair value of
the asset received, as determined by appraisal, may be more
clearly evident than the fair value of the securities.
Donated Assets
 On occasion, companies acquire assets through donation.
 The receiving company is required to record
 The donated asset at fair value.
 Revenue equal to the fair value of the donated asset.
10-11
Exchanges
General Valuation Principle: Cost of asset acquired is:
 fair value of asset given up plus cash paid or minus cash
received or
 fair value of asset acquired, if it is more clearly evident
In the exchange of assets fair value is used except in rare
situations in which the fair value cannot be determined or the
exchange lacks commercial substance.
When fair value cannot be determined or the exchange lacks
commercial substance, the asset(s) acquired are valued at the
book value of the asset(s) given up, plus (or minus) any cash
exchanged. No gain or loss is recognized.
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Exchange Lacks Commercial Substance
When exchanges are recorded at fair value, any gain or loss is
recognized for the difference between the fair value and book
value of the asset(s) given up. To preclude the possibility of
companies engaging in exchanges of appreciated assets solely to
be able to recognize gains, fair value can only be used in legitimate
exchanges that have commercial substance.
A nonmonetary exchange is considered to have commercial
substance if the company expects a change in future cash flows
as a result of the exchange.
10-13
Self-Constructed Assets
When self-constructing an asset, two accounting issues must be
addressed:
 Overhead allocation to the self-constructed asset.
 Incremental overhead only
 Full-cost approach
 Proper treatment of interest incurred during construction
Under certain conditions, interest incurred on
qualifying assets is capitalized.
Asset constructed:
 For a company’s own use.
 As a discrete project for sale
or lease.
Interest that could have been
avoided if the asset were not
constructed and the money
used to retire debt.
10-14
Interest Capitalization
Capitalization begins when
 construction begins
 interest is incurred, and
 qualifying expenses are incurred.
Capitalization ends when
 the asset is substantially complete and ready for
its intended use, or
 when interest costs no longer are being incurred.
10-15
Interest Capitalization
Interest is capitalized based on Average
Accumulated Expenditures (AAE).
Qualifying expenditures (construction labor, material, and
overhead) weighted for the number of months outstanding
during the current accounting period.
If the qualifying asset is
financed through a specific
new borrowing
If there is no specific new
borrowing, and the company
has other debt
. . . use the specific rate of
the new borrowing as the
capitalization rate.
. . . use the weighted average
cost of other debt as the
capitalization rate.
10-16
Interest Capitalization
If specific new borrowing had been insufficient to cover
the average accumulated expenditures . . .
. . . Capitalize this
portion using the 12
percent weightedaverage cost of debt.
. . . Capitalize this
portion using the 10
percent specific
borrowing rate.
Other
debt
AAE
Specific
new
borrowing
10-17
Research and Development (R&D)
Research
 Planned search or critical investigation aimed at discovery of new
knowledge . . .
Development
 The translation of research findings or other knowledge into a
plan or design . . .
Most R&D costs are expensed as incurred. (Must be
disclosed if material.)


R&D costs incurred under contract for other companies are
capitalized as inventory and carried forward into future years.
Costs of assets purchased for R&D purposes are expensed in
the period unless they have alternative future uses.
10-18
Software Development Costs


All costs incurred to establish the technological feasibility of a
computer software product are treated as R&D and expensed
as incurred.
Costs incurred after technological feasibility is established and
before the software is available for release to customers are
capitalized as an intangible asset.
Costs
Expensed
as R&D
Start of
R&D
Activity
Costs
Capitalized
Technological
Feasibility
Operating
Costs
Date of
Product
Release
Sale of
Product
10-19
Software Development Costs


Amortization of capitalized computer software costs starts
when the product begins to be marketed.
Two methods, the percentage-of-revenue method and the
straight-line method, are compared and the method
producing the largest amount of amortization is used.
Disclosure
Balance Sheet
 The unamortized portion of capitalized computer software cost is an
asset.
Income Statement
 Amortization expense associated with computer software cost.
 R&D expense associated with computer software development cost.
10-20
End of Chapter 10