Intangible Assets 12.

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Presentation transcript:

Intangible Assets 12

Intangible Asset Issues Characteristics Lack physical existence. Not financial instruments (i.e. not tradable assets). Normally classified as long-term in nature. Common types of intangibles: Patents Copyrights Franchises or licenses Trademarks or trade names Goodwill

Types of Intangibles Six Major Categories: Marketing-related: intangibles used for marketing or promotion like trademark or trade name. Customer-related: intangibles that arise from outside interactions like customer relationships. Artistic-related: involves intangibles like ownership rights to music/plays/pictures/work – copyright in other words. Contract-related: rights that arise from contractual arrangements like franchise or licenses. Technology-related: innovations or technological advances like patents. Goodwill

Types of Intangibles Goodwill Conceptually, represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized. Only recorded when an entire business is purchased. Goodwill is measured as the excess of ... cost of the purchase over the FMV of the identifiable net assets purchased.

Recording Goodwill Illustration: Multi-Diversified, Inc. decides that it needs a parts division to supplement its existing tractor distributorship. The president of Multi-Diversified is interested in buying Tractorling Company. The illustration presents the statement of financial position of Tractorling Company.

Recording Goodwill Illustration: Multi-Diversified investigates Tractorling’s underlying assets to determine their fair values. Tractorling Company decides to accept Multi-Diversified’s offer of $400,000. What is the value of the goodwill, if any?

Recording Goodwill Illustration: Determination of Goodwill. This method of valuation is called a master valuation approach.

Recording Goodwill Illustration: Multi-Diversified records this transaction as follows. Property, Plant, and Equipment 205,000 Patents 18,000 Inventories 122,000 Receivables 35,000 Cash 25,000 Goodwill 50,000 Liabilities 55,000 Cash 400,000

Goodwill Goodwill Write-off Bargain Purchase Goodwill considered to have an indefinite life. Should not be amortized. Only adjust carrying value (purchase price) when goodwill is impaired (write-off of intangibles is known as impairment). Negative publicity about a firm can create goodwill impairment, as can the reduction of brand-name recognition. Bargain Purchase Purchase price less than the fair value of net assets acquired. Amount is recorded as a gain by the purchaser. Occurs if it is a forced liquidation or distressed sale of business.

Impairment of Intangible Assets Impairment of Goodwill Goodwill is not depreciated or amortized, but it is subjected to a regular test for impairment to make sure the account balance is not overstated. Two Step Process: Step 1: If fair value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment. Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.