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INTERMEDIATE
F I F T E E N T H E D I T I O N
ACCOUNTING
, Key learning aids to help you master the
textbook material and prepare you for
a successful career.
CHAPTER PREVIEW As our opening story indicates, sustainability strategies are taking
PREVIEW OF CHAPTER 12 on increased importance for companies like Southwest Airlines and
The Chapter Preview summarizes the major issues discussed Clorox. Reporting challenges for effective sustainability investments
in the chapter, and provides students with a visual outline of are similar to those for intangible assets. In this chapter, we explain the basic conceptual and reporting issues
related to intangible assets. The content and organization of the chapter are as follows.
the key topics. Intangible Assets
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Presentation of
Intangible Types of Impairment of Research and
Intangibles and
Asset Issues Intangibles Intangibles Development Costs
Related Items
• Characteristics • Marketing-related • Limited-life • Identifying R&D • Intangible assets
• Valuation • Customer-related intangibles • Accounting for R&D • R&D costs
• Amortization • Artistic-related • Indefinite-life • Similar costs
• Contract-related intangibles other
• Technology-related than goodwill
• Goodwill • Goodwill
UNDERLYING CONCEPTS
• Summary
Underlying Concepts
The Underlying Concepts highlight and explain major The controversy surrounding the
accounting for R&D expenditures
conceptual topics in the chapter. reflects a debate about whether
such expenditures meet
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inition of an asset. If so, then an
“expense all R&D costs” policy
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results in overstated expenses
and understated assets.
WHAT DO THE NUMBERS MEAN? What do the numbers mean? DEFINITELY INDEFINITE
The “What do the numbers mean?” boxes further The importance of intangible asset classification as either
limited-life or indefinite-life is illustrated in the experi-
to limited-life, with an expected life of 21.33 years (a fairly
definite useful life) and, shortly thereafter, wrote off this
students’ understanding of key concepts with practical, ence of Outdoor Channel Holdings. Here’s what hap-
pened. Outdoor Channel recorded an intangible asset
intangible completely.
Apparently, the company was overly optimistic about the
real-world examples. related to the value of an important distributor relation-
ship, purchased from another company. At that time, it
expected future cash flows arising from the distributor rela-
tionship. As a result of that optimism, income in the second
classified the relationship as indefinite-life. Thus, in the year was overstated by $9.5 million, or 14 percent, and the
first two years of the asset’s life, Outdoor Channel re- impairment recorded in the third year amounted to 7 percent
corded no amortization expense on this asset. In the third of assets. From indefinite-life to limited-life to worthless in
year, investors were surprised to find that Outdoor Chan- two short years—investors were surely hurt by Outdoor’s
nel changed the classification of the distributor relationship aggressive intangible asset classification.
Source: Jack Ciesielski, The AAO Weblog, www.accountingobserver.com/blog/ (January 12, 2007).
INTERNATIONAL PERSPECTIVE International
Perspective
International Perspectives provide students with specific IFRS requires the capitalization
examples of how global companies (and other countries) of appropriate development
expenditures. This conflicts
implement key accounting regulations. They also provide with GAAP.
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EVOLVING ISSUE Evolving Issue RECOGNITION OF R&D AND INTERNALLY GENER
The Evolving Issue feature introduces and discusses a The requirement that companies expense immediately all
R&D costs (as well as start-up costs) incurred internally is a
showed a significant relati
subsequent benefits in th
current topic in the accounting industry in which the practical solution. It ensures consistency in practice and uni-
formity among companies. But the practice of immediately
earnings, and shareholder v
Another study found that
profession may be encountering controversy or nearing writing off expenditures made in the expectation of benefit-
ing future periods is conceptually incorrect.
earnings usefulness for com
from capitalizing to exp
resolution. The feature shows how the key standard-setting Proponents of immediate expensing contend that from an
income statement standpoint, long-run application of this
decline appears to persist
The current accountin
organizations make decisions to adjust to the changing standard frequently makes little difference. They argue that
because of the ongoing nature of most companies’ R&D
generated intangible ass
trade-offs made among r
global business environment. activities, the amount of R&D cost charged to expense each
accounting period is about the same, whether there is immedi-
and cost-benefit consider
completed some limited-
ate expensing or capitalization and subsequent amortization. for intangible assets, and
Others criticize this practice. They believe that the balance joint project on the accou
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D E M O N S T R AT I O N P R O B L E M
Sky Co., organized in 2014, provided you with the following information.
1. Purchased a license for $20,000 on July 1, 2014. The license gives Sky exclusive rights to sell its
services in the tri-state region and will expire on July 1, 2022.
2. Purchased a patent on January 2, 2015, for $40,000. It is estimated to have a 5-year life.
3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2015, were $45,000.
The process has an indefinite life.
4. On April 1, 2015, Sky Co. purchased a small circuit board manufacturer for $350,000. Goodwill
recorded in the transaction was $90,000.
5. On July 1, 2015, legal fees for successful defense of the patent purchased on January 2, 2015, were
DEMONSTRATION PROBLEM $11,400.
6. Research and development costs incurred as of September 1, 2015, were $75,000.
Instructions
The Demonstration Problem provides a model for how to (a) Prepare the journal entries to record all the entries related to the patent during 2015.
(b) At December 31, 2015, an impairment test is performed on the license purchased in 2014. It is
solve end-of-chapter material. estimated that the net cash flows to be received from the license will be $13,000, and its fair value is
$7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2015.
(c) What is the amount to be reported for intangible assets on the balance sheet at December 31, 2014?
At December 31, 2015?
FASB CODIFICATION FASB CODIFICATION
The FASB Codification refers students to the relevant FASB Codification References
[1] FASB ASC 350-10-05. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting
FASB literature for the key concepts presented in Standards No. 142 (Norwalk, Conn.: FASB, 2001).]
each chapter. [2] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. 11.]
[3] FASB ASC 805-10. [Predecessor literature: “Business Combinations,” Statement of Financial Accounting Standards No. 141R
(Norwalk, Conn.: FASB, 2007).]
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[4] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting
Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. B55.]
[5] FASB ASC 805-10-20. [Predecessor literature: “Business Combinations,” Statement of Financial Accounting Standards
No. 141R (Norwalk, Conn.: FASB, 2007).]
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USING YOUR JUDGMENT USING YOUR JUDGMENT
The Using Your Judgment section FINANCIAL REPORTING
provides students with real-world Financial Reporting Problem
The Procter & Gamble Company (P&G)
homework problems covering topics The financial statements of P&G are presented in Appendix 5B. The company’s complete annual
report, including the notes to the financial statements, can be accessed at the book’s companion website,
such as financial reporting, financial www.wiley.com/college/kieso.
statement analysis, and professional Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
research. (a) Does P&G report any intangible assets, especially goodwill, in its 2011 financial statements and
accompanying notes?
(b) How much research and development (R&D) cost was expensed by P&G in 2010 and 2011? What
percentage of sales revenue and net income did P&G spend on R&D in 2010 and 2011?
PROBLEMS SET B PROBLEMS SET B
In addition to the B Set of Exercises, we now provide See the book’s companion website, at www.wiley.com/college/kieso, for an additional
set of problems.
an additional set of problems for each chapter, based on
the problems in the textbook. The B Set of Problems are
available in WileyPLUS and on the book’s companion c12IntangibleAssets.indd Page 693 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12
website, at www.wiley.com/college/kieso.
IFRS INSIGHTS IFRS INSIGHTS
IFRS Insights offer students a detailed discussion as
well as assessment material of international accounting There are some significant differences between IFRS and GAAP in the accounting
for both intangible assets and impairments. IFRS related to intangible assets is
standards at the end of each chapter. presented in IAS 38 (“Intangible Assets”). IFRS related to impairments is found in
IAS 36 (“Impairment of Assets”).
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