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Chapter 12

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 12: Intangible Asset, Deferral, The Assets

Management and Organizational Studies
Course Code
MOS 3360A/B
Stacey Hann

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Chapter 12 The Business Importance and Characteristics of Goodwill and
Intangible Assets
Characteristics of Goodwill
Goodwill an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified or separately
How is goodwill calculated?
o Where one company 100% of another business, the fair value of what is given up
by the acquiring entity is allocated to the various assets and liabilities it receives
The difference between the fair value of the consideration transferred to acquire the
business and the fair value amounts assigned to the identifiable net assets is the amount
recognized as goodwill
Characteristics of Intangible Assets
Intangible assets nonmonetary assets that lack physical substance and usually have a
higher degree of uncertainty concerning their future benefits
Intangible assets have three characteristics identifiability, non-physical existence, and
nonmonetary nature
o Must have at least one of the following characteristics
1. It results from contractual or other legal rights
2. It is separable it can be separated or divided from the entity and sold,
transferred, licensed, rented, or exchanged, either by itself or in combination
with another contract, identifiability asset, or liability
Non-physical existence
o The value of intangible assets comes from the rights and privileges granted to the
company using them
o Intangible assets are non-physical
o Often is needed for a physical component to work
Intangible assets are nonmonetary
o Accounts receivable and long-term loans lack physical substance but they have
monetary value
Provides economic benefits over a period of time
o Economic benefits benefits provided by asset, such as increased revenues from
sales of products or services and reductions in future costs
Recognition and Measurement at Acquisition
Measured at cost at acquisition
Each type of asset can be recognized only when it meets the same two recognition
1. It is probable that the entity will receive the expected future economic benefits
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2. The asset’s cost can be reliably measured
Purchased Intangibles
o Because the amount paid is based on the company’s expectations about receiving
future economic benefits from the asset, the “probability” criterion for recognition
is met
o Cost includes the acquisition cost and all expenditures directly associated with
making the intangible ready for its intended use
o Expenditures incurred after the asset is ready for use as intended and initial
operating losses are also excluded
Intangibles Purchased in a Business Combination
o When several intangibles are bought together in a “basket purchase”, the
accounting is more complex because the cost has to be allocated to each
intangible based on its relative fair value
o Business combination what results when one entity acquires control over the
net assets of another business, either by acquiring the net assets directly, or by
acquiring the equity interest representing control over the net assets
o In-process research and development an identifiable intangible asset
involving the research work and findings of a company, acquired when the
company purchases another
It must be separable from goodwill to be reported separately
o Prepaid expense expenses paid in cash and recorded as assets before they are
used or consumed
o A prepayment is recognized as an asset only when an entity pays for goods before
their delivery or for services before receiving those services
o The asset is the right to receive the goods or services
o When received, this “right to receive” no longer exists and the costs are expensed
Recognition and Measurement of Internally Developed Intangible Assets
How costs associated with internally generated intangible assets should be accounted for
has been a controversial issue for many years. The following alternatives have been
1. Recognize the costs as internally generated intangible assets when certain criteria are
met, and expense all others
2. Recognize all costs of internally generated intangible assets as an expense
3. Recognize expenditures on all internally generated intangible assets as an expense,
with certain specified exceptions
4. Allow a choice between the accounting treatments in (1) and (2)
Identifying Research and Development Phase Activities
o The process of generating the intangible is broken down into two parts: a
research phase and a development phase
o Research is the planned investigation undertaken with the hope of gaining new
scientific or technical knowledge and better understanding
o Development is the translation of research findings or other knowledge into a plan
or design for new or substantially improved materials, devices, products,
processes, systems, or services before starting commercial production or use
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