Financial Accounting and Reporting

eferred to as licenses or permits.
5. Technology-related intangible assets → Technology-related intangible assets relate to
innovations or technological advances. Examples are patented technology and trade secrets
granted by a governmental body. A patent gives the holder exclusive right to use, manufacture,
and sell a product or process for a period of 20 years without interference or infringement by
others. The two principal kinds of patents are product patents, which cover actual physical
products, and process patents, which govern the process of making products.
6. Goodwill → Goodwill is measured as the excess of the cost of the purchase over the fair value
of the identifiable net assets purchased. Goodwill generated internally should not be capitalized
in the accounts. Goodwill is recorded only when an entire business is purchased. To record
goodwill, a company compare the fair value of the net tangible and identifiable intangible assets
with the purchase price of the acquired business. The master valuation approach assumes that
goodwill covers all the values that cannot be specifically identified with any identifiable tangible
or intangible asset. Companies that recognize goodwill in a business combination consider it to
have an indefinite life and therefore should not amortize it.
In a few cases, the purchaser in a business combination pays less than the fair value of the
identifiable net assets. Such a situation is referred to as a bargain purchase.
An intangible asset is impaired when a company is not able to recover the asset’s carrying
amount either through using it or by selling it. If the carrying amount is higher than the
recoverable amount, the difference is an impairment loss. If the recoverable amount is greater
than the carrying amount, no impairment is recorded.
If there is an indication that an intangible asset is impaired, the company performs an
impairment test: compare the carrying value of the intangible asset to the recoverable amount.
Recall that the recoverable amount is defined as the higher of fair value less costs to sell or valuein-use.
Fair value less costs to sell mean what the asset could be sold for after deducting costs of
disposal. Value-in-use is the present value of cash flows expected from the future use and
eventual sale of the asset less at the end of its useful life. The impairment loss is the carrying
amount of the asset less the recoverable amount of the impaired asset.
Research and development (R&D) costs are not in themselves intangible assets.
Research activities → original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding. Examples: laboratory research aimed
at discovery of new knowledge: searching for applications of new research findings.
Development activities: application of research findings or other knowledge to a plan or design
for the production of new or substantially improved materials, devices, products, processes,
systems, or services before the start of commercial production or use. Examples: conceptual
formulation and design of possible product or process alternatives; construction of prototypes
and operation of pilot plants.
The costs associated with R&D activities and the accounting treatments accorded them are as
follows:
1. Materials, equipment and facilities. Expense the entire costs, unless the items have alternative
future uses.
2. Personnel
3. Purchased intangibles
4. Contract services
5. Indirect costs
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