Accounting for intangible

Introduction
Intangible
assets are those assets characterized by the right-privileges and benefits of
possession rather than by physical existence.
Leading
examples are goodwill, lease-hold, copy-wrights, Franchise, Licenses and
trade-marks. Thus, intangible assets are those assets which are used are used
in operation of the business but which have no physical substance and are
non-current. Others include patents, deferred charges, pre-incorporation and
formation expenses.

The term ”amortization”
is used to describe the systematic write-off to the expenses of the cost of an
intangible asset over the period of its economic usefulness.
The usual
accounting entry for amortization consists of:

Dr.                               Cr.
Amortization
Expenses                                         xx                           xx
           Intangible Assets A/c
The basis of
valuation for intangible assets is cost. An intangible Asset should appear in
the balance sheet only if a cost of acquisition or development has been
incurred. Any write offs during the period and the market value of investments
should be disclosed.
Intangibles
are considered to be assets either because they represent rights to future
benefits or developing them will serve to benefit a number of accounting
periods in the future.
Hence, the
cost must be allocated to the periods in which the benefits will be realized.

Goodwill
Goodwill may
be defined as the present value of future earnings in excess of the earnings
normally realized in the industry.
The existence
of the intangible asset of goodwill is indicated when entre business is sold
for a price in excess of the fair market value of the other assets. The
willingness of the purchasers of a going business to pay greater than the sum
of the values of the tangible assets indicates that they are paying for
intangible assets as well.
If the
business does not include such specific Identifiable
 intangible as patents or franchises,
the extra amount paid is presumable for Goodwill.
Superior
earning in the past years are of significance to prospective purchases of going
business only to the extent they believe such earnings may continue after they
acquire the business.
If the
prospective purchasers believers that by purchasing a particular company with a
record of superior earnings in the past they will earn these above average
earnings in the future they may reasonably be expected to pay a premium price
for the business. The premium which they pay represents the cost of purchased
goodwill and may properly be recorded in the accounting records of new owners in
Goodwill A/c.
Example:
Assume that
the business in the same line of trade are sold and that the normal rate on
capital invested in this industry as 10% a year. The relative earnings power of
the two companies during the past 5 years is indicated by the following
schedule:

A prospective
investor would be willing to pay more for Company Y than X because Company Y
has a record of superior earnings which will presumably continue for some time
in future.
Company Y has
goodwill, Company X has not. Goodwill is to be recorded in the accounts only
when paid for. This situation usually occurs only when a going business is
purchased in its entirety.
When ownership
of a business changes hand, any amount paid for goodwill rest on the assumption
that earnings in excess of normal will continue under the new ownership.
            Two acceptable treatments for
Goodwill are
(1)        Immediate write-off or are preferred
treatment,
(2)       Amortization through the Profit and Loss
Account over its useful economic life.
Deferred expenses
Intangible
particularly those with limited lives are sometimes classified as deferred
charges. Deferred expenses are expenditures that are expected to yield benefits
for several accounting periods and should be amortized over its estimated
useful life.
Included in
this category are items as bond issuance costs, plant rearrangement and moving
costs, short-up costs etcetera. The distention between intangible and deferred
expenses is not an important one. Both represent “bundles of services” in the
form of long term prepayments awaiting allocation to those accounting periods
in which services will be consumed.
Research and development (R & D) costs
Research and
development (R & D) cost are, by nature incurred in order to benefit future
accounting periods. Expenditure for R & D are made in the expectation that
they will lead to new or improved products or process that will in turn
increase revenue or decrease expenses.
The matching
concept suggests that R & D costs be capitalized as intangible assets and
amortized over the periods, then amortization should commence with commercial
production of the product.
In practice,
however, it has proven exceedingly difficult to match specific expenditures for
R & D with specific products or processes. Some expenditure are for basic
research. They are not intended to produce direct benefits. Others produce no
benefit at all or result in benefits which could not have been foreseen at the
time were incurred.
Given almost
ultimate flexibility in accounting for R & D, some firms capitalize costs
that were likely to provide future benefits. Others wrote off large amounts of
previously capitalized costs in carefully selected periods so as to avoid
bordering other accounting periods with amortization charges.
As a
consequence, R & D costs must now be charged to an expense when incurred as
if they were to benefit a single accounting period.
The
recognition of R & D costs as current period expenses modified the
accounting treatment of given certain intangibles, examples patents. The
rationale for writing off R & D costs as an expenses in the period in which
they are incurred present an attempt to ensure greater comparability of
financial statements and to eliminate bad reporting practices on part of at
least a few companies.
Conclusion
Assets
characterized by rights, privileges and benefits of possession rather than by
physical existent are referred to as intangible assets. Amortization is a term
used to describe the systematic write-off to the expense of the cost an
intangible assets over the period of its economic usefulness.
Leading
intangible assets are goodwill, leased-hold, copy-writes, franchises, licenses
and trademarks. Others include patents, deferred charges, pre-incorporation and
formation expenses.

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