Search Financial-Accounting.us
Acquisition of Intangible Assets in Financial Accounting
Intangible assets acquired from others are initially recorded at their historical cost. For example, if a company acquires a patent for $300,000, cash would decrease and patents would increase by $300,000.
Because the patent has already been developed, future economic benefits seem probable and recording an asset is proper.
As another illustration, StorageTek’s purchase of Edata is recorded as follows (in thousands):
Intangible assets can also be developed internally. In most cases, costs incurred to develop separately identifiable intangible assets are capitalized. Costs incurred to protect these assets (such as legal costs incurred to protect intangible assets from infringement) can also be capitalized. Nike’s trademarks, such as its swoosh, have a balance sheet value of $221 million and Nike considers its trademarks to be its “most valuable assets. ”However, Nike’s balance sheet shows total assets of $5.4 billion. How can trademarks be Nike’s most valuable asset yet represent such a small percentage of its total assets? The answer, of course, is that balance sheets show many assets at their historical cost, which may understate their economic value.
Research and Development Costs - Many firms internally develop new products, as opposed to purchasing patents from others. Because large expenditures can be made without the assurance of ultimate success, this strategy is more risky. Substantial uncertainty exists regarding future economic benefits and, because of this, GAAP requires that all research and development costs be expensed immediately. Research and development costs are those incurred to generate new knowledge or to translate knowledge into a new product or process. Most countries follow the practice of immediately expensing these costs.
The divergence in the accounting rules for externally acquired versus internally developed patents can reduce the inter-firm comparability of financial statements, particularly in research-intensive industries such as pharmaceuticals. As shown in figure 6.6, Roberts Pharmaceutical Corporation’s intangible asset, property rights acquired (from others), increased from $204,611,000 in 1996 to $217,919,000 in 1997.
Figure 6.6 - Intangible Assets
Roberts’ strategy is to acquire already-established pharmaceutical products from other companies. These rights are obtained in one of two ways: (1) the direct purchase of a patent from the holder or (2) a licensing agreement with the holder of the patent. The acquisition cost of those rights is capitalized as assets.
In contrast, Merck, Inc., internally develops its pharmaceutical products. Accordingly, the nearly $1.8 billion Merck spent to develop new products in 1997 was expensed immediately, even though some of those products proved successful and resulted in patents. As this situation illustrates, the economic value of patents (and other intangible assets) can be significantly different from the value assigned for accounting purposes.
Figure 6.7 - Software Development Costs
Special accounting rules exist for software development costs. For a given project, these costs are expensed until technological feasibility is demonstrated, and costs incurred after that point are capitalized. To some extent, these rules are inconsistent with the general procedures for research and development. Figure 6.7 contains a note from StorageTek’s financial statements that describes StorageTek’s accounting for software development costs.
Intangible Assets Topics
Related Noncurrent Assets Topics
