Intangible Assets & Goodwill
Intangible asset = identifiable, non-monetary asset without physical substance. Goodwill = the unidentifiable premium paid in a business combination — explicitly excluded from intangible assets. ACC 926 Module 12.
ADMN 201 names “patents, trademarks, copyrights, franchise fees” and gives the one-line goodwill definition. ACC 926 supplies recognition rules, finite-vs-indefinite life, and impairment mechanics.
Recognition of Intangible Assets
Three criteria
- Identifiability — separable (can be sold separately) OR arises from contractual/legal rights.
- Control — entity has the power to obtain future economic benefits and restrict others’ access.
- Future economic benefits are probable.
Purchased vs. Internally Generated
| Origin | Treatment |
|---|---|
| Purchased separately | Capitalize at cost |
| Acquired in business combination | Capitalize at fair value at acquisition date |
| Internally generated — research phase | Expense as incurred |
| Internally generated — development phase (IFRS) | Capitalize if 6 PIRATE criteria met |
| Internally generated — development phase (ASPE) | Policy choice: capitalize OR expense |
| Internally generated brands, mastheads, customer lists | Cannot be recognized (lack reliable measurement) |
IFRS PIRATE Criteria (Development Capitalization)
Must demonstrate all six:
- Probable future benefits
- Intention to complete
- Resources (technical, financial) to complete
- Ability to use or sell
- Technical feasibility
- Expenditure measurable reliably
Finite vs. Indefinite Life
graph TD I[Intangible Asset] I --> F[Finite Life] I --> Inf[Indefinite Life] F --> FA[Amortize over useful life] F --> FI[Test for impairment when indicators present] Inf --> InfA[Do NOT amortize] Inf --> InfI[Test annually for impairment IFRS<br/>Test when triggered ASPE]
(diagram saved)
- Finite life — amortize over the useful life (or legal/contractual life, whichever is shorter). Method: straight-line unless another reflects the consumption pattern.
- Indefinite life — no foreseeable limit on the period over which the asset is expected to generate net cash inflows. Do not amortize. Test for impairment annually (IFRS) or when triggered (ASPE).
Types of Intangibles
| Category | Examples | Typical life |
|---|---|---|
| Marketing-related | Trademarks, trade names, internet domains | Often indefinite (renewable) |
| Customer-related | Customer lists, contracts | Finite (purchased only) |
| Artistic-related | Copyrights | Finite (legal life) |
| Contract-related | Franchise, licensing, royalty agreements | Finite (contract term) |
| Technology-related | Patents, trade secrets, software | Finite (legal life) |
Goodwill
Goodwill = Purchase Price − FV of identifiable net assets acquired
Where “identifiable net assets acquired” = FV of identifiable assets − FV of liabilities assumed.
Goodwill represents what the buyer paid for that cannot be assigned to a specific asset — synergies, assembled workforce, customer loyalty, location, reputation. Internally generated goodwill is never recognized.
Goodwill Impairment
| IFRS (IAS 36) | ASPE | |
|---|---|---|
| Test frequency | Annually + when triggered | Only when triggered |
| Tested at | Cash-generating unit (CGU) level | Reporting unit level |
| Loss measure | CA of CGU − recoverable amount of CGU | CA of reporting unit − FV of reporting unit |
| Reversal | Never (even if value recovers) | Never |
Goodwill impairment is the one impairment that is never reversed, even under IFRS.
IFRS Goodwill Impairment Steps
- Allocate goodwill to a CGU (the smallest group of assets generating largely independent cash inflows).
- Compute recoverable amount of CGU = max(FV less costs to sell, value-in-use).
- If recoverable amount < CA of CGU → impairment loss.
- Apply loss first to goodwill, then pro-rata to other CGU assets.
Cross-Course Connections
- AccountingEquation-FinancialStatements — ADMN 201 mentions intangibles and goodwill on the balance sheet; this is the recognition + measurement layer
- Goodwill-IntangibleAssets — connection page bridging the two
- Depreciation — finite-life intangibles use amortization (depreciation logic)
- PPE — tangible long-lived assets (parallel structure)
- IFRSvsASPE — divergence on R&D capitalization, goodwill testing frequency
Key Points
- Intangibles need: identifiable + control + probable future benefits
- Internally generated brands, customer lists, etc. cannot be recognized
- IFRS R&D: research expensed; development capitalized if PIRATE criteria met
- ASPE R&D: development is a policy choice
- Finite life → amortize; indefinite life → annual impairment test (IFRS) or trigger-based (ASPE)
- Goodwill = Purchase Price − FV of identifiable net assets acquired
- Internally generated goodwill never recognized
- Goodwill impairment never reversed, even under IFRS
- IFRS tests goodwill at CGU; ASPE tests at reporting unit