 Hello, and welcome to the session in which we would look at the concept of intangible assets. What are intangible assets? Well, they are assets. What are assets? Well, the big idea is assets are resources that provide future benefit for the company. True, except intangible assets, they are resources, but they lack physical existence. It means you cannot see, you cannot touch those assets. However, they're extremely useful for your business. Most assets these days for large companies like Apple, Facebook, the companies that literally rule the world, Google, are intangible in nature. That's technology, patented technology. So that's very important in the real world to understand how intangible asset works. Bear in mind, we have to differentiate them from financial assets like stocks and bonds. Those are really, they also lack physical existence, but this is not what we are discussing. Also, what we need to know about long-term assets about, I'm sorry, about intangible asset, the long-term assets. Long-term means when the company either create those assets or when they purchase them, they purchase them for a long period of time. What we mean longer than a year. Usually it's a long period of time. What do we need to know as intermediate accounting students or CPA candidates about the intangible assets? We need to know the different types of intangible assets. We're going to break them into six types. The cost. When we acquire them, how do we record them at cost? We amortize them. Some we do, others we don't. How do we amortize them? How do we deal with cost subsequent to acquisition? So after we put them on the box at cost, what do we do next? And we have to discuss their impairments. We're going to start by looking at the types of intangible assets and we're going to execute goodwill. Goodwill is one type of intangible asset, but we're going to deal with goodwill separately in a separate recording because it's worth paying the voting time for goodwill. Well, we have one type of intangible asset. It's called marketing-related intangible assets. What are marketing-related intangible assets? Those are assets like trademarks, trade names, internet domain, non-compete agreement. These assets, they might have limited or unlimited life. For example, trademark and trade names have legal protection for an indefinite 10-year renewable. Usually when it's 10-year period and it's renewable, renewable means the company can renew it for another 10 years, forever. Usually the company, they will never let those trademark or trade names expire. For example, Yahoo is a trade name. Once you know Yahoo, it's a Yahoo company. Trademark is the Apple. The Apple, once you see this, you know this is an Apple product. And what happens for Apple to protect this, they're going to have to renew it every 10 years and rest assured, companies will renew their, will renew their trademark. So as you're going to notice, as I'm mentioning different intangibles, I'm going to be discussing whether they have a limited life or unlimited life because that's going to be important later. So intangible assets, they might have a limited life or indefinite life, which is unlimited. Another type of intangible assets are customer lists. Customer lists are literally customer lists. For example, you bought a customer list to either email them, mail them your product for marketing purposes, send them your catalog, production backlog. For example, if you're buying a company and there's a production backlog, that's an intangible asset by itself, contractual customer relationship. You have some sort of a relationship with customers and it's contractual in nature. Those are also intangible assets. Those assets will have a limited life. So it's very important to understand what limited life is. It means you have this customer list, you can use it for several years, then you can no longer use it. That's what we mean by limited life. And you're going to see why that's important when we start to talk about amortization. We could have a third type of intangible assets and those artistic related, like plays, literally works, music works. For example, copyrights granted is for the life of the author plus 70 years. And we're talking about something like the Walt Disney Company and the Mickey Mouse icon. Contract related, those are contract related. In other words, you obtain the right through a contract, like a franchise, broadcast right, construction permit, supply contract. Those might have a limited or unlimited life. Certain franchise, you pay one fee and you can operate this franchise forever. Others are not, for example, McDonald versus Subway. Those are franchise, broadcast right. If you want to use, if you want to start a radio station, you have to buy that broadcast right. Maybe it's for a period of time. Maybe it's unlimited, construction permit, same thing. Those are contract related. Again, they could be limited or unlimited. And it's very important to differentiate between the two again for amortization purposes. Technology related intangibles, those are patent trade secrets. What is a patent? It's how you do something, how you manufacture something, how you present a product, how you engineer a product, how you create a pill for a pharmaceutical company. That's a secret. That's a patent and it's a trade secret. Usually the government will give you 20 years of protection. Now, why would they give you 20 years of protection? It's because before you create the product, you spent time, money and effort. And now you came up with this patent with something unique, a new drug, a new technology. Well, since you invested all this money, time and effort, you have 20 years to recoup. So you have that exclusivity to recoup. Then after that, it's, you no longer have protection. You amortize those over the legal life or useful life, whichever is shorter. Because sometime you might have a patent. It's great. It has a useful life. It has a legal life of 20 years. Then suddenly new technology comes out and your patent is not as good anymore. Therefore, you might have to do it over the useful life, whichever is shorter. And companies like Merck, Pfizer, Johnson and Johnson will have those type of technology rights. So the next question to answer is how to value? How do we value intangible assets? Now, I just want to let you know this topic is covered in an intermediate accounting as well as the CPA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your CPA review course. I can explain the material differently. I can show you the theory behind the concept. Your risk to try me is one month of subscription. I have resources such as multiple choice through false exercises. Your potential gain is improving your performance. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. This is a list of all my course catalog, which include intermediate, managerial, cost, advanced, governmental, so on and so forth, where I have lectures and lectures and multiple choice questions. My CPA supplemental resources are aligned with your Becker, Roger, Gleam, and Wiley. So it's very easy to go back and forth between my resources and your CPA review course. I also give you access to all the AI CPA released questions, almost 1500 of them with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording, share it with other connect with me on Instagram, Facebook, Twitter, and Reddit. We have to differentiate between purchased intangibles and internally generated intangibles. That's the first thing. This is how we value them. Well, if it's purchase intangibles, we're going to value them at cost. How much we paid for them? And what is a cost? Well, what did you pay to get this intangible ready for its intended use? This will include your purchase price, any legal fees, and some other incidental expenses for that cost. What happened if it's internally generated intangibles? What do we mean by internally generated versus purchase? Purchase means you went to another company or to another person and you actually pay the money. So I'm going to pay you money. And in return, you're going to give me this intangible asset ready to be used. I'm ready to use it. That's what a purchase is. Another way to obtain an intangible is to internally create one. What happened is this, you will spend money on something called research and development. And we're going to have to talk about research and development later on. And as a result, you created a new patent, a new technology that's internally created intangible. For these intangibles, generally, generally the cost to create them up to the technological feasibility is expensed. So all the money that you spend on this technology to create the technology, you expense it. You might be asking, why don't we capitalize it? And the reason is simple. When you are undergoing research and development, and we will talk about this later on, you don't know whether this research and development will generate future benefit, which is generate an asset. Therefore, since you don't know, you will expense. Once you reach technological feasibility, you will capitalize direct cost incur and developing intangibles. Now, the development stage, such as legal cost, those you can, you can capitalize. You can treat as an asset. So it's expensed until you reach technological feasibility. And this is going to open another area for us called research and development. We'll have a different recording for that. Now, once you have the asset on the books, you're going to amortize it. What is amortization? Amortization is the same thing as depreciation. The same thing as depletion. And what is that? That is taken the cost of the intangible and expense it. Expense the cost. Now, for amortization, we're going to differentiate between the two types of intangibles. Remember, I kept talking about this. Limited life intangibles and unlimited life intangible. So the first thing you ask yourself, is this a limited life intangible or an unlimited life intangibles? If it has a limited life intangible, you amortize two expense over the useful life of the asset. What is the useful life? It's the period that the asset will contribute to your cash flow. It's a generating money. That's what we mean by useful life. Amortization should be cost less residual value. Usually intangible assets will have zero residual value. But that's the formula. Cost minus intangible, cost minus residual divided by life. So usually we'll use the straight line. And the companies should still evaluate limited life intangibles for what we called impairment. Impairment means if this asset lost permanent value, it's no longer as useful. You remember it has a useful life. Useful life is the time that we amortize the asset. Once it uses utility, then we no longer, we have to do impairment. We have to do impairment. So let's take a look at an example. Adam Company purchases a customer list of a large internet marketing company for $3 million on January 1, X1. Adam expect to benefit from this information evenly over three years. And this is basically the contract for that customer list. Well, Adam will debit a customer list for $3 million. That's the asset. That's the intangible asset and will credit cash $3 million. Then over the next three years, at the end of year one, year two, and year three, Adam will debit amortization expense for $4 million and they will credit the customer list or accumulated amortization for a million to amortize the cost. Amortization means expensing the cost, expensing this $3 million over three years. And as I said, we have limited as well as unlimited life intangibles. For unlimited life intangibles, we don't know the expected future cash flow. Notice in the previous example, Adam knows over the next three years, he can use the customer list to generate more cash flow, to generate more sales. Well, if the asset has an indefinite life, then the cash flow, the period is unknown. Therefore, we don't amortize those intangibles. So what do we have to do if we don't amortize them? We must notice the word must. We don't use the word must a lot in accounting. We must test them for impairment at least annually or as needed sometime less than a year. If circumstances changes, if technology changes and our asset are not performing as we expected, the technology, the patent is not generating the money because of technological changes that's no longer as useful. Our drug is no longer as good because another company came with a better drug, then we have to test for impairment. I think for impairment will have a separate session for testing for impairment, whether we are dealing with limited life or unlimited life impairment will have to do, will have to learn how to do the testing for impairment. Let's talk about cost subsequent to acquisition. Sometime what's going to happen, the company will have to incur cost, usually legal cost, to defend an intangible. For example, to defend a patent. What happened under those circumstances? If you need to defend, it doesn't have to be a patent at any intangible, but patent is a good example. If the defense is successful and you incurred money, you are going to capitalize this expenditure. In other words, you're going to add the expenditure to the asset itself. If the defense was not successful, you are going to expense it. Well, and once you expense it, you're going to check for impairment. That's going to trigger an impairment testing event. Why? Because if you have a patent and someone sued you and said your patent is not as good or you infringe on my patent, it means it lost value. So you have to check for impairment. Let's take a look at an example. Adam incurred $150,000 in legal cost on January 1st, X1 to defend a patent. Adams was successful. The patent used for life is 15 years, amortized on a straight line basis. So on January 1st, Adam will debit the patent $150,000, credit cash $150,000. Notice what we did. We treated the expenditure as a patent because the defense was successful. Then what's going to happen for the next 15 years? We're going to amortize $10,000 over that amount. So we're going to expense it later. We will expense it later. Now, the best way to learn about intangibles, learn about this topic is to go to my website farhatlectures.com, work MCQs, additional questions, additional lectures. In the next session, I would look at the impairment of intangible assets. Once again, whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm going to explain the material differently. To pass the exam, give it all what you got. Don't shortchange yourself. The CPA exam is a lifetime investment. Give me a try for a month. You see it's helping you. You keep it. You see if it's not helping you, you cancel. That's your risk and that's your reward. I believe it's pretty straightforward. The CPA exam is worth it. Good luck, study hard, and of course, stay safe.