Accounting Textbooks Boundless Accounting Controlling and Reporting of Intangible Assets Intangible Asset Impairment
Accounting Textbooks Boundless Accounting Controlling and Reporting of Intangible Assets
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 11
Created by Boundless

Limited-Life Impairment

Limited-life intangibles are amortized throughout the useful life of the intangible asset using either the units of activity or the straight-line method.

Learning Objective

  • Summarize how to calculate the impairment on a limited life asset

Key Points

    • Limited-life intangibles are intangible assets with a limited useful life, such as copyrights, patents and trademarks.
    • Intangible assets are non-monetary assets that cannot be seen, touched or physically measured. Intangible assets are created through time and effort, and are identifiable as separate assets.
    • Non-physical or "intangible" assets are amortized to reflect the change in their value due to use, expiration or obsolescence over time.

Terms

  • asset

    Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities).

  • intangible

    Incapable of being perceived by the senses; incorporeal.

  • amortization

    The distribution of the cost of an intangible asset, such as an intellectual property right, over the projected useful life of the asset.

  • straight-line method of amortization

    debt paid off with regular, equal sized payments

  • straight-line method

    the company charges the same amount to depreciation each year over that period until the value shown for the asset has reduced from the original cost to the salvage value

Example

    • A software company has a patent valued at $10 million with a useful life of 40 years. Due to market conditions, the company believes the patent's value has decreased and tests it for impairment at the end of the year. Year end calculations reveal the patent is valued at $8 million and an impairment loss of $2 million is recorded as a debit to Loss on Patent Impairment on the income statement and a credit to Accumulated Impairment Losses on the balance sheet (disclosed as a contra asset account to the intangible asset). As a result of the impairment, the amortization expense on the patent should be adjusted to reflect the new value.

Full Text

Limited-Life Impairment

Intangible assets are non-monetary assets that cannot be seen, touched, or physically measured. Intangible assets are created through time and effort, and are identifiable as separate assets. They are classified into categories: either purchased vs. internally created intangible assets; and limited-life or indefinite-life intangible assets.

The two primary forms of intangibles are legal intangibles, which includes trade secrets, copyrights, patents, and trademarks (also referred to as Intellectual Property) and competitive intangibles, which includes knowledge activities, collaboration activities, leverage activities, and structural activities. Limited-life intangibles are intangible assets with a limited useful life, such as copyrights, patents and trademarks

Intangible assets are amortized to reflect their consumption, expiry, obsolescence or other decline in value as a result of use or the passage of time, process which is similar to the deprecation process for tangible assets. Intangible assets can have either a limited or an indefinite useful life. Intangible assets with a limited-life are amortized on a straight-line basis over their economic or legal life, based on whichever is shorter. Examples of intangible assets with a limited-life include copyrights and patents. Only intangible assets with an indefinite life are reassessed each year for impairment.

Limited-life intangibles are systemically amortized throughout the useful life of the intangible asset using either units of activity method or straight-line method. The amortization amount is equal to the difference between the intangible asset cost and the asset residual value. That calculated amount is credited to either the appropriate intangible asset account or accumulated amortization account .

Amortization & depreciation in the accounting cycle

A bond's discount amount must be amortized over the term of the bond.

Reversal of Impairment Loss

When an intangible asset's impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods. Increases in value in excess of prior impairment loss are debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet. Asset amortization for future periods should be adjusted due to the increase in value.

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