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Accounting for Intangible Assets & Amortization

In this video, we explain Accounting for Intangible Assets & Amortization Start your free trial: https://farhatlectures.com/courses/fi... Accounting for Intangible Assets & Amortization Intangible assets are non-physical assets that provide future economic benefits to a company, such as patents, trademarks, copyrights, franchises, and goodwill. Unlike tangible assets, intangible assets can't be physically touched but are valuable because they generate revenue or competitive advantages. The cost of intangible assets is allocated over time through amortization. Key Concepts Intangible Assets: Non-physical assets that provide economic value (e.g., patents, trademarks, goodwill). Amortization: The process of allocating the cost of an intangible asset over its useful life. Useful Life: The expected period over which the asset will provide economic benefits. Residual Value: The estimated value of the intangible asset at the end of its useful life, typically zero. Types of Intangible Assets Patents: Exclusive rights to manufacture or sell an invention. Trademarks: Symbols or names identifying a product or business. Copyrights: Exclusive rights to reproduce or sell creative works. Franchises: Rights to operate a business under a franchisor’s model. Goodwill: The excess paid when acquiring a company over the fair value of its net assets. Recognition of Intangible Assets Intangible assets are recognized if they are identifiable and provide future economic benefits. They are recorded at acquisition cost, which includes purchase price and related costs (e.g., legal fees). Intangible Assets with Indefinite Useful Lives Assets like goodwill and certain trademarks have indefinite useful lives and are not amortized. Instead, they are tested annually for impairment. If impaired, the asset's value is reduced to its recoverable amount, and a loss is recognized. Impairment of Intangible Assets Impairment occurs if an intangible asset's carrying value exceeds its recoverable amount (the higher of fair value or value in use). When impairment is detected, the asset’s value is written down. Impairment Journal Entry: Debit: Impairment Loss Credit: Intangible Asset This impacts the financial statements by lowering the asset’s value and recognizing the loss. Goodwill and Impairment Goodwill represents the excess paid for a company over its identifiable net assets. It is not amortized but must be tested for impairment yearly. If goodwill is impaired, a loss is recorded, reducing its value on the balance sheet. Example: If goodwill’s recoverable amount is less than its carrying value, an impairment loss is recognized, impacting the income statement. Summary of Intangible Asset Accounting Recognition: Intangible assets are recorded at acquisition cost if identifiable and capable of generating future benefits. Amortization: Assets with finite lives are amortized using the straight-line method over their useful life. Impairment: Intangible assets with indefinite lives, such as goodwill, are tested for impairment annually. Goodwill: Goodwill is not amortized but must undergo annual impairment testing. Amortization and impairment ensure that the carrying value of intangible assets reflects their true economic value over time. Proper accounting of intangible assets helps maintain accurate financial statements, reflecting both the benefits and potential impairments of non-physical assets. #financialaccounting #onlinecourses #onlinecourses