>> Intangible assets are long term assets,
which have no physical form.
Meaning they are not tangible.
They're usually legal rights.
Some intangible assets have finite useful lives,
whereas others have indefinite useful lives.
Intangible assets with finite useful lives rarely have residual values,
because the legal protections expire
at the end of the useful life rendering them worthless.
The two common types of intangible assets with finite lives are patents and copyrights.
Patents are the legal rights granted by the federal government,
that grant exclusive rights for 20 years to produce or sell an innovation.
Note that the useful life of a patent is often less than 20 years,
as technology changes render innovations outdated or obsolete.
Copyrights are similar protections,
but they cover works of art and software.
The legal protection is the author's life plus 70 years.
Three common types of intangible assets with
indefinite lives are trademarks and trade names,
franchises and licenses, and goodwill.
Trademarks and trade names protect a distinct slogan or image of a company.
Don't start your own company with a slogan "Just Do It"
or Nike will sue you for trade name infringement.
Franchises and licenses are privileges granted to
sell a product or service in accordance with specific conditions.
Finally, goodwill is a unique intangible asset,
it is the amount paid for a company in excess of the fair value of the net assets.
This video, we'll focus on the accounting for
intangible assets with indefinite useful lives, other than goodwill.
So you recall that amortization is the process of
allocating cost of an intangible asset to expense.
But intangible assets with indefinite useful lives are not amortized.
Instead, they are tested for impairment annually.
Impairment incurs when the expected future cash flows
are less than the assets book value.
When this happens, we record
impairment loss by debiting and
account impairment loss and crediting the intangible asset.
There is a two step process when determining if an asset has been impaired.
Step one is the test for impairment.
The test compares the asset book value with the value of the expected future cash flows.
If the cash flows are greater than the book value,
then no impairment has incurred and you're done.
However, if the net book value is greater than the expected future cash flows,
then asset impairment has incurred and you need to move on to step two.
Step two is where we determined the amount of impairment.
The amount is the difference between
the asset's net book value and the asset's fair market value.
Let's conclude with an example.
At the end of the year, Adam and the Ants tested a trademark for impairment.
The net book value is $100,000,
the expected future cash flows are $80,000,
and the fair value is $50,000.
Let's perform the test to see if impairment has incurred,
and if so, how much is it.
Step one uses the net book value and the expected future cash flows.
Since the net book value is $100,000
and greater than the $80,000 of expected future cash flows,
then impairment has occurred.
Step two uses the net book value and
the fair market value to determine the amount of impairment.
Since the net book value is $100,000 and it's
greater than the $50,000 of fair market value.
Then the amount of impairment is the difference between the two or $50,000.
So we can record the journal entry as a debit to
impairment loss and a credit to trademark for $50,000.