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R&D, Intangibles

R & D Costs
• Any item considered an R&D cost must be EXPENSED AS INCURRED

Research = A critical investigation aimed to discovering new product/process, or improvement of an

old product process

Development = Taking the research and translating it into a plan/design/prototype

EXAM HINT: Once the company is doing anything related to the actual production of the item, they
are no longer considered in the R&D phase (e.g. “setup costs for production” are not considered R&D)

Alternative Future Uses

• Classic Example: Company constructs a lab building for R&D purposes
• Treatment: CAPITALIZE because it has alternative future uses
• R&D Expense: Depreciation of building ONLY expensed to R&D
• Depreciation life: Use entire useful life of investment, not just the period for which R&D
is expected to take place

No Alternative Future Uses

• “The equipment can only be used for this project”
• Expense entire cost in year 1

What should be Capitalized?
1. Purchase Price
2. Legal & Other Fees to register the intangible
3. Legal Fees in successful defense of an intangible
a. Note: unsuccessful defense = expense in current period

Goodwill à Only thing for goodwill to capitalize is excess paid over FMV
• Developing, maintain, enhance, restore, etc… are all EXPENSED AS INCURRED!!!
• Test of impairment at the reporting unit level
• Reversal of impairment loss à PROHIBITED IN ALL CASES

Finite useful life (copyright, patent, leasehold improvement, etc…)
• Must amortize over the best estimate of its useful life
• Must consider legal, regulatory, biz needs, economic life, etc…

Indefinite useful life (Goodwill, trademarks)

• NOT AMORTIZED, but tested for impairment at least annually

Lease-renewal option issues: Determining amortization period

• If intent is to renew, amortize over lease term (including renewal)
• If intent is unknown, amortize only over remaining lease obligation (but no renewal period)
• Either way, compare the above term to the useful life of the improvement and use the
lesser of the two to determine how many years it should be amortized over

Computer Software treatment

To be sold, leased or otherwise marketed
• Expense: R&D costs until economic feasibility is established, then capitalize
• Capitalize: Production costs incurred prior to sale/release to public, creation costs of training
manual masters
Annual Amortization of capitalized software cost
Greater of: 1) Ratio of current revenues to current & future revenues
2) SL method
• Carried on B/S @ lesser of unamortized cost or NRV

Internal Use
• Expense: Preliminary project stage (conceptual formulation and evaluation of alternatives,
determination of existence of needed technology, and final selection of alternatives)
• Expense: Training costs and data conversion costs
• Capitalize: Design, coding, installation, testing (cease when product is complete)

Internal Use – Post implementation/Operational Stage

• Expense: Training & maintenance
• Capitalize: Upgrade costs
• Amortize capitalized costs over the useful life

Cash Surrender value of life insurance

Classification = noncurrent asset
Expense for year = (premium paid) – (increase in surrender value) – (divs received)

Bond Sinking Fund- noncurrent asset (investment section of B/S)

Affected by:
1. Additions/withdraws from the fund
2. Fund earnings
3. Gains/losses on disposal of fund assets
4. Fund operating expenses

**Note: Exchange of a fund asset for another (cash to investment) does not affect the net balance of the
Leasehold improvementsu
• Includes construction of a building in liue of rent, which reverts to lessor @ end
o In this case, depreciate (amortize, actually, since its a leasehold improvement) over
remaining life with no salvage value taken into account