2.4. Intangible assets – accounting and amortization

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Do curso por Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

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Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

1 rating

Curso 3 de 5 em Specialization Understanding Modern Finance

Whenever the word “accounting” is pronounced, it is immediately associated with the need to memorize endless boring numbers. However, it is the common financial statements that contain important information that provides inputs for valuation of investment projects. The only challenge is how to properly extract them. Accounting and finance are indeed intertwined. Sometimes people that are not experienced in the area even mix them up. But most often emphasis in accounting is on numbers. Still, the deep understanding of key accounting concepts helps reveal the interests and actions of people behind these numbers. And the human dimension of accounting adds invaluable insight in the potential of successful project implementation. This Course discusses core ideas and concepts of both financial and managerial accounting. It by no means pretends to be comprehensive to any extent. But, being rather an accounting overview, it focuses on the issues that are most relevant and important for effective valuation of investment projects. The learners will gain insight into the essence of accounting. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. To pursue a career in accounting, a more detailed study is strongly recommended.

Na lição

Operational Assets. Depreciation. Short-Term Investments. Long-Term Liabilities. Shareholders’ Equity. Some Tax Issues

Week 2 is devoted to long-term assets and liabilities. We start with operational assets and see the role of depreciation and amortization in financial accounting and compare it to the way depreciation is used in valuation of investment projects. Then we discuss how financial investments in securities – stocks and bonds – are treated in accounting dependent upon goals and time horizon of holding and/or issuing of these securities. You will see how financial concepts (present values) are used in accounting for bond premium/discount amortization. Finally, an overview of the accounting approach to taxes is provided. On an example, you will study the core idea of deferred taxes.

2.1. Operational assets – types and accounting approach13:17

2.2. Depreciation11:14

2.3. Depreciation tax shield8:53

2.4. Intangible assets – accounting and amortization7:22

2.5. Short-term investments in bonds10:19

2.6. Short-term investments in stocks12:33

2.7. Bonds (1) – parameters and accounting approach10:31

2.8. Bonds (2) – amortization of premium/discount13:34

2.9. Equity (1) – accounting for common and preferred stock11:37

2.10. Equity (2) – treasury stock and stock dividends12:15

2.11. Accounting for taxes – an overview9:11

2.12. Deferred taxes – an example8:32

Conheça os instrutores

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

Well, in order to properly complete our discussion of Depreciation Amortization,

we have to say a few words about,

what happens with intangible assets?

So, we talk about amortization,

because this is the term used for them, of intangible assets.

Well, another reason is because, now,

we live in a new economy with a lot more emphasis on new technologies,

new ways of communications.

And it's clear that the contribution of intangible assets

into the performance of companies is greater than it used to be.

Still at the same time,

there are certain things that make

the recording accounting for amortization of intangible assets,

a vigor or at least a less clear procedure.

Well, first of all,

let me remind you that we have various kinds of intangible assets.

We have, identifiable and non-identifiable,

and the last one is

sort of primarily, goodwill.

Now, the normal method used is straight line.

Because, accelerated amortization is not used for various reasons,

and one is remember,

we said that accelerate depreciation for tangible assets is used to sort

of promote earlier replacement with the new assets,

we have maybe better technology,

we have greater performance,

greater efficiency, and so on.

Here, we cannot push for that.

Because, if we have let's say,

a property right, it's valid for some period of time,

and then, well, if we could find

another invention that would serve us better, it would be great.

But in general, we'll keep using the one that we own.

Now, with respect to straight line,

the question is, for how long?

And here, we have a couple of things,

Legal Life, it's different for patent it's 17 years,

for copyright it's 50 years.

Now, then, there was expected useful life,

and we take the smaller.

And in any case,

the maximum useful life is 40 years.

So, if the asset

is still valid for some time more than 40 years,

we still use for amortization purposes this period length.

Now, the final couple of comments here,

is first of all,

how are we recording that?

Well, first of all,

we have amortization expense,

let's say this amount.

And, we have the intangible asset account,

so we credit the same amount here.

So we do not have accumulated amortization.

So with not have any contra account.

We just immediately put that on asset account.

Now, some special numbers with respect to lengths like,

I will say patents 17 years,

then, copyright 50 years.

Now, the important thing,

again, in the new economy is R&D.

R &D is not capitalized at all.

So, we just write this off as an expense for this year,

even if we spend a huge amount of money.

And finally, I would like to pay special attention to goodwill.

We said before that goodwill is a very special intangible asset

that is born only when the company is purchased.

Let me show you how this happens.

Let's say that this is a company with its balance sheet that looks like this.

These are total tangible assets,

and then these are total intangible assets here.

And on the right side,

so these are assets,

this part is a liabilities in net worth,

and here, we have some liabilities.

And this is net worth or equity.

So, and let's say that this company is purchased by another one,

and to do so, the company has to buy this.

And let's say, it's bought not at this amount,

but at this amount which is much higher.

So, let's see what happens with the balance sheet of the new company.

So I put here the bottom line.

And first of all,

we can see what happens.

Total tangible assets they stay the same.

Total intangible assets other than goodwill,

they also stay the same.

On the right side,

we have the liabilities here,

and this is a new net worth,

because the company paid a premium.

So, the difference between this and that is the premium.

You see what happens,

this is something missing,

and this plug number,

this is exactly goodwill.

So we can say that,

the company's purchased at this premium because the buyer thinks that there are

some intangible assets here other than the identifiable intangible assets,

and, so strictly speaking,

of this is total identifiable intangible assets, it would be better to say it this way.

So this is how goodwill actually occurs.

Now, I'm wrapping up here, and now,

we will move on and we have to move

to some other long-term things namely long-term liabilities.

But, before doing so,

I will make sure the discussion of some,

let's say "Quarterly Bridge Thing",

we will say about short-term investments.

But in the very special kinds of Assets.

This will be marketable securities.

In the next episodes,

we'll talk about fixed income marketable securities,

and then in the episode to follow, about equity marketable securities.

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