Summary: Intangible Assets and Goodwill
Intangible assets are comprised of nonphysical acquired assets—brand, franchise, trademarks, patents, customer lists, licenses—that have value based on the rights belonging to the company that had purchased them. Intangible assets are amortized, just like fixed assets are depreciated, over their useful lives on the income statement (Exhibit 6.10).
| Type of Intangible Asset | Overview | Accounting Treatment | Tax Treatment |
|---|---|---|---|
| Patent | Exclusive right from the federal government to sell a product or process for a 17-year period | Amortization over useful life (up to 17 years) | Tax-deductible (income statement) |
| Copyright | A registered symbol or name reserved exclusively for its owner for an indefinite number of periods (renewed every 20 years) | Amortization over useful life (not to exceed 40 years) | Tax-deductible (income statement) |
| Trademarks and Brand Names | A registered symbol or name reserved exclusively for its owner for an indefinite number of periods (renewed every 20 years) | Amortization over useful life (not to exceed 40 years) | Tax-deductible (income statement) |
| Leaseholds | A long-term rental contract for the right to occupy land or buildings | Amortization over useful life of the lease | Tax-deductible (income statement) |
| Franchises and Licenses | A right to an exclusive manufacture or sale of products or services | Amortization over useful life (not to exceed 40 years) | Tax-deductible (income statement) |
| Goodwill | The amount by which the purchase price for a company exceeds its fair market value (FMV) | No longer amortized after 12/15/01; undergoes annual impairment test | Not tax-deductible (income statement) |
Goodwill, a type of intangible asset, is the amount by which the purchase price for a company exceeds its fair market value, representing the intangible value stemming from the acquired company’s business name, customer relations, and employee morale.
Since December 15, 2001, goodwill on the balance sheet is no longer amortized on the income statement. Instead, goodwill is annually tested for impairment (loss of value).
If found to be impaired, goodwill is adjusted down on the balance sheet to better reflect current market value, and its write-down is expensed through the income statement.
Other Assets
Other assets is a catch-all category that includes miscellaneous noncurrent assets, which are not considered fixed or intangible. Such other assets may include prepaid expenses and some types of long-term investments.
Source: Used with permission. Microsoft 2005 Annual Report.