Financial Accounting: An Integrated Statements Approach, 2nd Edition

recorded as an asset. Thus, even though the Coca-Cola trademarks are extremely valu-

able, they are not shown on the balance sheet because the costs for establishing these

trademarks are immaterial. If, however, a trademark is purchased from another busi-

ness, the cost of its purchase is recorded as an asset. The cost of a trademark is in most

cases considered to have an indefinite useful life. Thus, trademarks are not amortized

over a useful life, as are the previously discussed intangible assets. Rather, trademarks

should be tested periodically for impaired value. When a trademark is impaired from

competitive threats or other circumstances, the trademark should be written down and

a loss recognized.

Goodwill

In business, goodwillrefers to an intangible asset of a business that is created from

such favorable factors as location, product quality, reputation, and managerial skill.

Generally accepted accounting principles permit goodwill to be recorded in the

accounts only if it is objectively determined by a transaction. An example of such a

transaction is the purchase of a business at a price in excess of the net assets (assets 

liabilities) of the acquired business. The excess is recorded as goodwill and reported

as an intangible asset. Similar to trademarks, goodwill is not amortized because it has

an indefinite life. However, a loss should be recorded if the business prospects of the

acquired firm become significantly impaired. This loss would normally be disclosed in

the Other Expense section of the income statement. To illustrate, Time Warner, Inc.,

recorded one of the largest losses in corporate history of nearly $54 billion for the

write-down of goodwill associated with the AOLandTime Warnermerger. The en-

try is recorded as follows:

Exhibit 8 shows the frequency of intangible asset disclosures for a sample of 600

large firms. As you can see, goodwill is the most frequently reported intangible asset.

This is because goodwill arises from merger transactions, which are very common.

Exhibit 9 summarizes the characteristics of intangible assets discussed in this sec-

tion. Patents and copyrights are examples of intangible assets with finite lives and are

thus subject to periodic amortization based upon their estimated useful lives.

Trademarks and goodwill are examples of intangible assets with indefinite lives and

are thus not subject to periodic amortization. Rather, intangible assets with indefinite

lives are tested periodically for impairment. If the intangible asset is impaired, then the

intangible asset carrying value is written down, and an impairment loss is recognized

for the period.

414 Chapter 9 Fixed Assets and Intangible Assets

21st Century Pirates

Pirated software is a major concern of software companies. For

example, during a recent global sweep, Microsoftseized nearly

5 million units of counterfeit Microsoft software with an estimated

retail value of $1.7 billion. U.S. copyright laws and practices are

sometimes ignored or disputed in other parts of the world.

Businesses must honor the copyrights held by software

companies by eliminating pirated software from corporate

computers. The Business Software Alliance (BSA)repre-

sents the largest software companies in campaigns to investi-

gate illegal use of unlicensed software by businesses. The BSA

estimates software industry losses of nearly $12 billion annu-

ally from software piracy. Employees using pirated software on

business assets risk bringing legal penalties to themselves and

their employers.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

Loss from Impaired Goodwill 54,000,000,000

Goodwill 54,000,000,000

SCF BS IS

—AT SET Ec