Question

compare the effect of the accounting treatment of goodwill in subsequent years with the effect of the accounting treatment of property, plant and equipment (or intangibles with finite useful lives) in subsequent years.

Answer 1

the cost of intangible assets are either amortized over their respective useful/legal lives, or are tested for impairment on an annual basis. Amortization is the systematic write-off of the cost of an intangible asset to an expense, which effectively allocates a portion of the intangible asset’s cost to each accounting period in the economic or legal life of the asset (an amortization expense). Only recognized intangible assets with finite useful lives are amortized. This differs from tangible assets which are depreciated (resulting in a depreciation expense) over their useful life.

Intangible assets have a useful life that is either identifiable or indefinite. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The finite useful life of an intangible asset is considered to be the length of time it is expected to contribute to the cash flows of the reporting entity. Pertinent factors that should be considered in estimating the useful lives of intangible assets include legal, regulatory, or contractual provisions that may limit the useful life.

Firms may only include the immediate purchase costs of an intangible asset, which do not include the costs associated with internal development or self-creation of the asset. If an intangible asset is internally generated in its entirety, none of the costs related to the asset are capitalized.