Hello all,
Hope everyone is having some fun studying so far 
I just did two questions with the same concept below from Kaplan Question Bank.
Both of them mention that “patents and copyright purchase cost will be Capitalized instead of expensed.” I didnt find the paragraphs talking about this in the Kaplan book. Can someone helpe explain? Thank you!
- Under U.S. Generally Accepted Accounting Principles (GAAP), development cost of patents and copyrights can be capitalized:
A) when purchased from other entities. B) when developed internally. C) when purchased or developed internally but excluding registration costs.
When patents and copyrights are internally developed, only the legal fees incurred for registration can be capitalized. However, if the patents and copyrights are purchased from other entities, full acquisition cost can be capitalized.
- Under U.S. GAAP, which of the following statements is MOST accurate? A) Purchased patent and copyright costs are not expensed. B) Goodwill cannot be recognized and capitalized in a purchase transaction. C) Research and development costs are not expensed.
- Explanation
-
References
When a company purchases intangible assets like patents or copyrights, these costs are capitalized, not expensed. (Costs to internally develop intangible assets are generally expensed when incurred.) The cost of purchased intangible assets with finite useful lives is amortised over the assets’ useful lives.
Under Acquistion accounting, all assets and liabilkities are revalued to Fair Value. If the acquirer believes that a patent or trademark or copyright has value, they will assign it value, usually via third party appraisal valuation firm. And it will appear on the Balance Sheet.
Acquisitions are kind of a time to start over from an accounting standpoint. All assets previoulsly recorded at historical cost are now subject to adjustment. And assets previously unrecognized, like the intabgibles in the quesitons, are subject to a valuation adjustment (from zero).
And then managemnt gets to defend these new valuations to the auditors.
The idea is that you can’t create value by just claiming you have value! Someone must recognize that value. The best example of a value recognition is when someone buys it!
Both are related to internally developed goodwill (under both GAAPs) which can be recognized and fair valued only at the moment of acquisition when the buyer is willing to pay more for the market value of these target company items .
Otherwise, if company does not develop internally than purchases licences, franchises,software, etc. on the market, it is considered as already marked valued (has market price) so may be capitalized as an asset in BS.
The third exception is developing company which core is develop intangible assets only for market selling purpose in which case applied similiar accounting treatment related to inventory and COGS.
Great to know! Thanks for all your explanations!