Chapter+10+Notes+-+Capital+Assets

Homework: SS1, SS2; BE10-1, BE10-2, BE10-3, BE10-4 Highlights: **capital assets** refer to long-lived assets acquired for use in the operation of a business over many accounting periods and are employed to support the production and/or sale of goods and services; **capital assets can either be tangible or intangible**; **tangible assets** include property, plant and equipment, and natural resources; **intangible assets** include patents, copyrights, trademarks, franchises and many others (see SO 9 below)
 * __SO 1 - 2 Property, Plant & Equipment__**


 * - property, plant and equipment** (aka **fixed assets**, or **land, building** and **equipment**) refer to tangible assets used in the operation of a business

- property, plant and equipment typically break down and become obsolete over time (other than land), but do not lose physical substance, whereas **natural resources** (e.g., oil deposits, coal mines, forest tracts) derive from the earth and will eventually physically lose their substance, or **deplete**, over time

- property, plant and equipment are recorded at their **historical cost (purchase price**) in accordance with cost principle - historical cost includes **all costs necessary to acquire asset (acquisition cost) plus all costs necessary to make asset ready for intended use** - costs necessary to **acquire asset and prepare asset for intended use** are **capitalized** (recorded as capital assets and amortized/depreciated over useful life, other than non-depreciable land) rather than **expensed** (recorded as expenses in current period) because such costs provide benefits over future periods - **acquisition cost** is either measured by amount of **cash paid** in **cash transaction** or **cash equivalent price of assets paid** in **non-cash asset (in-kind) purchase,** which is essentially an exchange of assets between two parties - **cash equivalent price** is either **fair market value of assets given up** or, if those values cannot be determined, **fair market value of assets received**

- according to **lower of cost or market (LCM) principle**, when present value of capital asset falls below its net book value (cost less accumulated depreciation), asset should be adjusted to reflect current market (resale) or replacement (repurchase) value, and impairment loss (expense) should be recorded equivalent to that difference

- **property, plant and equipment** can be subdivided into four categories:

(i) **land** (e.g., non-depreciable building sites or vacant lots) (ii) **land improvements** (e.g., depreciable driveways, parking lots, fences, signs, landscaping or lighting fixtures that were subsequently added to land to improve value of land) (iii) **buildings** (e.g., stores, offices, restaurants, factories, warehouses) (iv) **equipment** (e.g., cash registers, office furniture, computers and copiers, factory machinery, delivery vehicles)


 * (i)** **Land (property)**: cost of acquired land should be debited to Land account and includes purchase price of land (acquisition cost) plus legal and survey fees, accrued property taxes, clearing, draining and grading costs of vacant land, demolition and removal costs of pre-existing building on land (to make room for construction of new building) __net__ any proceeds from salvaged materials, and any other costs necessary to prepare land for intended use; Land is __not__ subject to depreciation as it neither breaks down nor loses value over time


 * (ii)** **Land improvements (property)**: unlike land, improvements to land (driveways, parking lots, fences, signs, landscaping or lighting fixtures) have limited lives and so such purchases should be debited separately to Land Improvements account (fixed asset) and amortized over their useful lives - land improvements tend to occur __subsequent to__ initial purchase of parcel of land


 * (iii)** **Building (plant)**: costs associated with purchase or construction of building should be debited to Buildings account and amortized over life of building, and include purchase price, closing costs such as legal and registration fees, remodeling, replacement and repair costs, plumbing, flooring and wiring costs, planning and design costs, building permit fees, and any interest charges on financing incurred during, but not subsequent to, construction of new building


 * (iv) Equipment:** cost of equipment should be debited to appropriate account (e.g., Plant Machinery, Delivery Vehicle, Office Furniture, etc.) and includes purchase price and any additional costs related to preparation of equipment for intended use (freight costs, insurance costs during transit, assembly and installation costs) - note that **license and insurance costs for vehicles** are __not__ recorded as capital assets, as they are properly recorded as current assets (Prepaid Expenses/Assets) and then adjusted (expensed for usage) at close of each period because they represent **recurring costs that typically benefit a single year**, whereas **capitalized costs tend to be one-time payments that provide benefits into future periods for the life of the asset**

- **basket purchase** refers to acquisition of multiple capital assets at a single price in a single transaction (e.g., land and building purchased for $350,000) - to determine cost of individual items that must be recorded separately, __relative__ fair market values (typically based on recent appraisal) are employed


 * Basket $500,000 purchase of land and building, with land recently appraised at $200,000 and building recently appraised at $200,000**

- **Cash - cr - 500,000**
 * Land - dr - $250,000 (200 / 400 x 500)**
 * Building - dr - $250,000 (200 / 400 x 500)**

__**SO 3 - 4 Amortization**__ Homework: SS4, SS5; BE10-5, BE10-6, BE10-7; P10-2A Highlights: **amortization** (or **depreciation**) is the __estimated__ allocation of the cost of a capital asset (other than land) to an expense over the course of its estimated useful life in accordance with the matching principle wherein costs are matched to the revenues they helped to generate - journal entry to calculate and record amortization __at end of each fiscal period__ involves **debit to Amortization Expense** and **credit to Accumulated Amortization** (contra asset account) so that the net result of the appearance of the **Equipment** and **Accumulated Amortization - Equipment** accounts on the balance sheet is to present the **net book value** (asset cost less accumulated amortization) of the capital asset - **land improvements, buildings and equipment** are considered amortizable assets because their usefulness and revenue-generating capacity decline over the life of the asset due to physical factors (general wear and tear) and economic factors (obsolescence) - land, however, is __not__ considered an amortizable asset because land does not experience wear and tear or obsolescence, nor does it decline in usefulness or revenue- generating capacity over its lifetime

- **three factors are involved in the calculation of amortization:**


 * (i) original cost (purchase price) of asset**
 * (ii) estimated residual/salvage (scrap/trade-in) value of asset at end of useful life (which is not amortized as this value is expected to be recovered)**
 * (iii) estimated useful life of asset in terms of time (years) or units of activity (kilometres driven or machine hours employed) or output (units produced)**


 * - three methods of amortization are generally acceptable and in use today:**


 * (i) straight-line method**
 * (ii) declining-balance method**
 * (iii) units-of-activity method**

- amortization method chosen should be consistently applied over life of asset and should best match asset's contribution to revenues over time

__**(i) Straight-line amortization**__


 * annual amortization expense**
 * =** **original cost - estimated residual value (aka amortizable or depreciable cost) / estimated useful life in years**

- note that __annual amortization expense__ is __identical__ from year to year using straight-line method - also note that **net book value of asset** (original cost less accumulated amortization) will be equal to estimated residual value at end of asset's useful life - when assets are acquired midway through fiscal period, annual amortization expense using straight-line method may be prorated (adjusted for time) by using **50% rule** (recording amortization at 50% of annual amortization in first and/or last years of estimated useful life) or **part-year amortization** (first year amortization equivalent to actual number of months of asset ownership in first year) - straight-line method is most common method of amortization in Canada

- **straight-line amortization rate** **(%) can be calculated by dividing estimated useful life in years into 100%** **(100 / estimated useful life in years = straight-line amortization rate)** - to save time, straight-line amortization rate can then be multiplied by amortizable/depreciable cost to calculate annual amortization expense under straight-line method - more importantly, **straight-line amortization rate is used in calculation of annual amortization under __declining-balance method__ as well** (see below)

__**(ii) Declining-balance method**__


 * annual amortization expense**
 * =** **net book value at start of current year (original cost less accumulated amortization) x fixed rate (%) of amortization**

- **fixed rate of amortization** used in declining-balance calculation can either be **straight-line amortization rate** (see above) or a **multiple of straight-line amortization rate (e.g., two times straight-line rate, commonly referred to as double declining-balance method)** - note that declining-balance method produces __declining annual amortization expense__ figures over the life of the asset, i.e., higher amortization expense in early years and lower amortization expense in later years - note that **estimated residual value is not used in this calculation,** **nor is estimated useful life used** other than in assisting in determination of straight-line amortization rate - using this method, amortization should no longer be recorded once asset's net book value falls below asset's expected residual value under straight-line method - **part-year amortization** (equivalent to actual number of months of asset ownership in first year) should be used with this method in calculating first year's amortization expense when asset is purchased midway through period

__**(iii) Units-of-activity method**__


 * amortizable cost per unit**
 * =** **original cost - estimated residual value / estimated total units of activity over useful life (expected lifetime activity of asset in terms of machine hours or kilometres driven or units of output)**


 * annual amortization expense**
 * =** **amortizable cost per unit x actual units of activity during current year**

- units-of-activity method is most appropriate for calculating amortization of factory machinery or delivery vehicles - part-year amortization is unnecessary for units-of-activity method as annual amortization expense is a function of actual usage rather than time - annual amortization expense varies from year to year under units-of-activity method as actual asset usage tends to fluctuate over time . __**Examples of all three methods**__
 * Record year one annual amortization expense of capital asset (e.g. equipment) assuming original cost of $50,000, estimated residual value of $10,000, estimated useful life of 8 years (or 12.5% per year) and estimated lifetime units of production of 100,000 units (with actual year one output of 20,000 units)**

-- **Accumulated Amortization - Equipment - cr - 5,000**
 * __(i) straight-line method (50,000 - 10,000 / 8)__**
 * Amortization Expense - Equipment - dr - 5,000**

-- **Accumulated Amortization - Equipment - cr - 12,500**
 * __(ii) double declining-balance method (100% / 8 x 2 x 50,000)__**
 * Amortization Expense - Equipment - dr - 12,500**

-- **Accumulated Amortization - Equipment - cr - 8,000**
 * __(iii) units-of-activity method (50,000 - 10,000 / 100,000 x 20,000)__**
 * Amortization Expense - Equipment - dr - 8,000**

- for **income tax purposes** amortization expense may be deducted from revenues to determine taxable income, and to that end Canada Revenue Agency (CRA) requires taxpayers (individuals and corporations) to employ **declining-balance method** of amortization on tax returns using **fixed published rates of annual capital cost allowance (amortization) with respect to each class of depreciable asset** - CRA also requires taxpayers to use **50% rule** to calculate annual amortization expense in the year of asset acquisition (year one)

__**SO 5 - 7 Revisions of amortization & disposals**__ Homework: SS7, SS8, SS9; BE10-8, BE10-9, BE10-10, BE10-11 Highlights: amortization is recorded at the end of each period as an adjusting entry under the category of estimates - straight-line amortization is based on at least two estimates (residual value and useful life) and these estimates must occasionally be revised after the fact in recognition of changing physical or economic conditions indicating excessive or inadequate past estimates - revisions are __not__ made retroactively for prior periods but rather for __current and future periods__ only - **at time of revision, updated amortizable cost (current net book value [original cost minus accumulated amortization] less revised estimated residual value) must be divided by revised estimated remaining useful life in years to arrive at new annual amortization expense**


 * __Example of calculation of revised straight-line amortization__**
 * updated net book value (original cost less accumulated amortization) at time of revision = $5000
 * revised estimated residual value = $500
 * revised amortizable cost = $4500 ($5000 - $500)
 * revised estimated remaining useful life = 5 years
 * revised annual amortization expense using straight-line amortization = **$900/yr** ($4500/5)


 * Amortization Expense - Equipment - dr - 900**
 * -- Accumulated Amortization - Equipment - cr - 900**

or put another way:


 * revised annual depreciation expense using straight-line method =**


 * __net book value at time of revision (original cost - accumulated amortization) - revised estimated residual value__**
 * revised estimated remaining useful life in years**

- **ordinary repairs** to capital assets refer to expenditures that __maintain__ the efficiency or useful life of the unit and should be debited to **Repairs and Maintenance Expense** - examples include vehicle oil changes, painting of buildings and replacement of worn-out machinery parts - known as **operating expenditures**, these costs involve relatively small amounts and occur rather frequently
 * __Repairs vs Additions/Improvements__**

- **additions and improvements** to capital assets refer to expenditures that __increase__ the efficiency, production capacity or useful life of the unit and should be **debited directly to the appropriate capital asset account and then amortized** over the remaining life of the original asset or the useful life of the addition or improvement - known as **capital expenditures**, these costs involve significant amounts but occur rather infrequently

- property, plant and equipment can be **disposed** of (physically eliminated) in one of three ways:
 * __Disposals of Capital Assets__**


 * (i) retirement** of the asset (discarding the item in exchange for __zero__ return)
 * (ii) sale of the asset** to another company for a gain or loss
 * (iii)** **exchange** or **trade-in of the asset** for another asset

(i) **retirement of capital asset** involves tossing out the item and receiving nothing in return - net book value must first be updated by recording **partial amortization for the year** up to date of retirement (**Amortization Expense dr, Accumulated Amortization cr**) - net book value is then eliminated by debiting Accumulated Amortization account and crediting the asset account (e.g., Equipment) for their full values at time of retirement in order to bring both figures to zero

(a) if net book value of asset was __zero__ at time of retirement (i.e., fully amortized), no other accounts are affected

Accumulated Amortization - Machinery - dr - 250,000 --- Machinery - cr - 250,000
 * __Example of retirement of machinery with net book value (asset cost - accumulated amortization) of zero__**

(b) if net book value of asset was __not zero__ at time of retirement (i.e., not fully amortized), **Loss on Disposal expense account** (found in Other Expenses section of income statement) must be debited for the difference between proceeds of retirement ($0) and net book value - this is equivalent to selling a valuable asset for zero dollars and incurring a loss on sale

__**Example of retirement of machinery with net book value** **of $50,000 ($250,000 - $200,000)**__ Accumulated Amortization - Machinery - dr - 200,000 Loss on Disposal (expense) - dr - 50,000 Machinery - cr - 250,000

- please note that fully amortized asset (i.e., zero net book value) which is __still in use__ within the company should remain on books until ultimately retired but should not be further amortized

(ii) **sale of capital asset** involves selling the item to another company for either a gain or a loss by comparing the proceeds of sale (cash received from sale) to the net book value at time of sale - where proceeds of sale exceed net book value, a **Gain on Disposal** (found in Other Revenues section of income statement) is realized - where proceeds of sale are less than net book value, a **Loss on Disposal** (found in Other Expenses section of income statement) is realized - as with retirement, net book value must first be updated by recording **partial amortization for the year** up to date of sale (**Amortization Expense dr, Accumulated Amortization cr)** - net book value is then eliminated by debiting Accumulated Amortization account and crediting the asset account (e.g., Equipment) for their full values at time of sale in order to bring both figures to zero, in addition to the recording of proceeds of sale (Cash dr) and either a gain on sale (Gain on Disposal cr) or a loss on sale (Loss on Disposal dr)

Cash - dr - 45,000 Loss on Disposal (expense) - dr - 5,000 Accumulated Amortization - Machinery - dr - 200,000 --- Machinery - cr - 250,000
 * __Example of sale of machinery with net book value of $50,000 ($250,000 - $200,000) for $45,000 (loss)__**

__**Example of sale of machinery with net book value of $50,000** **($250,000 - $200,000)** **for $60,000 (gain)**__ Cash - dr - 60,000 Accumulated Amortization - Machinery - dr - 200,000 Machinery - cr - 250,000 Gain on Disposal (revenue) - cr - 10,000

(iii) **exchange of capital asset for new asset** involves trading in an older asset as partial payment towards the purchase of a newer asset and receiving a trade-in allowance on the estimated value of the older asset - cash may also be offered in this deal equal to difference between purchase price of new asset and trade-in allowance granted on older asset

__**SO 8, 10, 11 - Natural resources & financial ratios**__ Homework: SS10, SS12, SS13; BE10-12, BE10-15

- **natural resources** (aka wasting assets) refer to standing timber (uncut trees) and land deposits of oil, gas and minerals - acquisition cost of natural resource (purchase price plus any costs necessary to prepare resource for intended use) minus estimated residual value is amortized over estimated life of asset using **units-of-activity method** - additional consideration of estimated future site restoration costs (site restoration, reforestation, environmental cleanup, etc.) following eventual depletion of natural resource site must also be taken into account when calculating amortization -> such future restoration costs must be estimated on date of acquisition and amortized over life of asset; however, treatment of such future restoration costs is complicated and deserves special attention (see below)
 * __SO 8 - Amortization of natural resources__ **


 * amortizable cost per unit **
 * = acquisition ** ** costs + estimated future restoration costs - estimated residual value / **** estimated lifetime units of output **


 * annual amortization expense of natural resource **
 * = ** ** amortizable cost per unit x annual units actually extracted and sold **


 * __Calculation of amortization of natural resource using units-of-activity method with restoration costs__**
 * acquisition cost of crude oil deposit = $1.1 m
 * estimated future restoration costs = $100,000 (//equal to **1/10** of total amortizable cost of 1.1 m + 100,000 - 200,000//)
 * estimated residual value = $200,000
 * estimated lifetime units of activity = 100,000 barrels of oil
 * //amortizable cost per unit = $1.1 m + $100,000 - $200,000 / 100,000 barrels = $10 / barrel//
 * actual first-year units of output extracted and sold = 5,000 barrels of oil

Amortization Expense - Oil Deposit - dr - 50,000 (//5,000 barrels x $10 / barrel//) -- Liability for Future Restoration Costs - cr - 5,000 (//equal to **1/10** of annual amortization expense)// -- Accumulated Amortization - Oil Deposit - cr - 45,000 (equal to difference between annual amortization expense and liability for future restoration costs)

- **Liability for Future Restoration Costs** (which is calculated second) is a **long-term liability** and, while included in the calculation of annual amortization expense, is __not__ included in Accumulated Amortization - to calculate this liability figure every year, determine estimated future restoration costs as percentage of total amortizable cost (c + efrc -erv) and then apply that same percentage figure to annual amortization expense - when said estimated restoration costs are finally realized (paid) many years later, the Liability account will be debited and the Cash account will be credited

- please note that Accumulated Amortization (which is calculated last) is merely the difference between Amortization Expense and Liability for Future Restoration Costs

capital assets can be listed on the balance sheet either separately (e.g., Equipment, Patents, Goodwill, etc.) or in major asset classes (Property, Plant & Equipment, Natural Resources, Intangible Assets, Goodwill) or not categorized at all (Capital Assets) - sometimes capital assets are listed at their cost price minus accumulated amortization while other times capital assets are listed at their net book value with explanations found in the notes that accompany the financial statements
 * __SO 10 - Capital assets on the balance sheet__**


 * __SO 11 - Financial ratios__**
 * financial ratios** are useful in determining how the company's **assets are being employed by the firm to generate either revenues or profits:**

(i) **asset turnover = annual net __sales__ / average total assets** (beginning assets minus ending assets / 2)

e.g. $1 m / ($400,000 + $600,000 / 2) = asset turnover of 2 times

(asset turnover measures __efficiency__ of asset usage)

(ii) **return on assets = annual net __income__ / average total assets** (beginning assets minus ending assets / 2)

e.g. $50,000 / ($400,000 + $600,000 / 2) = return on assets of 10%

(return on assets measures __profitability__ of asset usage)

Homework: SS11; BE10-13; E10-11, E10-12 Highlights: intangible assets are **rights, privileges and competitive advantages resulting from ownership of long-lived assets lacking in physical substance that provide benefits over future periods** - like tangible assets, intangibles are recorded at cost (purchase price plus all costs necessary to make item ready for intended use) and amortized over time (where appropriate) in systematic manner - like tangible assets, intangibles should be reviewed periodically to determine any decline in market value and in such cases, difference between current fair market value and net book value (cost less accumulated amortization) must be written down as impairment loss (expense) - like tangible assets, net book value of intangibles that are disposed of (retired or sold) must be eliminated and any gain or loss on disposal recognized as other revenue or expense
 * __SO 9 - Intangible assets__**

- unlike tangible assets, **amortization of intangibles is credited directly to intangible asset account (e.g., Patents) and __not__ to Accumulated Amortization contra account**


 * - intangibles are typically amortized using straight-line method, with amortizable cost of intangible asset (cost less estimated residual value, which is typically negligible or nil) allocated over __shorter__ of (i) estimated useful life of asset or (ii) legal life of asset, e.g., patent life of 20 years**

................................................. **lower of eul or legal life of asset**
 * annual amortization expense = __cost - estimated residual value__**

- that said, **intangible assets with __no recognizable legal life__ that possess __zero or indefinite estimated useful life__ should __not__ be amortized at all, but should still be written down as an impairment loss when market value falls below net book value**

- intangibles are either listed separately under the Capital Assets section of the balance sheet (e.g., Patents, Trademarks, Copyrights, etc.) or listed under the single heading "Intangible Assets" with further explanation found in the notes accompanying the financial statements

(a) **patents** refer to the exclusive right granted by federal government's Canadian Intellectual Property Office (CIPO) of Industry Canada to manufacture, sell or control an **invention or innovation** for period of **20 years** from acceptance of application - patents are **non-renewable** - patents are recorded at cost which includes purchase price (if purchased as pre-existing patent from patent holder), CIPO registration fees and any costs of defending patent against legal challenges (e.g., legal fees associated with intellectual property infringement lawsuits) - **patent costs should be amortized over shorter of 20-year legal life or estimated useful life** - estimated useful life takes into account obsolescence, consumer demand and industry competition

(b) **copyright** refers to the exclusive right granted by CIPO to reproduce or sell or otherwise financially benefit from an **artistic creation or published work** - copyright extends for **lifetime of creator plus 50 years beyond his/her death** - like patents, copyright is recorded at cost which includes purchase price (if purchased as pre-existing copyright from copyright holder), CIPO registration fees and any costs of defending copyright against legal challenges - amortization of copyright is necessary but complicated as legal life of copyright depends on indefinite lifespan of creator (life plus 50 years) - accordingly, in most cases **estimated useful life of copyright is used to calculate annual amortization** by taking into account likely future sustainability of public demand for artistic creation and likely frequency of future copyright infringement

(c) **trademarks and trade names** refer to **words, phrases, colour schemes, songs or symbols that identify a particular product or company (trademark) or the legally registered name under which a business operates (trade name)** - once registered with CIPO, creator obtains exclusive legal right to commercially exploit trademark or trade name for a period of **15 years** - trademarks and trade names may be **renewed every 15 years in perpetuity (forever)** - because trademarks/trade names may be legally renewed again and again and because the useful life of trademarks/trade names is indefinite as long as company remains in business, these types of intangible assets are typically **__not__ amortized** but should still be written down as an impairment loss when market value falls below net book value - on occasion however, **trademarks __should__ be amortized when they possess defined estimated useful lives, i.e., when the trademark holder has no intention to renew the trademark and where the trademark itself has limited marketability** - like patents and copyrights, trademarks and trade names are recorded at cost which includes purchase price (if purchased as pre-existing trademark/trade name from trademark/trade name holder), CIPO registration fees, design costs and any costs of defending intellectual property rights against legal challenges

(d) **franchises** refer to private contractual agreements between franchisors (e.g. Second Cup) and franchisees (private investors) granting the franchisee **permission to sell the products of and use the intellectual property, marketing and reputation of the franchisor in exchange for a specified franchise fee (one-time, up front payment) plus royalties (percentage of revenues)** - periodic franchise royalties paid to franchisor are recorded as operating expenses though

(e) **licenses** refer to franchise-type agreements involving government body licensor (e.g, federal, provincial or municipal government or Crown corporation) and private business licensee - **license agreement permits private firm to use public property in provision of private goods and services (e.g, city streets for bus lines, public land for telephone lines, public airwaves for radio broadcasts)** - periodic license royalties paid to licensor are recorded as operating expenses though

- **both franchise and license agreements** can be granted for **definite** or **indefinite periods of time** or **in perpetuity** - acquisition costs of franchises and licenses (i.e., franchise/license fee, legal costs, etc.) with **defined contractual lives** **should be** **amortized** **over shorter of legal life (term of contract) or estimated useful life**, while those with **indefinite lives** or **lives in perpetuity** **should** **__not__ be amortized** at all - franchises and licenses should periodically be tested for impairment though (decline in market value) and written down if necessary

(f) **goodwill** refers to favourable characteristics of business including **strong reputation, good customer relations, management expertise, desirable location, quality products, skilled employees,** etc - **goodwill is only recorded when existing business is purchased** - **upon purchase of business, goodwill is recorded in books of purchaser (debit Goodwill asset account) at __excess__ of purchase price over fair market value of net assets (assets minus liabilities) acquired** - because goodwill has indefinite life (pursuant to going concern concept), **goodwill is __not__ amortized** but must be periodically tested for impairment (decline in market value) and written down if necessary

(g) **research and development** (R & D) costs are __not__ intangible assets (or even assets in the first place) but still deserve attention as they are used to generate patents and copyrights

- **research** refers to any **planned investigation undertaken to gain knowledge and understanding of future product application** - under IFRS, all research costs **should be expensed** (Research Expense) in the same period they were incurred and **__not__ amortized**

- **development** refers to the **use of research findings in furtherance of a plan or design** - under IFRS, **development costs __may__ be __capitalized__** (and **included in cost of patent or copyright and then amortized**) when they relate to clearly defined product or process that management intends to manufacture and market with identified target market and sufficient resources available to complete project, i.e., **development charges should be capitalized when they are likely to generate future economic benefits for the company** - development costs that do not satisfy the above definition should not be capitalized but rather should be expensed (Development Expense) in the same period they were incurred

(h) **other intangible assets** include **customer lists, non-competition agreements with valuable employees, exclusivity agreements with significant buyers, endorsement contracts with celebrities, advertising campaign costs, start-up costs**, etc. - like other intangibles, these assets are amortized over the shorter of their legal lives (e.g., contractual term) or estimated useful lives - also known as **deferred charges** on the balance sheet


 * - see p. 486 for an excellent summary of amortization issues related to intangible assets**