Well, in order to properly complete our discussion of Depreciation Amortization,

we have to say a few words about,

what happens with intangible assets?

So, we talk about amortization,

because this is the term used for them, of intangible assets.

Well, another reason is because, now,

we live in a new economy with a lot more emphasis on new technologies,

new ways of communications.

And it's clear that the contribution of intangible assets

into the performance of companies is greater than it used to be.

Still at the same time,

there are certain things that make

the recording accounting for amortization of intangible assets,

a vigor or at least a less clear procedure.

Well, first of all,

let me remind you that we have various kinds of intangible assets.

We have, identifiable and non-identifiable,

and the last one is

sort of primarily, goodwill.

Now, the normal method used is straight line.

Because, accelerated amortization is not used for various reasons,

and one is remember,

we said that accelerate depreciation for tangible assets is used to sort

of promote earlier replacement with the new assets,

we have maybe better technology,

we have greater performance,

greater efficiency, and so on.

Here, we cannot push for that.

Because, if we have let's say,

a property right, it's valid for some period of time,

and then, well, if we could find

another invention that would serve us better, it would be great.

But in general, we'll keep using the one that we own.

Now, with respect to straight line,

the question is, for how long?

And here, we have a couple of things,

Legal Life, it's different for patent it's 17 years,

for copyright it's 50 years.

Now, then, there was expected useful life,

and we take the smaller.

And in any case,

the maximum useful life is 40 years.

So, if the asset

is still valid for some time more than 40 years,

we still use for amortization purposes this period length.

Now, the final couple of comments here,

is first of all,

how are we recording that?

Well, first of all,

we have amortization expense,

let's say this amount.

And, we have the intangible asset account,

so we credit the same amount here.

So we do not have accumulated amortization.

So with not have any contra account.

We just immediately put that on asset account.

Now, some special numbers with respect to lengths like,

I will say patents 17 years,

then, copyright 50 years.

Now, the important thing,

again, in the new economy is R&D.

R &D is not capitalized at all.

So, we just write this off as an expense for this year,

even if we spend a huge amount of money.

And finally, I would like to pay special attention to goodwill.

We said before that goodwill is a very special intangible asset

that is born only when the company is purchased.

Let me show you how this happens.

Let's say that this is a company with its balance sheet that looks like this.

These are total tangible assets,

and then these are total intangible assets here.

And on the right side,

so these are assets,

this part is a liabilities in net worth,

and here, we have some liabilities.

And this is net worth or equity.

So, and let's say that this company is purchased by another one,

and to do so, the company has to buy this.

And let's say, it's bought not at this amount,

but at this amount which is much higher.

So, let's see what happens with the balance sheet of the new company.

So I put here the bottom line.

And first of all,

we can see what happens.

Total tangible assets they stay the same.

Total intangible assets other than goodwill,

they also stay the same.

On the right side,

we have the liabilities here,

and this is a new net worth,

because the company paid a premium.

So, the difference between this and that is the premium.

You see what happens,

this is something missing,

and this plug number,

this is exactly goodwill.

So we can say that,

the company's purchased at this premium because the buyer thinks that there are

some intangible assets here other than the identifiable intangible assets,

and, so strictly speaking,

of this is total identifiable intangible assets, it would be better to say it this way.

So this is how goodwill actually occurs.

Now, I'm wrapping up here, and now,

we will move on and we have to move

to some other long-term things namely long-term liabilities.

But, before doing so,

I will make sure the discussion of some,

let's say "Quarterly Bridge Thing",

we will say about short-term investments.

But in the very special kinds of Assets.

This will be marketable securities.

In the next episodes,

we'll talk about fixed income marketable securities,

and then in the episode to follow, about equity marketable securities.

2.4. Intangible assets – accounting and amortization

Core Concepts of Accounting – Numbers and People

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