Accounting for Intangible Assets

Section: Fixed Assets Administration Number: 55.115 Title: Accounting for Intangible Assets

Index

POLICY

 .100 POLICY STATEMENT  .110 POLICY RATIONALE  .120 AUTHORITY  .130 APPROVAL AND EFFECTIVE DATE OF POLICY  .140 KNOWLEDGE OF THIS POLICY  .160 RESPONSIBILITIES  .210 CHARACTERISTICS OF INTANGIBLE ASSETS  .220 INTERNALLY GENERATED INTANGIBLE ASSETS  .250 CAPITALIZATION POLICY  .300 GENERAL ACCOUNTING POLICIES  .310 AQUISITION OF INTANGIBLE ASSETS  .350 AMORTIZATION  .410 YEAR END ACCOUNTING PROCEDURES  .510 UPGRADES AND ENANCEMENTS  .520 IMPAIRMENT  .690 CONTACT INFORMATION  .695 HISTORY

APPENDIX

 .710 CAPITALIZATION THRESHOLDS  .720 AMORTIZATION POLICIES  .751 ASSET TYPES BY ASSET ACCOUNT CODE  .790 OTHER DEFINITIONS  .995 HISTORY

POLICY

.100 POLICY STATEMENT

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The following policy provides for the consistent accounting of intangible assets and serves as a reference for answering questions relating to intangible assets. Examples of intangible assets include the following:

Computer Software: The ownership of, or right to use, computer programs that control the functioning of computer hardware and other devices. Computer software comprises both operating systems and application programs. Computer software is either created by another party and acquired by OUS, or created internally within OUS.

Easement/Right of Way: The right to use the land of another party for a particular purpose.

Water Rights: The right to draw water from a particular source, such as a lake, irrigation canal, or stream.

Timber Rights: The right to cut and remove trees from the property of another party.

Patent: The right to exclude others from making, using, offering for sale, selling or importing an invention. Patents are issued by the U.S. Patent and Trademark Office.

Copyright: A form of protection provided to the authors of "original works of authorship" including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. Copyrights are registered by the Copyright Office of the Library of Congress.

Trademark: A word, name, symbol or device which is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others. Trademarks used in interstate or foreign commerce may be registered with the Patent and Trademark Office.

.110 POLICY RATIONALE

Criteria used in developing accounting policies for intangible assets include:

 GASB Statement No. 51, (GASB 51) "Accounting and Financial Reporting for Intangible Assets."  NACUBO Financial Accounting and Reporting Manual (FARM)  State of Oregon, Department of Administrative Services (DAS) Oregon Accounting Manual (OAM) [OUS is not required to follow the OAM; however, we use the OAM as a reference in developing OUS fixed assets accounting policies.]

.120 AUTHORITY

 ORS 351.085 ‐ Duties and Powers of Chancellor  ORS 351.090 ‐ Standardization of accounts and Records; Preparation of Budget; Allocation of Funds  IMD 6.001 ‐ Finance and Business Affairs Accounting Policies ‐ Assignment of Responsibility

.130 APPROVAL AND EFFECTIVE DATE OF POLICY

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This policy was approved by the Associate Vice President for Finance and Administration/Controller on April 15, 2009 with an effective date of July 1, 2009.

.140 KNOWLEDGE OF THIS POLICY

All institutional and Chancellor's Office personnel with fixed asset-related responsibilities should be knowledgeable of this policy.

.160 RESPONSIBILITIES

University and OUS Controller's Division responsibilities for the accounting of intangible assets include the following:

A. University Responsibilities:

 Recording intangible asset transactions in Banner Fixed Assets and Banner FIS, including o Acquisition, amortization, and disposal of intangible assets, as well as, corrections of intangible asset records. o Completion of year‐end accounting procedures related to intangible assets.  Reconciling Banner Fixed Assets to Banner FIS.  Maintaining supporting documentation for all transactions in Banner Fixed Assets and Banner FIS.  Providing property control over intangible assets, which involves confirming the existence of each intangible asset and making adjustments to Banner Fixed Assets as appropriate.  Providing certifications, if requested by the Controller's Division, that intangible asset accounting functions have been completed.

B. Controller's Division Responsibilities:

 Developing accounting policies pertaining to intangible assets.  Maintaining and updating Banner Fixed Assets validation tables.  Preparing intangible asset sections of annual financial statements.

.210 CHARACTERISTICS OF INTANGIBLE ASSETS

To be recorded as an intangible asset in the OUS accounting records, the intangible asset must have the following characteristics:

 Owned by the university o Expenditures for items not owned by the university are expensed.  Lacks physical substance o Assets with physical substance are recorded as tangible assets (personal property or real property). o Capital leases lack physical substance but are accounted for as part of tangible assets. Refer to Fiscal Policy Manual Section 05.281 Accounting for Leases.  Non‐financial in nature o Assets in monetary form are recorded as cash or investments.

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 Used primarily for operations and not used to directly obtain income or profit. o Royalty agreements are not reported as intangible assets because they exist primarily to generate royalty income. Patents or copyrights underlying a royalty agreement are used primarily for operations and are therefore considered intangible assets. o Assets obtained for resale are not used in operations and are therefore not recorded as intangible assets.  Separately identifiable o Goodwill is not recorded as an intangible asset because goodwill is not a separately identifiable asset. o An intangible component (right) of a tangible asset (e.g., rights associated with land ownership) is accounted as part of the tangible asset.  Supported by a formal agreement o An intangible asset is generally supported by a formal agreement that either allows OUS to sell, rent, or otherwise transfer the right to another party, or the agreement gives OUS certain contractual or other legal rights to tangible assets owned by other parties.

.220 INTERNALLY GENERATED INTANGIBLE ASSETS

An intangible asset is considered "internally generated" if it is:

 Created or produced by OUS or an entity contracted by OUS, or  Acquired from a third party but requires more than minimal incremental effort on the part of OUS to put the intangible asset in service.

Expenditures in creating the internally generated intangible asset are either expensed or capitalized, depending on the stage in the asset’s development. In initial development, all expenditures are expensed (not capitalized). Initial development ends upon the occurrence of all of the following:

 Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon the completion of the project.  Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity.  Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear projects, continue development of the intangible asset.

Expenditures incurred subsequent to meeting the above criteria are capitalized.

.250 CAPITALIZATION POLICY

Capitalizable costs that (1) meet the above characteristics and (2) meet or exceed the capitalization threshold are recorded (capitalized) as an intangible asset in the OUS accounting records. Appendix .710 provides additional information of capitalization thresholds and the account codes to be used when acquiring and capitalizing intangible assets.

Capitalized Costs:

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 External direct costs of materials and services incurred to acquire the intangible asset and put it into service.  Payroll, OPE, and travel costs that are directly associated with generating an intangible asset and putting it into service. (Does not include costs incurred during planning stages.)  Fair market value of donated intangible assets.  Costs in the application development phase of internally generated computer software. These costs take place when: o Preliminary phase of the project is complete. o Management implicitly or explicitly authorizes and commits to funding the software project, at least currently in the case of a multiyear project. o Includes costs associated with software configuration and software interfaces, coding, installation of software to hardware, and testing (including the parallel processing phase). o Data conversion should be considered an activity of the application development stage only to the extent it is determine to be necessary to make the computer software operational, that is, in condition for use. Other data conversion costs should be expensed as incurred.

Expensed Costs:

 General administrative costs and overhead costs.  Costs in the preliminary phase of a project of internally generated intangible assets. Preliminary phase of internally generated computer software includes costs attributable to the conceptual formulation, evaluation of alternatives, determination of the existence of needed technology, and final selection of alternatives for the development of the software.  Training costs associated with the intangible asset.  Costs in the post‐implementation/operating stage of internally generated computer software.  Software maintenance costs.  Costs of business process reengineering activities as a result of computer software.  Outlays associated with a successful defense of legal rights embodied within an intangible asset.  Costs of all general and unspecified upgrades to software.

Software may be acquired as part of a package of products and services (e.g., training, maintenance, data conversion, reengineering costs, site licenses, and rights to future upgrades and enhancements). The cost of the package should be allocated among all individual elements. The allocation should be based on objective evidence of fair value of the elements in the contract, not necessarily separate prices stated within the contract for each element. Costs that are not susceptible to allocation between maintenance and relatively minor enhancements should be expensed.

A software licensing agreement to be paid over multiple years is a capitalizable cost of acquiring the software. The cost would be recognized as a liability representing the university’s obligation to make annual payments over the life of the agreement.

Software obtained or developed as part of an enterprise resource planning (ERP) system with multiple modules (e.g., procurement, human resources, and financial reporting), results in a separate intangible asset record for each module.

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.300 GENERAL ACCOUNTING POLICIES

Intangible assets follow the accounting for fixed assets, as described in Fiscal Policy Manual Section 55.100 Fixed Assets Accounting Policies. The provisions in this policy are to be applied in addition to Section 55.100.

The accounting structure of intangible assets is as follows:

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Intangible assets are recorded in the Banner Fixed Assets system which reconciles to the fixed asset control accounts in the Banner General Ledger.

Intangible assets are either recorded in proprietary funds (self-supporting entities such as auxiliary enterprises and service departments) or in the university’s investment in plant fund.

.310 AQUISITION OF INTANGIBLE ASSETS

Intangible assets are acquired by OUS through purchase and license, donation; or internally generated within OUS.

Purchase

Purchases of intangible assets are processed through the Banner FIS accounts payable system. Purchases from proprietary funds (auxiliary enterprises and service departments) are recorded directly in the general ledger as an intangible asset using a A82xx general ledger account code. Purchases from non-proprietary funds are initially charged to a 408xx operating ledger expenditure account code and subsequently capitalized in the university’s investment in plant fund.

Donation

Donation of an intangible asset is capitalized at its fair market value at date of donation. Donations of intangible assets follow the same accounting policies of section 200.C. of OUS Fiscal Policy 55.100 Fixed Assets Accounting Policies.

Internally Generated

Outlays for internally generated intangible assets typically involve multiple invoices and multiple payments.

 Payments of invoices are recorded throughout the year with a 408xx intangible asset expenditure account code in the Banner FIS operating ledger.  Payroll applicable to internally generated intangible assets is also recorded in the Banner FIS operating ledger, but with the appropriate payroll expense account codes.  Other costs directly associated with the internally generated intangible asset are recorded in the Banner FIS operating ledger, but with the appropriate services and supplies expense account codes.

At the end of the fiscal year, a worksheet is prepared to identify the operating ledger expenditures that should be capitalized as part of the intangible asset. The worksheet includes the expenditure amounts of the operating ledger for each combination of fund, organization, account, program, activity, and location code that should be capitalized as part of the intangible asset.

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The completed worksheet is submitted to the university’s fixed assets accountant for capitalizing the expenditures to a new or existing intangible asset record in the Banner Fixed Assets system. Depending on the funding source of the expenditures made, the costs of the intangible asset are capitalized to a proprietary fund (auxiliary enterprise or service department) or the university’s investment in plant fund. The capitalization results in a credit to the E1001- NIP Change in Fixed Assets general ledger fund addition account which offsets the expenditures in the operating ledger that have been capitalized.

Expenditures capitalized to an internally generated intangible asset are recorded to an “in development” intangible asset account code, and moved from the “in development” account code when the intangible asset is completed and ready for amortization.

A copy of the completed worksheet is sent by the university’s fixed assets accountant to Controller’s Division Accounting and Reporting for making the appropriate adjustments and reclassifications to the OUS annual financial statements.

.350 AMORTIZATION

Amortization is the accounting process of allocating the intangible asset’s capitalized cost to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Amortization is not a matter of valuation but a means of cost allocation. Intangible assets are not amortized on the basis of a decline in their fair market value, but on the basis of systematic charges to expense.

An intangible asset has an indefinite useful life and is not amortized if there are no legal, contractual, regulatory, technological, or other factors that limit its useful life.

An intangible asset is amortized if there are legal, contractual, regulatory, technological, or other factors that limit its useful life. Useful life may vary among intangible assets depending on the above factors attributable to each intangible asset. The useful life should be the shorter of the intangible asset’s technological life versus it’s legal/contractual, and regulatory life.

OUS uses straight-line amortization with zero salvage value.

Appendix .720 provides additional detail of amortization policies by account code.

.410 YEAR-END ACCOUNTING PROCEDURES

Year-end accounting procedures pertaining to intangible assets are in the fixed assets section of the annual closing of the books instructions.

Each university needs to provide a reconciliation at the end of each fiscal year to show that the change in the Banner FIS general ledger account balance for each type of intangible asset to the capitalized cost of intangible assets acquired during the year less the intangible assets disposed of during the year.

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.510 UPGRADES AND ENHANCEMENTS

Upgrades and enhancements are defined as modifications to an existing intangible asset that result in additional functionality, an increase in efficiency, or an extension of the estimated useful life. Significant modifications may result in a new and separate intangible asset record. All other modifications are expensed in the year incurred.

.520 IMPAIRMENT

Loss due to impairment should be measured as the difference between the book value (original cost less accumulated amortization) and the net realizable value (the estimated amount that can be recovered from selling, or any other method of disposing of an item, less the estimated cost of disposal), if any.

For software, impairment should be recognized and measured when one of the following occurs:

 The software is no longer expected to provide substantial service potential and will be removed from service.  A significant adverse change occurs in the extent or manner in which the software is used or is expected to be used.  A significant change is made or will be made to the software program.  Stoppage of development of computer software due to a change in the priorities in management.

For other intangible assets, impairment should be recognized and measured when one of the following occurs:

 The intangible asset is no longer expected to provide substantial service potential and will be removed from service.  Stoppage of development of an internally generated intangible asset due to a change in the priorities in management.

Intangible assets impaired from development stoppage should be recorded at the lower of carrying value or fair value.

.690 CONTACT INFORMATION

Direct questions about this policy to the following offices:

Subject Contact General questions from institutional personnel Institution Office of Business Affairs General questions from institutional central administration and Chancellor's Office Chancellor's Office personnel Controller's Division

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.695 HISTORY

04/15/09 - Approved

Policy last updated: 03/30/09

APPENDIX

.710 CAPITALIZATION THRESHOLDS

Capitalization Thresholds, Fund and Account Codes - Proprietary Funds

Account Codes Used in Type of Capitalization Proprietary Funds Intangible Threshold Asset for for PURCHASE CAPITALIZATION Easements/Right Unit cost > A8211 A8211 of Ways $100,000 Computer Unit cost > A8221 A8221 Software $100,000 Unit cost > Water Rights A8231 A8231 $100,000 Unit cost > Timber Rights A8241 A8241 $100,000 Patents and Unit cost > A8251 A8251 Copyrights $100,000 Unit cost > Trademarks A8261 A8261 $100,000 Other Intangible Unit cost > A8271 A8271 Assets $100,000

Acquisitions of intangible assets not meeting the above capitalization thresholds should be recorded as an expense in the accounting records.

Capitalization Thresholds, Fund and Account Codes - Non-Proprietary Funds

Type of Capitalization Account Codes Used in Non- Intangible Threshold Proprietary Funds

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Asset for for CAPITALIZATION PURCHASE in Net Investment in Plant Fund Easements/Right Unit cost > 40811 A8211 of Ways $100,000 Computer Unit cost > 40812 A8221 Software $100,000 Unit cost > Water Rights 40813 A8231 $100,000 Unit cost > Timber Rights 40814 A8241 $100,000 Patents and Unit cost > 40815 A8251 Copyrights $100,000 Unit cost > Trademarks 40816 A8261 $100,000 Other Intangible Unit cost > 40817 A8271 Assets $100,000

Acquisitions of intangible assets not meeting the above capitalization thresholds should be recorded as an expense in the accounting records.

(Note: The unit cost threshold does not apply to attachments; however, the threshold does apply to the asset as a whole.)

.720 AMORTIZATION POLICIES

Amortization Policies by Account Code

Treatment of Amortization Accumulated First Year Capital Asset Asset Amortized? Amortization Expense Amortization Amortization Account Code Type (Yes/No) Frequency Account Account (see notes Code Code below table) A8210 - Easements/Right of UE Note 1 Monthly 80711 A8711 Note 2 Ways A8221 - Computer US Note 1 Monthly 80721 A8721 Note 2 Software A8231 - Water UW Note 1 Monthly 80731 A8731 Note 2 Rights A8241 - Timber UT Note 1 Monthly 80741 A8741 Note 2

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Rights A8251 - Patents & UP Note 1 Monthly 80751 A8751 Note 2 Copyrights A8261 - UK Note 1 Monthly 80761 A8761 Note 2 Trademarks A8271 - Other UO Note 1 Monthly 80771 A8771 Note 2 Intangible Assets A8222 - In Development US No (Computer Software) A8252 - In Development UP No (Patents/Copyrights) A8262 - In Development UK No (Trademarks) A8272 - In Development (Other UO No Intangibles)

Notes:

1 - Intangible assets are amortized unless they have an indefinite service life.

2 - Proportional - Amortization begins in the month the intangible asset is acquired and ready for use (e.g., "substantially complete"), and removed from "In Development" status in Banner Fixed Assets. If the maintenance in Banner Fixed Assets is performed late, "catch-up" amortization would need to be performed back to the month that the property was completed or "substantially completed." Additional capitalizable costs to completed or "substantially completed" records will be added at the end of the fiscal year, with amortization on the additional capitalizable costs to begin on July 1 of subsequent year. In Development amounts must be updated in Banner Fixed Assets at least at year-end, but more frequently is desirable.

Amortization pertaining to capital assets of proprietary funds is charged to auxiliary enterprise or service department funds. Amortization pertaining to other funds is charged to the investment-in- plant fund.

.751 ASSET TYPES BY ASSET ACCOUNT CODE

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To provide for consistency in coding, the following provides, by each account code for intangible assets, the associated account codes for accumulated amortization and amortization expenses, and allowable asset types:

Accum Depr/ Depr/ Account Account Data Amort Asty Type Code Description Entry Amort Expense Codes 18 Capital Assets/Acc Depr/Amort A8200 Capital Assets (Intangible) N A8210 Easements/Right of Ways N A8211 Easements/Right of Ways Y A8711 80711 UE A8220 Computer Software N A8221 Computer Software Y A8721 80721 US A8222 In Development (Computer Software) Y US A8230 Water Rights N A8231 Water Rights Y A8731 80731 UW A8240 Timber Rights N A8241 Timber Rights Y A8741 80741 UT A8250 Patents & Copyrights N A8251 Patents & Copyrights Y A8751 80751 UP A8252 In Development (Patents/Copyrights) Y UP A8260 Trademarks N A8261 Trademarks Y A8761 80761 UK A8262 In Development (Trademarks) Y UK A8270 Other Intangible Assets N A8271 Other Intangible Assets Y A8771 80771 UO A8272 In Development (Other Intangible) Y UO

.790 OTHER DEFINITIONS

Term Definition Amortization The accounting process of allocating the cost of intangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Amortization is not a matter of valuation but a means of cost allocation. Assets are not amortized on the basis of a decline in their fair

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market value, but on the basis of systematic charges to expense. Amortization Date the asset is acquired and ready for use. - "Acquired" refers to the Start Date acquisition date - the date one takes possession of the asset. An asset can be "ready for use" but may or may not be "in-use" or "in-service". In circumstances when the asset acquired is not ready for use, the asset should be initially coded as "in development." The amortization start date would then be the date the asset is ready for use (e.g., "substantially complete"), and removed from "in development."

.995 HISTORY

04/15/09 Approved

Appendix last updated: 03/30/09

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