EITF 08-7 – Accounting for Defensive Intangible Assets
This EITF was ratified in November 2008 by the FASB Board and is effective for intangible assets acquired on after the beginning of the first annual reporting period beginning on or after December 15, 2008. The guidance is to be applied prospectively and early adoption is not permitted.
The objective of this EITF is to clarify how to account for defensive intangible assets subsequent to initial measurement. It applies to acquired intangible assets that the entity does not plan to actively use but intends to hold to prevent its competitors from using it, unless the intangible asset must be expensed in accordance with other literature. (FAS 2, paragraph 11(c) requires R&D costs to be expensed in a transaction that does not qualify as a business combination if the assets are not going to be used.)
A defensive intangible asset should be accounted for as a separate unit of accounting and should not be included as part of the cost of the acquirer’s existing intangible assets. A useful life should be assigned to the defensive intangible asset in accordance with paragraph 11 of FAS 142. The useful life would be estimated to be the period of time that the entity would receive indirect cash flows from other assets because they kept their competitors from using the asset. In other words, how long will the entity benefit from acquiring the alternative technology?
EITF 08-7 includes four examples that illustrate whether an intangible asset is a defensive intangible asset or not. Take a look at the examples if you have questions about the status of any acquired intangibles.
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.