4/19/2023
Intangible
Assets
Philippine Accounting Standards (PAS) 38
Learning Objectives
• Define an intangible asset.
• State the initial measurement of intangible assets that are (a)
externally acquired and (b) internally generated.
• State the subsequent measurement of intangible assets that (a)
have finite useful life and (b) indefinite useful life.
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Objective
PAS 38 prescribes the accounting treatment for
intangible assets that are not dealt with specifically
in another IFRS.
The Standard requires an entity to recognize an
intangible asset if, and only if, certain criteria are
met.
The Standard also specifies how to measure the
carrying amount of intangible assets and requires
certain disclosures regarding intangible assets
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Scope
PAS 38 applies to all intangible assets other than:
• financial assets (see PAS 32 Financial Instruments: Presentation)
• exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation
of Mineral Resources)
• expenditure on the development and extraction of minerals, oil, natural gas,
and similar resources
• intangible assets arising from insurance contracts issued by insurance
companies
• intangible assets covered by another IFRS, such as intangibles held for sale
(PFRS 5 Non-current Assets Held for Sale and Discontinued Operations),
deferred tax assets (PAS 12 Income Taxes), lease assets (PAS 17 Leases),
assets arising from employee benefits (PAS 19 Employee Benefits (2011)), and
goodwill (PFRS 3 Business Combinations).
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Intangible assets
An intangible asset is an identifiable non-monetary
asset without physical substance.
Goodwill acquired in a business combination is outside
the scope of PAS 38 because it is unidentifiable.
Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.
Examples of Intangible Assets
• Computer software • Import quotas
• Patents • Franchises
• Copyrights • Customer or supplier
relationships
• Motion picture films
• Customer loyalty
• Customer lists
• Market share and
• Mortgage servicing
marketing rights
rights
• Fishing licenses 7
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Essential criteria in the
definition of intangible assets
1. Identifiability – separable or arises from
contractual rights
2. Control – power to obtain (or restrict others from
obtaining) the economic benefits from an asset.
3. Future economic benefits – may include revenue
from the sale of products or services, cost savings, or
other benefits resulting from the use of the asset by
the entity.
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Recognition
An intangible asset shall be recognized if management
can demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic
benefits will flow to the entity; and
3. The cost of the asset can be measured reliably.
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Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible
asset is acquired. Intangible assets may be acquired
through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation 10
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Separate acquisition
The cost of a separately acquired intangible asset
comprises:
1. Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts
and rebates; and
2. Any directly attributable cost of preparing the asset
for its intended use.
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Separate acquisition -
Illustration
Royal Company purchased a new trademark and incurred the following
costs:
Purchase price 1,000,000
Non-refundable value added tax 50, 000
Training of personnel on the use of
new trademark 70,000
Research expenditures associated with the
purchase of the new trademark 240,000
Legal cost incurred to register the new trademark 105,000
Administrative salaries 120,000
Required: What is the initial cost of the trademark? Php1,155,000
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Acquisition as part of a business
combination
The cost of intangible asset acquired in a business
combination is its fair value at the acquisition date.
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Acquisition by way of a
government grant
Intangible assets acquired by way of government grant
may be recorded at either:
1. fair value
2. alternatively, at nominal amount or zero, plus
direct costs incurred in preparing the asset for its
intended use
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Exchanges of assets
• If the exchange has commercial substance, the intangible asset is
initially recognized using the following order of priority:
a. Fair value of the asset Given up (Plus cash Paid or minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash Paid or minus cash
received)
• If the exchange has lacks commercial substance, the intangible asset
is initially recognized using (c) above.
• An exchange transaction has a commercial substance if the
expected future cash flows from the asset received significantly differ
from those of the asset given up. 15
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Internally generated intangible
assets
The costs of self-creating an intangible asset are classified
into:
a. Research costs – include costs of searching new knowledge
and identifying and selecting possible alternatives.
b. Development costs – include costs of designing from
selected alternative and using knowledge gained from research.
If an entity cannot identify in which phase a cost is
incurred, the cost is regarded as incurred in research
phase.
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R&D Costs
1. Costs incurred in research phase are expensed
immediately.
2. Costs incurred in development phase are
expensed immediately, unless they meet all of the
following conditions for capitalization:
1. Technical feasibility, 5. Availability of adequate
resources, and
2. Intention to complete,
6. Measured reliably.
3. Ability to use or sell,
4. Probable economic benefits, 17
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R&D Costs
The following are not R&D expenses but rather regular
expenses.
a. Costs incurred during commercial production:
i. Trouble-shooting during commercial production
ii. Periodic or routine design changes to existing products
iii. Modification of design for a specific customer
iv. Design, construction and operation of plant that is feasible for commercial
production
v. Engineering follow through in an early phase of commercial production
vi. Quality control during commercial production
b. Advertising and other marketing expenses
c. Training costs 18
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Items of PPE used in R&D
activities
• If the item of PPE can be used in various R&D activities
or other purposes, the cost of the PPE is capitalized and
depreciated. The amount of depreciation is included as
R&D expense.
• If the item of PPE is can only be used on one specific
R&D project, the cost of the PPE is expensed
immediately in its entirety as R&D expense.
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Items NOT recognized as
intangible assets
The cost of internally generated brands, mastheads,
publishing titles, customer lists, goodwill and items
similar in substance are expensed when incurred.
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Subsequent expenditure
Subsequent expenditures on an intangible asset are
generally recognized as expense.
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Reinstatement of costs in
subsequent period
Expenditure on an intangible item that was initially
recognized as an expense shall not be recognized as part
of the cost of an intangible asset at a later date.
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Subsequent Measurement
After initial recognition, an entity shall choose as its
accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the
intangible asset has an active market.
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Amortization
• Intangible assets with finite useful life are amortized
over the shorter of the asset’s useful life and legal life.
• Intangible assets with indefinite useful life are not
amortized but tested for impairment at least annually.
• The default method of amortization is the straight
line method.
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Amortization - Illustration
On January 1, 2021, Entity A purchases a patent from
Entity B for Php300,000. Entity B, the original owner,
has held the patent for 5 years. Entity A estimates that
the patent has a remaining useful life of 16 years
Required: How much is the carrying amount of the
patent at December 31, 2022?
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Amortization - Illustration
Cost 300,000
Residual Amount -_
Depreciable amount 300,000
Divided by:
(Shorter of useful life and remaining legal life) 15
Annual Amortization Expense 20,000
Cost 300,000
Accumulated Depreciation (20,000 x 2 yrs) (40,000)
Carrying Amount at December 31, 2022 260,000
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Impairment
Intangible Assets are tested for impairment using
PAS 36
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Derecognition
• An intangible asset is derecognized
• when it is disposed of or
• when no future economic benefits are expected from it
• The difference between the carrying amount and the net
disposal proceeds, if any, is recognized as gain or loss
in profit or loss (unless PRFS 16 Leases required
otherwise on a sale and leaseback)
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Disclosures
• useful life or amortization rate
• amortization method
• gross carrying amount
• accumulated amortization and impairment losses
• line items in the income statement in which amortization is included
reconciliation of the carrying amount at the beginning and the end of
the period showing:
• additions (business combinations • reversals of impairments
separately) • amortization foreign exchange
• assets held for sale differences
• retirements and other disposals • other changes
• revaluations
• Impairments 29
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Disclosures
• basis for determining that an intangible has an indefinite
life
• description and carrying amount of individually material
intangible assets
• certain special disclosures about intangible assets acquired
by way of government grants
• information about intangible assets whose title is restricted
• contractual commitments to acquire intangible assets
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Disclosures
Additional disclosures are required about:
• intangible assets carried at revalued amounts
• the amount of research and development expenditure
recognized as an expense in the current period
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