INTANGIBLE ASSETS
Intermediate Accounting 1
INTANGIBLE ASSETS
DEFINITION
Intangible asset — identifiable nonmonetary asset without physical substance.
CHARACTERISTICS
● Identifiability
● Control
● Future Economic Benefits
INTANGIBLE ASSETS
SCOPE
PAS 38 applies to all intangible assets. PAS 38 does not apply to the following:
1. Goodwill acquired in a business combination
2. Financial assets
3. Rights arising from exploration and evaluation assets
4. Deferred taxes
5. Expenditure on the development and extraction of non-regenerative resources
6. Intangible assets held for sale in the ordinary course of business
7. Leases
8. Assets arising from employee benefits
9. Deferred acquisition costs and intangible assets arising from an insurer's contractual rights
under insurance contracts
10. Non-current intangible assets classified as held for sale
INTANGIBLE ASSETS
RECOGNITION
An intangible asset after meeting the definition shall be recognized when:
● It is probable that the future economic benefits that are attributable to the asset will flow to the
entity
● The cost of the intangible asset can be measured reliably.
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
An intangible asset shall be measured INITIALLY at COST. Measurement of cost depends on how
the intangible asset is acquired. It could be acquired through:
A. Separate Acquisition
The cost of a separately acquired intangible asset comprises:
1. Purchase price including import duties and non-refundable purchase taxes after
deducting trade discounts, rebates and other similar discounts
2. Any directly attributable costs necessary to bring the asset for its intended use
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
B. Deferred Settlement Basis
If the payment for an intangible asset is deferred beyond normal credit terms, the cost is the cash price
equivalent. The difference between the cash price and the total payments is recognized as interest expense
over the credit period.
C. Acquisition Through Business Combination
If an intangible asset is acquired in a business combination, the cost of the intangible asset is based on the
fair value on the date of acquisition. The fair value of an intangible asset acquired in a business combination
can be measured with sufficient reliability to be recognized separately from goodwill.
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
D. Acquisition Through Government Grant
● An intangible asset may be acquired by way of a government grant, free of charge or for nominal consideration.
● The intangible asset acquired by way of government grant may be initially recorded at either:
1. Fair value
2. Nominal amount or zero, plus any expenditure that is directly attributable to preparing the asset for its intended use.
E. Exchange
If the exchange has commercial substance, the intangible asset acquired initially measured using the following order of priority:
● Fair value of the asset given up plus cash paid or minus cash received
● Fair value of the asset received
● Carrying amount of asset given up plus cash paid or minus cash received
If the exchange lacks commercial substance, the intangible asset is initially measured at the
● Carrying amount of asset given up plus cash paid or minus cash received
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
D. Internally Generated
Examples of directly attributable costs are:
i. Cost of materials and services used or consumed in generating the intangible asset.
ii. Cost of employee benefits arising from the generation of the intangible asset.
iii. Fees to register a legal right.
iv. Amortization of patents and licenses that are used to generate the intangible asset.
Not components of the cost of an internally generated intangible asset:
v. Selling, administrative and other general overhead, unless directly attributed to the asset.
vi. Clearly identified inefficiencies and initial operating losses incurred before an asset achieves
planned performance.
vii. Expenditure on training staff to operate the asset.
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
D. Internally Generated
Classification of Internally Generated
RESEARCH PHASE — original and planned investigation undertaken with the prospect of gaining
scientific or technical knowledge and understanding. Generally, research costs are EXPENSED.
Research activities include:
i. Laboratory research aimed at discovering or obtaining new knowledge
ii. Searching for application of research finding and other knowledge
iii. Conceptual formulation and design of possible product or process alternatives
iv. Testing in search or evaluation of product or process alternatives
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
D. Internally Generated
Classification of Internally Generated
DEVELOPMENT PHASE — application of research findings or other knowledge to a plan or design for the
production of new or substantially improved material, device, product, process, system or service, prior to the
commencement of commercial production
Capitalization of development costs depends if the entity can demonstrate ALL of the following criteria:
i. The technical feasibility of completing the intangible asset so that it will be available for use or sale.
ii. The intention to complete the intangible asset and use or sell it.
iii. The ability to use or sell the intangible asset.
iv. How the intangible asset will generate probable future economic benefits.
v. Availability of resources or funding to complete development and to use or sell the asset.
vi. The ability to measure reliably the expenditure attributable to the intangible asset during its
development.
INTANGIBLE ASSETS
MEASUREMENT
INITIAL MEASUREMENT
D. Internally Generated
Classification of Internally Generated
Development activities include:
i. Design, construction and testing of preproduction prototypes and models
ii. Design of tools, jigs, molds and dies involving new technology
iii. Design, construction and operation of a pilot plant that is not of scale economically
feasible for commercial production
iv. Design, construction and testing of a chosen alternative for new or improved product or
process
INTANGIBLE ASSETS
MEASUREMENT
SUBSEQUENT MEASUREMENT
After initial recognition, an entity shall choose as its accounting policy either the COST MODEL or
REVALUATION MODEL.
Cost Model
An intangible asset shall be carried at cost, less any accumulated amortization and any
accumulated impairment loss.
Revaluation Model
An intangible asset shall be carried at a revalued amount, less any subsequent amortization and
any subsequent accumulated impairment loss.
AMORTIZATION
DEFINITION
Amortization — systematic allocation of the depreciable amount of an intangible asset over the
asset's useful life.
RULE ON AMORTIZATION
ONLY intangible assets with FINITE OR LIMITED LIFE are amortized over their useful life.
Intangible assets with INDEFINITE LIFE are NOT AMORTIZED but are TESTED FOR
IMPAIRMENT at least annually and whenever there is an indication that the intangible asset may be
impaired.
AMORTIZATION PERIOD
Amortization shall begin when the asset is available for use and ceases when the asset is
derecognized or when classified as held for sale whichever is earlier.
AMORTIZATION
FACTORS OF AMORTIZATION
Amortizable Amount
Cost less residual value
Useful Life
● Finite Useful Life
● Indefinite Useful Life
Residual Value
The residual value of an intangible asset shall be presumed to be zero, except:
1. When a third party is committed to buy the intangible asset at the end of its useful life.
2. When there is an active market for the intangible asset so that its expected residual value can
be measured and it is probable that there will be a market for the asset at the end of its useful
AMORTIZATION
AMORTIZATION METHOD
According to PAS 38, the amortization used shall reflect the pattern in which the asset's future
economic benefits are expected to be consumed by the entity. If that pattern cannot be determined
reliably, the STRAIGHT-LINE METHOD shall be used.
PRESENTATION OF AMORTIZATION
The amortization charge for each period shall be recognized in profit or loss unless amortization is
required to be included in the carrying amount of another asset.
INTANGIBLE ASSET
SUBSEQUENT COSTS ON INTANGIBLE ASSETS
AS A RULE, a subsequent expenditure on an intangible asset shall be recognized as EXPENSE.
Subsequent expenditure may be capitalized or added to the cost of the intangible asset if the
following recognition criteria for an intangible asset are met:
1. It is probable that future economic benefits that are attributable to the subsequent
expenditure will flow to the entity.
2. The subsequent expenditure can be measured reliably.
IMPAIRMENT OF INTANGIBLE ASSETS
● FINITE LIFE — An intangible asset is tested for impairment when impairment indicators are
present.
● INDEFINITE LIFE — An intangible asset is tested for impairment ANNUALLY and when
impairment indicators are present.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
MARKETING-RELATED
A. Trademark
A symbol, sign, slogan or name used to mark a product to distinguish it from other products
which enhance marketability.
A trademark can be:
● Acquired separately
● Internally developed
Under R.A. 8293 or the Intellectual Property Code of the Philippines, the legal life of trademark is 10
years and may be renewed for periods of 10 years each. Accordingly, the cost of trademark is NOT
AMORTIZED but subject to test for impairment at least annually.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
MARKETING-RELATED
B. Masthead
A list, usually found on the editorial page of a newspaper or other periodical, listing the
publisher, editorial board, advertising rates, etc.
● In order to be recognized should be separately purchased
● Internally generated mastheads are expensed outright
● The cost of masthead purchased includes the purchase price and any directly
attributable cost of preparing the asset for its intended use.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
MARKETING-RELATED
C. Website Development Costs
Purpose of the website Capitalize as intangible asset?
Internal YES
External and customers can place orders YES
External and customers cannot place NO
orders
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
MARKETING-RELATED
C. Website Development Costs
Stages of website Treatment of the costs
Planning stage (research stage) Expensed outright
Application and infrastructure stage (development stage) Intangible asset
Graphical design stage (development stage) if all criteria were met
Content development stage (advertising) Expensed outright
Operating stage (subsequent costs) Expensed unless criteria were met
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
CUSTOMER-RELATED
Customer List
A customer database containing the name, contract information, order history and other vital
and social statistics, such as birth, death and even sickness.
● The cost of customer list acquired through purchase includes purchase price and any
directly attributable cost of preparing the asset for its intended use.
● The costs of internally generated customer list are recognized as expenses.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
ARTISTIC-RELATED
Copyright
an exclusive right granted by the government to the author, composer or artist, enabling the
grantee to publish, sell or otherwise benefit from the literary, musical or artistic work.
● The cost assigned to copyright consists of all expenses incurred in the production of the
work including those required to establish or obtain the right.
● Where the copyright is purchased, the cost includes the cash paid, and directly
attributable cost necessary for the intended use.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
CONTRACT-RELATED
A. Franchise
● The cost of the franchise includes the lump sum payment for the franchise and all legal fees and
expenses incurred in connection with the franchise acquisition.
● The lump sum payment is known as the initial franchise fee
● Periodic Franchise Fee — if the franchise agreement requires the franchisee to make periodic
payment to the franchisor based on the franchisee's revenue, such payment is treated as outright
expense.
Amortization of franchise:
● Granted for a definite period
● Granted indefinitely or perpetually
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
CONTRACT-RELATED
B. Leasehold
The right acquired by the lessee by virtue of a contract of lease to use the specific property
owned by the lessor for a definite period of time in consideration for a certain sum of money.
● The cost of leasehold shall be amortized over the life of the lease.
● If the cost is not very substantial, it may be charged to outright expense.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
TECHNOLOGY-RELATED
A. Patent
An exclusive right granted by the government to an inventor enabling him to control the manufacture, sale or other use of
invention for a specified period of time.
A patent can be: R.A. No. 8293, or the Intellectual Property Code of the
● Acquired separately Philippines — the legal life of patent is 20 years from
● Internally developed the date of filing the application.
Amortization period of patent:
● The original cost shall be amortized over the legal life or useful life, whichever is shorter.
● A competitive patent acquired to protect an original patent shall be amortized over the remaining life of the original
patent.
● If a related patent is acquired in order to extend the life of the old patent, the cost of the related patent and any
unamortized cost of the old patent shall be amortized over the extended life.
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
TECHNOLOGY-RELATED
B. Computer Software
A generic term for organized collections of computer data and instructions.
Two major categories:
● System software - provides basic non-specific functions of the computer.
● Application software used by users to accomplish specific tasks.
Classification:
● Integral part of PPE
● Used for licensing or rental to others
● Reproduced from product masters for resale
INTANGIBLE ASSET
MAJOR CATEGORIES OF INTANGIBLE ASSETS
OTHERS
Goodwill
Arises when earnings exceed normal earnings by reason of good name, capable staff and personnel, high credit standing, reputation
for fair dealings, reputation for superior products, favorable location and a list of regular customers.
Only goodwill acquired in a business combination can be capitalized as an intangible asset. Internally developed goodwill is not
recorded.
How to measure goodwill?
● Residual Approach - goodwill is measured by comparing the purchase price for the entity with the net tangible and identifiable
assets, meaning total assets excluding goodwill minus liabilities assumed. (PURCHASE PRICE - FV OF NET ASSETS)
● Direct approach - Under direct approach, goodwill is directly computed as the excess of average earnings over normal
earnings using the following methods:
○ Purchase of excess earnings
○ Capitalization of excess earnings
○ Present value of excess earnings
○ Capitalization of average earnings
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