CHAPTER 4

INTANGIBLE ASSETS

Learning Objectives

After studying this chapter, the students should be able to:

1. Define intangible asset.

2. Enumerate and describe the essential criteria in the definition of an intangible asset.
3. Enumerate the criteria for recognition of an intangible asset.
4. Compute the cost of an intangible asset.
5. Enumerate examples of intangible assets.
6. Compute the amortization of an intangible asset.
7. Journalize the transactions related to intangible assets.

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 CHAPTER 4

INTANGIBLE ASSETS

PAS 38, defines an intangible asset as identifiable, non-monetary asset without physical
substance. It has three (3) essential characteristics: identifiability, controllability, and future
economic benefits.

An asset is identifiable if it either:

(a) is separable, i.e., is capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a related
contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or other rights and obligations.

An entity controls an asset if the entity has the power to obtain the future economic benefits
flowing from the underlying resource and to restrict the access of others to those benefits. The
capacity of an entity to control the future economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law.

The future economic benefits flowing from an intangible asset 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. For example, the use of intellectual property in a production process may reduce
future production costs rather than increase future revenues.

Intangible assets are categorized into five (5) and some of it is discussed in the succeeding
sections:

1. Marketing-related intangible assets such as trademarks, brand names, and Internet domain
names.
2. Customer-related intangible assets such as customer lists, order backlogs, and customer
relationships.
3. Artistic-related intangible assets such as items protected by copyright.
4. Contract-based intangible assets such as licenses, franchises, and broadcast rights.
5. Technology-based intangible assets including both patented and unpatented technologies as
well as trade secrets.

RECOGNITION

An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
(b) the cost of the asset can be measured reliably.

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CLASSIFICATION AND PRESENTATION

Intangible assets are presented as one line item under the non-current asset section of the
statement of financial position.

MEASUREMENT

An intangible asset is measured initially at cost. The cost of separately acquired intangible
assets comprises:
(a) Purchase price, including any import duties and nonrefundable purchase taxes, minus
discounts and rebates; and
(b) Directly attributable costs of preparing the asset for use.

The cost of an internally generated intangible asset comprises all directly attributable costs
necessary to create, produce, and prepare the asset to be capable of operating in the manner
intended by management. Examples of directly attributable costs are:
(a) costs of materials and services used or consumed in generating the intangible asset;
(b) costs of employee benefits arising from the generation of the intangible asset;
(c) fees to register a legal right; and
(d) amortization of patents and licenses that are used to generate the intangible asset.

To determine whether the cost incurred internally can be recognized as an intangible asset, it is
important to note whether these costs are incurred in the research phase or the development
phase.

Research is original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding. The standard provides that no intangible
asset arising from research (or from the research phase of an internal project) shall be
recognized. Expenditure on research (or on the research phase of an internal project) shall be
recognized as an expense when it is incurred.

The following are considered research activities:

(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of research findings or other
knowledge;
(c) the search for alternatives for materials, devices, products, processes, systems or services;
and
(d) the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services.

Expenditures incurred during the development phase can be recognized as an intangible asset.
The development phase is the application of research findings or other knowledge to a plan or
design for the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.

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Examples of development activities are:
(a) the design, construction, and testing of pre-production or pre-use prototypes and models;
(b) the design of tools, jigs, molds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production; and
(d) the design, construction, and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.

Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets.

Subsequently, intangible assets are measured using either the cost model or the revaluation
model.

Cost Model

After initial recognition, an intangible asset shall be carried at its cost less any accumulated
amortization and any accumulated impairment losses.

Revaluation Model

After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequently accumulated amortization and any
subsequent accumulated impairment losses.

AMORTIZATION

The depreciable amount of an intangible asset with a finite useful life shall be allocated on a
systematic basis over its useful life. Amortization shall begin when the asset is available for use,
i.e., when it is in the location and condition necessary for it to be capable of operating in the
manner intended by management. Amortization shall cease at the earlier of the date that the asset
is classified as held for sale (or included in a disposal group that is classified as held for sale) by
PFRS 5 and the date that the asset is derecognized.

The amortization method 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.

The amortization charge for each period shall be recognized in profit or loss unless this or
another Standard permits or requires it to be included in the carrying amount of another asset.

An intangible asset with an indefinite useful life shall not be amortized but tested for impairment
annually or whenever there is an indication that it is impaired.
The amortization period and the amortization method for an intangible asset with a finite useful
life shall be reviewed at least at each financial year-end. If the expected useful life of the asset is

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different from previous estimates, the amortization period shall be changed accordingly as a
change in accounting estimate.

Residual Value

The residual value of an intangible asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.

The residual value of an intangible asset with a finite useful life shall be assumed to be zero
unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
(b) there is an active market for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset’s useful life.

Useful life

Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an
entity.

PATENT

A patent is an exclusive right granted by the government that enables the inventor to control the
manufacture, sale, or use of an invention. The Intellectual Property Code of the Philippines
provides that the life of the patent is 20 years. A patent cannot be renewed, but its life can be
extended by application of a related patent containing improvements and changes.

The cost of the patent acquired by purchase includes the purchase price and any directly
attributable expenditure necessary in preparing the asset for its intended use. For an internally
developed patent, its cost includes only the licensing and other related legal fees in securing the
patent rights. Subsequent expenditures to defend the patent are a charge to expense when
incurred.

In the amortization of patent, the following rules shall be observed:

a) The original cost shall be amortized over the legal life or the useful life whichever is
shorter.
b) If a competitive patent is acquired to protect an original patent, the cost of the
competitive patent shall be amortized over the remaining life of the old patent.
c) If a related patent is acquired 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. If no extension, the life of the new patent shall be amortized over its life and the cost
of the old patent is to be amortized over the remainder of its life.

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Illustrative Problem:

On January 3, 2015, Merry Company spent P89, 000 to apply for and obtain a patent on a newly
developed product. The patent had an estimated useful life of 10 years. At the beginning of 2017,
the company spent P16, 000 in successfully prosecuting an attempted infringement of the patent.
At the beginning of 2018, the company purchased for P37, 000 a patent that was expected to
prolong the life of its original patent by five years.

Required:
1. Journal entries to record the transactions above.
2. Presentation in the financial statements in 2015.

Solution:

1. Journal entries:
2015
Jan 1 Patent 89,000
Cash 89,000
To record the patent acquisition.

Dec 31 Amortization- patent (P89,000/10) 8,900

Patent 8,900
To record the patent amortization in 2015.

2016
Dec 31 Amortization- patent 8,900
Patent 8,900
To record the patent amortization in 2016.
2017
Jan 1 Legal fees 16,000
Cash 16,000
To record the patent infringement expenditures.

Dec 31 Amortization- patent 8,900

Patent 8,900
To record the patent amortization in 2017.

2018
Dec 31 Patent 37,000
Cash 37,000
To record the patent infringement expenditures.

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 Dec 31 Amortization- patent* 8,275
Patent 8,275
To record the patent amortization in 2017.

* Cost of original patent P89,000

Amortization for 2015-2017 (P8,900 x 3yrs) 26,700
Carrying value 1/1/2018 62,300
Related patent 37,000
Total 99,300/ 121 1
(10 yrs -3 yrs + 5 yrs)
remaining life
Amortization in 2018 P8,275

2. Presentation in the financial statements in 2015:

2015__
Income statement
General and administrative expenses*:
Amortization- patent P8, 900
Statement of Financial Position
Non-current assets:
Patent, net (P89, 000 – P8,900) P80,100

* Amortization is included in the income statement unless it is included in the valuation

of other assets such as inventory, etc.

COPYRIGHT

An exclusive right granted by the government that permits an author to sell, license, or control
his or her work. Legal life of copyright is during the lifetime plus 50 years after the death of the
author.
The cost of copyright includes all expenses incurred in the production of the work includes those
required to establish or obtain the right. If acquired, its costs include the purchase price plus any
directly attributable cost.

Theoretically, copyright is amortized over its useful life. But in practice, the cost of copyright is
written off against the revenue on the period of the first printing.

Illustrative Problem:

SINE Industries acquired two copyrights during 2015. One copyright related to a textbook that
was developed internally at the cost of P9, 900. This textbook is estimated to have a useful life of
3 years from September 1, 2015, the date it was published. The second copyright (a history
research textbook) was purchased from University Press on December 1, 2015, for P24, 000.
This textbook has an indefinite useful life.

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Required:
1. Journal entries to record the transactions above.
2. Presentation in the financial statements in 2015.

Solution:

1. Journal entries:
2015
Sept 1 Copyright 9,900
Cash 9,900
To record the copyright acquisition.

Dec 1 Copyright 24,000

Cash 24,000
To record the copyright acquisition.

1 Amortization- copyright (P9, 900/3 x 4/12)* 1,100

Copyright 1,100
To record the copyright amortization in 2015.

* The second copyright is not amortized but tested for impairment at least annually. The
amortization of the first copyright is based on the theoretical approach.

2. Presentation in the financial statements in 2015:

Income statement
General and administrative expenses*:
Amortization- copyright P1, 100

Statement of Financial Position

Non-current assets:
Copyright, net (P9, 900 + P24, 000 – P1, 100) P32,800
* Amortization is included in the income statement unless it is included in the valuation
of other assets such as inventory, etc.

FRANCHISE

An exclusive right or privilege received by a business or individual to perform certain functions

or sell certain products or services.

The cost of franchise includes the lump sum payment for the acquisition of the franchise plus
directly attributable costs necessary for its intended use, such as legal fees and expenses incurred

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in connection with the acquisition of the right. Periodic franchise fees paid by the franchisor are
charged to expense when incurred.

If the franchise is granted for a definite period, it is amortized over the useful life or the definite
period whichever is shorter. If the franchise is granted indefinitely, it is not amortized but tested
for impairment at least annually.

Illustrative Problem:

On January 1, 2015, DOR Company purchased a franchise from McDonald Company to sell for
20 years McDonald products for P5, 000,000. The initial franchise fee is payable in cash P500,
000, when the contract is signed and the balance in five equal installments every December 31,
evidenced by a note bearing an interest of 12%. The agreement provides that the franchisor shall
provide the necessary initial services required under a franchise contract. On January 31, 2015,
McDonald Company has substantially performed all the initial services.

Required:

1. Journal entries to record the transactions above.

2. Presentation in the financial statements in 2015.

Solution:

1. Journal entries:

2015
Jan 1 Franchise 5,000,000
Cash 500,000
Note payable 4,500,000
To record the franchise acquisition.

Dec 31 Note payable (P4, 500,000/5) 900,000

Interest expense (P4, 500,000 x 12%) 540,000
Cash 1,440,000
To record the payment of the first installment.

Amortization- franchise (P5, 000,000/20) 250,000

Franchise 250,000
To record the franchise amortization in 2015.

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 2. Presentation in the financial statements in 2015:

2015__
Income statement
General and administrative expenses
Amortization- franchise P250, 000
Statement of Financial Position
Non-current assets:
Franchise, net (P5, 000,000 – P250, 000) P4, 750,000

LEASEHOLD

Leasehold is a right acquired by the lessee by contract of lease to use the specific property owned
by the lessor for a definite period in consideration for a certain sum of money.

The cost of the leasehold is amortized over the life of the lease. If the cost is not substantial, it is
charged to outright expense.

TRADEMARK

A trademark is a distinctive name, symbol, or slogan that distinguishes a product or service from
similar products or services.

The cost of trademark includes filing and legal fees required to establish or obtain the right. If
acquired, its costs include the purchase price plus any directly attributable cost.

Trademark is amortized over its useful life or the legal life whichever is shorter. Considering the
almost automatic renewal of a trademark, an entity may classify a trademark as an intangible
asset with an indefinite life and as such, it is not amortized but tested for impairment annually or
whenever there is an indication that it was impaired.

COMPUTER SOFTWARE

Companies can either purchase computer software or create it. They may purchase or create
software for external or internal use. The cost incurred in creating a computer software product
shall be charged to expenses when incurred until a technical feasibility (completed detailed
program design or working model) has been established for the product.

The amortization method for computer software shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity. If such pattern cannot be
determined reliably, the straight line method is used.

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