PRACTICAL UC EspenillaG, Macariola INTANGIBLE LON OF THE ACCOUNTING SESNDARDS ion An intangible iy recognized it, and only if 8. Is probable that future economic benefits attributable to the asset will flow to the enterprise b. The cost of the asset can be measured reliably Identifiable Intangibles - can be identified a part from other assets of the enterprise and can be sold Separately. Example ~ patents, copyrights, customer lists, trademarks or trade names and franchises. Unidentifiable intangibles ~ assets that cannot be sold, transferred, licensed, rented or exchange separately. Example ~ goodwill 2. Measurement of intangibles - Initial Recognition: The intangible asst is initially recognized at historical cost, The historical cost of an intangible is its fair value which is equal to its cash price equivalents. The cash price equivalent is determined by the following ways of acquiting an intangible asset By purchase ~ the purchase price and any import duties and non-refundable purchase taves and any directly attributable expenditure on preparing the asset for its intended use such as professional fees for legal services, By a deferred plan beyond n normal credit terms ~ the eash price equivatents (the cash price or the present or discounted value for a non-interest long term liability). "The difference of the cash prive equivalents and the total amount of payments is interest and recognized as expenise over the term of the credit period, By the issuance of equity instruments ~ the fair market value of the instruments, which is equal to the fair ‘market value of the intangible. By part of a business combination ~ the fair market value on the date of acquisition. The fait market Value is equal to the following. ‘© i'there is an active market ~ quoted market price which is usually the current bid price. ‘© there is no active market ~ the amount, which would have been paid by the company in an arm's length transaetion between knowledgeable and willing parties (by discounting estimated cash flows from the intangible asset). If the fair market value of the intangible asset in a business combination cannot be measured reliably, the asset is mot recognized as a separate intangible but is included within the over-all cost of purchase goodwill, By goverament grant it is recorded at the fair value or nominal value of the asset. The allemative course that is sometimes followed is to record both asset and grant at nominal valve. Note that the standard does not prescribe a preference. Accordingly. reporting entities with such grants are given recording the grant at fair value or at nominal value, hoice of By exchange ~ the cost of the intangible asset is measured at the fait market value unless the transaction facks commercial substance. If the exchange lacks the necessary commercial substance, the intangible asset is not measured at fair market value but the carrying value of the asset given up. Internally generated intangible are the cost that can be directly attributed or allocated on a reasonable and consistent basis to creating, producing and preparing the asset for its intended use. The includes the follow ing: © cost of materials und services used or consumed in genera iz the intangible asset. * Salaries and wages and other employment related cost of personne! directly engaged in generating the asset. © Expenditure that is directly attributable to generating the and amortization of patents and licenses that are used to generate the asset such as fees to register a legal right ‘+ Overhead that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis to the asset. 3. Measurement subsequent to acquisition: Cost model — after initial recognition, the intangible shall be carried at its cost less accumulated amortization and accumulated impairment losses.SAY PRACTICAL ACCOUNTING I- Intangible 4 beste RE (on, an Tnlangible Asser shall be carried al A Fevalued amount, he date of revaluation less uny subsequent accumulated amortization and any Amortization period —the amortizable/depreciable amount of an intangible asset should be allocated an @ systematic basis over the best estimate of its useful life. The intangible assets with a limited life are amortized over their uselul fife. The intangible assets with indefinite Ife are not amortized but are tested fir impairment at feast annually. The method of amortization shall reflect the pattern in which the future ‘economic benefits from the asset are expected to be consumed by the entity, I the pattern eannot be detemmine rehably, the straight line method is used The residual value of an intangible usset shull be presumed to be zero, unless a third purty is committed to buy the intangible asset atte end of ts useful life (oF unless here Ws an active market, Any change in the methud of amorticalion oF Wife of ar imansible should be treated us a change in estimate, ‘Speeific guidelines on specific intangibles: Patent an exclusive right granted by the government to an inventor enabling him to control the manufacture, sale or other use of his invention fora specitied period of time. ‘The cost of a purchased patent should be amortized over its legal life (20 years) or useful tie whichever is shorter ‘The cost of a developed patent (the cost should include only the Ticensing and other related legal fees in securing the patent rights) should be amortized the shorter of the legal life or useful I If a competitive patent was acquired 1 protect the old patent, the competitive pa amortized over the remaining life of the old patent, Legal fees and other costs of successfully prosecuting or defending a patent should be charged successful litigation on patent should also be charged as an expense including the unamortized cost of the patent Fa new patent negates the old patent's value, the cost of the new patent can be made for adding the unamontized cost of the old patent, however. most business enterprises rely on the conservatism constraint and immediately write-off the unamortized cost of the old patent. should be Copyright — exclusive right granted by the government to the author. composer or artist enabling to publish, sell or otherwise benefit from his literacy, musical and artistic work. . ‘The costs (the expenses incurred in the production of the work including those required to establish or ‘obtain the right) should be amortized over the period itis expected to provide a revenue of legal lite whichever is shorter However, if revenues are expected to be received for an indefinite period oF time land renewal and registration can be done with minimal effort and eost, it should not be amortized but should however be reviewed for impairment at each reporting date Franchise - an exclusive right granted by the franchisor (government or private companies) fo @ franchisee to use the property or the rights (trademark, patent and process of the franchisor). ‘The cost ofthe franchise should be should be amortized or should be reviewed at each ceporting period for impairment a. If the franchise has a definite period — it should be amortized over the definite period (not exceeding 20 years) of usefl life whichever is shorter. b. Ifthe franchise has an indefinite life ~ it is not amortize but should however be reviewed for impairment at each reporting date. ‘Trademark/trade name/brand name is a symbol, sign, slogan or name use to mark a product to distinguish it from other products. The cost of te intangible should include ‘a, When purchased -the purchase price or the eash price equivalents, b, When developed -the expenditures required to establish including filing fees, registry fees and other expenses incurred in securing the trademark, ee ee oe The legal life of a trademark or trade name or brand name is 10 years and maybe renewed for perio of lyn cork” KA. Na 320). Toe onl ofa rodeumnk aeons ne test of impairment atleast annually as a result ofthe almost antomaiic renewal Trademark may be priv clooiid x anisoogite see witha indent if: omcoor ita lpk re tone, considered iidfnite, should be amortized wver its remaining usid life Goodwill: ‘Only a purchased goodwill (external) should be recognized as an asset, Gi joodwill generated internally Cnherent goodwill ) should be charged outright as an expense. Subsequent aoa reed a ke coil should be charged immediatly against income, The cost of purchased yoodlll terme following computations: 7 ye bye ion con less the fir market value of et asset acquired b. Purchase of average excess earinas average earnings ~ normal earnings x numberof yearaSAL PRICTICAL ACCOUNTING 1: Imunglbles 6. Captalization of averaye exes earnings averag hee Pane Sob wnings 198 F eapitalization rate Chpitalization of average earnings: average earnings + capitalization rate net unset The cost of yoodwill s not amortized because its useful fife is indefinite, However, goodwill shall be tested for impairment af least annually or mute frequently sf events or changes in circumstances indicate 4 possible impairinent ‘The amount of goodwill impairment is det generating unit (CGU) to which 10 hich the woodwill belangs, # If the recoverable amount of the CGU exceeds the carrying value of the CGU, the CGU and the woodwill allocated to tua unit shall be reyarded as not impuired. © IF the carrying, amount of the CL exeeeds the recoverable amount of the uni recognize an 1 lon ined by comparing the recoverable amount for the cash- We yowxtwill belongs against the carrying value of the cash-yenerat the company must Research an activity undertaken fo discover new knowledge that will be useful in developing new product ‘or that will result in sipnificant impravement of existing. product, Examples of these are: laboratory tor discovering new knowledye, semiching for application of research Findings and other knowledge; conceptual formulation and design of possible product or process alternative and; testing in search for product oF process alternative, Development is the application of rewatch Findings oF other knowledge to a plan or design for the production of new or substantially improved material, device, product, process, system, and prior to the ‘commencement of commertsal production. Examples of these are: a) design, construction and testing of pre-production prototype and inode; b) design of tools, jigs. molds and dies involving new technology, €) design, construction and operation of a pilot plant that is not of a scale economically feasible to the prise for commercial production, and d) desigh, construction and testing of 4 chosen alternative for new oF improved product or process The standard allows recognition of an intangible asset during the development phase, provided the enterprise carn demonstrate al the following: 44. Technical feasibility of completing the intangible asset so that it will be available for use or sale b. Its intention 1 complete the intangible asset and ether use it or sell it Its ability to use or sell the intangible aset d.The mechanisin by which the intangible will generate probable future economic benefits fe. The availability of adequate (echnical, financial and usher resources to complete the development and to use or sell the intangible ase, and f. The entity's ability o reliably measure the expenditure attributable to the intangible asset during its development. Uthe company cannoy distinguish the research phase from the development phase, the company treats the expunditure asi. was ncurred inthe research phase only. Internally Developed Computer Software: the cost incurred on the research stage in creating the software should be charged outright to expense when incurred until a technological feasibility has been established for the product, Technological feasibifity is established when a company has produced either a detailed program design of the software or a working model. After establishing technological feasibility, the cost of software 19 be capitalized should Include the cows of coding and testing and the cost to produce the product masters. ‘The cost of the computer software should be allocated base on the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If such patter canni mit reliably, the straight-line method is used, = ee Purchased Software: a. If itis for sale ~ should be treated as an inventory b. IF itis held for licensing or rental to others - recognized as an intangible asset © Ith efor ned and integra pt w the hardware weed ve ae ee frivar pte’ een [ition beet 7. Impairment of intangible Assets Other Than Goodwill: a. Subject to amortization b. Not subject to amortization Ifthe recoverable amount of an intangible asset is less than its c ptangible asset should be reduced to ity recoverable a et ane int, the reduction is an impairment loss.