ReSA The Review School of Accountancy Tel. No. 735-9807 & 734-3989 inancial Accounting and Reporting C. Uberita/C.Espenilla/G. Macariola An Intangible asset ~ isa long term asset that is non-monetary in nature and without physical existence, dependent on the rights or benefits that possession cours upon the ovwners, It is usually an asset that brings benefits over several accounting periods. The lack of phy: sal existence is not by itself a sufficient criterion 10 distinguish an intangible asset from a tangible asset because muany assets lack physical existence but they are not classified as intangible assets. The non-monetary criterion is equally important because intangible assets are not ‘money or claims to money Wis probable that future economie benefits atributsble to the asset will low to the enterprise b. The gost of the asset can be measured reliably Mentifiable and separable costs. or other values attributable can he defined, identified and reliably ‘measured, Capable of realization or sale separate from the business as a whole. Example ~ product patents, process patent, copyrights, franchises, certain trademarks and branded product names. Mentifiable butt not separable -costs or other values attributable may be defined or identified but usually ‘cannot be reliably measured. Incapable of separation from the business as @ whole. Examples: license, concessions, brand names associated with business names and most trademarks, Nor identifiable and not separable ~ costs or other values cannot usually be defined or identified Examples; goodwill, super earnings, business names and connections and reputations. 2. Measurement of intangibles - Initial Recognition: The intangible asset is initially recognized and recorded at ‘cost. The cost of an identifiable intangible asset ineluds all directly attributable costs incurred to develop ‘or acquire the asset, plus other inciddenal costs necessity to prepare the asset for its intended use. By purchase ~ the purchase price inclu directly attributable expenditure on prepari include. 8) Cost of emplayee benefits directly ftom bringing the asset to its working condition b)__ Professional fees arising from bringing the asset to its working condition ©) Cost of testing whether the asst is functioning properly. Any trade discounts and rebates are dedueted in arriving atthe cost. 1y import duties and non-refundable purchase taxes and any the asset for ir intended use . Directly attributable costs By a deferred plan beyond @ normal eredit terms ~ the éash price equivalents (the cash price or the present or discounted value for a not-interest long tern Viability). The difference of the cash price equivalents and the total amount of payments is interest and recoynized as expense over the term af the credit period. : By the issuance of equity instruments - the fair market value ofthe instru market value of the intangible is, which is equal to the fir market ¥ on the date of acquisition. The fair market By part of a business combination - the value is equal tothe following. + if there isan active market ~ quoted market price which is usually the eurent bid price © Ifthere is no active market ~ the amount, which would have bees paid by the company in an arm's length transaction between krcwledgeable and willing parties (by discounting estimated eash flows from the intangible asst) Ifthe fair market value of the imangible asset in a business combination cannot be measured reliably the asset is not recognized as a separate intangibie but is included within the over-all cast of purchase goodwill. By exchange ~ the cost of the intangible asset is measured at the fair market value unless the transaction lacks commercial substance. Ifthe exchange lacks the necessary commercial substance, the intangible asset is not measured at fair market value but its cost is the carrying value of the asset given up. cea be directly attributed or allocated on a reasonable nd preparing the asset for its intended use The cost Internally generated intangible ~ are the cost the and consistent basis to creating, producing includes the following © cost of materials and services used 0 “onsumed in generating the intangible asset.eSA / Financial Accounting and Reporting. Intangibtes Page 2 of 4 + Salaries and wages and other employment reluied cast of personnel directly engaged in generating the asset © Expenditure that is directly atributabie to generating the asset such as fees to register 2 k and amortization of patents and ficenses that are used to zeactte the asset. + Overhead that are necessary to generate the asset and that can be allocated on a reasonable and consistent basis tothe asset. right Measurement subsequent to acquisition Cost model after initial recognition. she in amortization and accumulated inipaicinent lowes Revaluation model after being its fair vale at the date of revaluation fos ay sbsegi accurnufated impairment losses. le shall be cxeried at its east fess accumulated sset shall be cavtied at a revalued amount, imortization and any nt of an intangible asset should be allocated on a ble assets with a linsted life are ae not amortized but are tested 4, Amortization period the amostizableidepreciable en systematic basts over the best estimate of is useful fie. The inta amortized over their useful lite, The intangsble assets with for ampairment at feast annually. The method of amortization shall roflect de pattern in which he tture economic benelits from the asset are expected to be consuuaed by the entity Ifthe pattem cannot be determine reliably, the straight ine method is asec! The residual vatue uf «my intangible asset shall be resummed t0 he zero, unless a third party cusimtted £9 buy the wianesble asset at the endl of as useful life tion or life of an intangible ‘or unless there ts an active market Amy change 1m thy esivul of amore shontd be treated asa drsge tn este 4. Subsequent cost in relation ta intangible avse's - PAS 3° des aot dest with subsequent expenditure on all intangible asseis eveept for “acquired fn-process rswiech sail developmasst project” acquired separately. oF ina business combination. tn accordane: subsequent expenditure incurred on a recognized intanyible asset crn only be cwwitalized i the expenditure increases the economic benefits of the asset beyond its original assessed standard of performance. This merease standard of performance includes extension af useful lie and increase in revenue capacity of the intangible asset Any other subsequent costs expendinize should be recognizst as va expense inthe period incurred For a Process research and development project that is acquire shall ire distinguished into those that are research and those that are development. Only developessat costs sual be capitalized 5. Shecific guidelines on specific intangibiey Parem- an exclusive right granted by U nen, to an inveator enabling him tw control the smutacture, sale or other use of his ‘periad of time The cost of a purchased patent should be amortized aver is legal life 20 years) or useful life whichever is shorter. ‘The cost of a developed patent (the cost should include only the licensing and other related legal fees in securing the patent rights) should be assorted the ster of the legal life or useful ie HF a competitive patent was acquired 9 protect the oll grent, the competitive patent. should be amortized over the remaining life of He elf pate 's and other cows of suecess filly presceut aan expense. Any cast of Hs outright as an expense including the wamorized Cs 95 Ifa new patent negates the old patents value, the evst of the new patent can be made for addi tunamortized cost of the vid however, must business enterprises rely on the conserva constraint and immediately write-off the unaenentized cost of the old pate or defending a patent should be charged ‘on patent should also be charged stom Copyright ~ exclusive rig to the author, composer or artist et publish. sell or otherwise henctit fram his literacy musical and artistic work, bling to The costs (the expenses incurred in the production of the ss including those required to establish or ‘obtain the right) should he amortized over the peviel ot expected to provide a revenue or legal whichever is shorter. However, ifrevenucy ars cy.ectes! to be received for an indefinite period of time and renewal and registration can be dane wish >sinianal efTont srl east it should nat he amortized but ‘should however be reviewed for impairment. etch sept fae Franchise ~ an exclusive right yranted hy the franchisor (govenimien! or private companies) to a franchisce to.use the property or the rights (irademark, patent and process of the ‘The cost ofthe franchise should be sheuld be amortized for impairment a. If the franchise has a definite periat ~ a shoul ts amortized ever the definite period (not exceeding 20 years) or useful life whichever is shores b. Uf the franchise has an indefinite life i 1s rot ams impairment at each reporting dats chy should however be reviewed for Resa ‘The Review Schoo! of Accountancy ‘BTel. No. 735-9807 & 734-3989ReS-4/ Financial Accounting and Reporting. Intangittes Page 3 of 4 TrademarWtrade name/brand namie 1s 2 symbol, sign, slogan of name use to mark # product 10 distinguish it from other product, Ihe sos of the intangible should include a. When purchased -the purchai 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 The legal life of « trademark or trarke name or brand name is 10 years and mavhe renewed for periods of 10 years cach -RA, No. 8293). The cost ofa trademark ty not amortized ut subject 10 test of impairment at least anvaually ax et result ofthe almost automatic renewal. Trademark may be properly classified ax an maanerle asset with an mdefinte life. However, if its life is no longer considered mdsfinite, it should he amortized over its remaining ssf life Zo0uwil Only purchased goodwill (extemal) should be recognized as an asset. Developed (internal) goodwill should be charged outright as an expense, Subsequent costs related to the goodwill should be charged immediately against income. ‘The €ost of goodwill is determined by the following computations 3, Acquisition cost less the fair market value of net asset aequited bh Purchase ofaverage exeess eamings: average earnings ~ normal earnings x number of years ©. Capitalization of average excess earnings: average eamings— normal earings f capita apitalization of average earnings: averny «capitalization rate ~ net assets a The cost of goodwill is not amortized because is useful life is indefinite. However, goodwill shall be {ested for impairment at Jeast annually or mote frequently if events ar changes in circumstances indicate a possible impairment The amount of goodwill impairment is determined by comparing the recoverable amount for the eash- ing unit (CCU) to which the goodwill belongs against the carrying value of the cash-generating Lit to whieh the goodwill belongs # I the recoverable amount of the CGU exceeds the carrying value of the CGU, the COU and the goodwill allocated to that unit shall be regarded as not impaired + IF the carrying amount of the CG) exceeds the recoverable amount of the unit, the company must recognize an impairment loss Research ~ an activity undertaken 10 discover ree knowledge that wil be useful in devetoping new product ‘oF that will resalt insignificant improvement of existing product. Examples of these are: 1. laboratory research aimed at obtaining o discovering new knowledge 2! searching for application of research findings and other knowledge 3. coneeptual formulation and design of passible product or process altemative, and ‘4. testing in search for product or process ternative Development: is the application of research ndings or other Knowledge to a plan or design for the production of new or substantially improsed material, device, product, process, system, and prior to the Commencement of commercial production Examples of theve ae: 1 design, construction and esting of pre-production provotype and model 2. desien of tools, js, molds and dies involving new technology 3. design, constraction and operation of pilot plant that is not ofa scale economically feasible to the enterprise for commercial productions, and 4. design, construction and testing of achoscn altemative for new or improved product or process. The standard allows recognition of an intangible asset during the development phase, provided the ‘enterprise can demonstrat all the fellowing: a Technical feasibility of completing naible asset so that it will be available for use or sale 1b. Its intention to complete the intangible asset and either use it or sel it Is ability to use or sel the intangible asset 4d. The mechanism by which the intangible wit! generate probable future economic henefits. ‘e,The availability of adequate technical. financial and other resources to complete the development and to use or sell the f. The emtity’s ability to reli expenditure attributable Jo the intanible asset during its development. W.the-compuny cannot distinguish the research phase from the development phase, the expenditure as if twas inthe research pluase only Internally Developed Computer Software- the cost incurred on the rescarch stage in ereating the software should be charged outright to expense when incurred until a technological fessibiity has been established for the product. Technological feasibility is established when a company has produced either a detailed program design of the sofiware ors working model After establishing trehnotogical Jeanrility the east ReSA The Review Schoo! af Accountancy ‘BTel. No. 735-9807 & 734-3989ReSiA/ Financial. Purchased Software i Pages of 4 Accounting and Reporting Intangibles. cathe cost tn produce the be capitalized should include coding and testing costs of of sofeware 10 product masters. ‘rhe cost of the computer softwar economic benefits are expected to be cousummest P reliably the straight-ine method ts use the asset's future the pater i which se xt be determined atwuld be allocated bose 01 1 such pattern cannot should be treated as an myentory hers -recagnized as ed as par of the n intangible asset a. Ifitis for sale hardware and capitalized as bb. itis held for licensing or rental 10 of efit is for used and integral part te the hardware ~ i property, plant and equipment Impairment of Intangible Assets Other Tha a. Subject to amortization bb. Not subject to amortization . Ifthe recoverable amount of an intangible »St1 is be amount, the carrying amount of the intangible asset should be reduced to its recayctable amount npairment los ied sntangite asset, it is recognized # pr “d intangible asset. the carrying value B Test the existing revaluation surplus is the meas ss than ns eaeryi the reduetion i fit or loss. rased on the revalued ure of IF'there is an impairment loss on a non-reval If there is an impairment foss on a revaluc amount less the fair value of the intangible impairment loss ~ related to the acavisition of a business eer east to sell and valu 1e in use) of each Impairment of Goodwi ‘a. Compute the recoverable value (higher of the fair vt reporting unit 10 which soodviil has been ass! tie act canying value of the assets (including je assumed not £0 be impaired and no wit ences Ne oobi b. If recoverable amount of the report goodwill) and liabilities of the report Jmpairiment loss is recvgnized fess then the net carrying amount of the assets and ‘oF the goodwill is computed. Ifthe recoverable amount of the reporting unit abilities of the reporting unit, then a new fai v Reversal of impairment loss for an Individual Asset The increased carrying amount of an asset over than goodwill auebutable toa reversal of an impairment ee aettnot exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss bec recognizes tor the 3+ ct it petor years ‘other than goadwill shat! be recognized immediately in profit Sd ansanint 4 reversal of impairment loss on a revalued assct is heeding tevalvation surplus. However, to the extent that an isly recognized in profit or foss, a reversal of that A reversal of an impairment foss for an ass for loss, unless the asset 1s carried at reval credited directly to equity under the impairment loss on the same revalued asset 5 pre impairment loss is also recognized in profit or loss. Wvements are alieration or modifications on the leased property made by the lessee, such lightning installations, major repairs or ‘sed ete, made on leased assets, Leasehold Impro as buildings. walkways. pavenen replacements. partitions, eabinets.sheive Leasehold improvements are generally ckesified a& papers: plant art & itaprovemente should be depreciated ever the shorts af the hte of the improvements oF the life of the leased asset If the lease contract contains a provision for ai ention tv reskw and the hikelihood of the renewal option is highly probable. the cost of the Keasshold iuproverert» sbonld be depreciated the shorter of the life of the improvement and the remaining extended lease term But when the option is uncertain, the cost of Izschold inroverients shuld be depreciate short betwcen he ie ofthe improvements and the eval option landscaping. driveway lipmnent. ‘The cost of leasehold the remaining lease teem, 38 if there wats 10 Ft ResA ‘The Review School uf Accountancy ‘Wel. No. 735-9857 & 734-3988 .ReSA The Review School of Accountancy ‘Bel. No. 735-9807 & 734-3989 . Uberita/C. Expenitia FINANCIAL ACCOUNTING & REPORTING G. Macariola/J. Binaluyo Intangibles On January 1, 2018, M Company acquired an intangible asset from a foreign company. The invoice price of the sible was P10,000,000 subject ta 10% discount if acquired on a cash basis M Company paid 2,000,000 mport duties and professional fees of P100,000 in relation 10 is acquisition. AL what le asset be initially recorded inthe books of M Company” 000,000 &. PI1,000.000 9,100,000 4 PLLtooo00 Mini Corp acquires a patent from Maxi Co. ia exchange for 2.500 shares of Mini Corp.'s PS par value ordinary shares and P85,000 cash, When the paieat was mitially issued to Masi Co., Mini Corp."s shares were selling at P7.30 per share. When Mini Corp, acquired the paient, is shares were selling for P9 a share. Mini Corp. should record the patent at what amount? a PRS.000 ©. P103,750. hb P9730. 4. P107,500 Michelle Compa 2,000,000, for cash of PS00,000 and the rights to distribute the same product value of the rights received is P1,700,000, The exchange is considered having the necessary commercial substance. At the time oF exchange, the intengible asset should be initially recorded by Michelle Company at a PILS00.000 «©, P2,000,000 b. PITo0.000 a. P2.200,000 ‘On January 1, 2018, Style Company acquires 160% interest in the equity of Splendor Company. paying eash consideration of P1.030,000. On this date, the share capital and reserves of Splendor Company are P200,000 nd P400,000 respectively. On acquisition dite, Splendor Company's water processing plant, with a carrying value of P440,000 is valued independestly st P60P,000. Also, Splendor Company hold and exclusive water rights from the government tor a 25-year concession. Based on the discounted cash Row method, the fair value fof this water rights is assessed at PAO0,000. Income Las rate is applies 19 asset recognition and value adjustments in a business combination. What isthe amount goodwill on combination? a none fe, P20,000 b. P1000 4. P30,000 Pirate Company purchased a patent on Januaty 1.011 for PA28.490. "The pa being amortized over its remaining legal life of 15 years expiring on January 1, 2026, On Jamuary 1, 2014, Pirate determined that the ‘economig benefits of the patent would not last longer than 10 years from the date of acquisition. What amount should be reported in the balance sheet as patent, ne: of aceumiulated amortization at December 31, 20177 a. P146.880 , P244,800 b. Pi9s.840 4d. 302.400 Morgan Corporation incurred 298.350 of rescareiv and development cost to develop a product for which a patent was granted on January 2. 2011, Legal tees and other costs associated with registration of the patent totaled P109.200, On January 2, 2017, Morgan Company paid P90,000 for legal fees for the litigation put up against the patent ‘The patent his a useful life of 20 years. The final verdict was known only on duly 1, 2017 in favor of Morgan Company. What total amount of expense Morgan Company should repott in its 2017 profit fr loss related to the patent? a P5460 Posa6o b. Poo.on0 4. P6840 Joyful Company made the following cash expenditures during 2019 related to the R&D of a new industria plastic R&D salaries and wages 10,000,000 ‘ R&D supplies consumed 3,000,000" Purchased of new R&D equipment on Jan 1, 218 5,000,000 ing and legal costs incurred on Now. 100.000 Payments to others for'services performed in connetion with R&D activities 1,200,000 37 1 3 “These costs were incurred evenly throughout 2019. Pave Loh Joyful Company is able to demonstrate that a as an intangible asset. The project rest 1, 2019, the production process met the eriteri ina new product to be manufactured in 2020, A,ReSA/ Financial Accounting and keg: 9 go mee Intangibles ‘was filed with the Philippine Patent Orfice The equipment purchased will be employed im other projects. Depreciation on the equipment for 2019 was P5600 Question 1: What amount of R&D esponse should Joyful Company repor in year 2019? . P7.450,000 0,000 ” . P14,800.000 Question 2- What amount of R&D expense shou'd “eysui Company report in year 20197 & None ©? 7430,000 b. P7,380.000 & P14,800,000, Advance Technology Company has «6 projec*s andes development, and the amounts capitalized as assets as at the end of the prior fi ; —Pevisct Project B Deetred development costs Prn.o60 0H0 Pi5.000.000 For the current financial year ended December 1.2918 develepment costs of P3.000.000 and P4.000.000 were ineurted for Project A sind Project B respesussh,. At the end ofthe curent financial year the directors wssessed amd concluded thut the mnacket sor the pundves under Project As unlikely to exist and therefore not Feasible to continue with ts development. For Pruyect R. the enteria For capitalization continue to be met Estimates made tor this project are ss follows. Revenue fom sale of products, P38,000,000; Further development costs to complete prayers, ®9.(:KL000, Related production costs oF products, P12,000,000 and directly attributable selling and idministrative costs, P4.000,600. What total amount of impairment joss on project B should the company recoynized? a None ©. 4,000,000 b. 3,000,000 4. P7.000,000 As of December 31, 2016, the canying value of Antonio Development costs was P8:400,000. Commercial production of the product under deveiapment pega in year 2016, The economic life of the product was 6 years, as of December 31, 2016. Based ov estiaates uxt eevoverable amount, an impairment loss of P2.400,000 was recognized in December 31,2016. At of financial year 2018, further development cost of 3,000,000 was incurred and capitalized! Une directors estisated that the circumstances that led to the write= down for impairment ta the 2016 no loaer-estst mn the current year 2018 ' Question | What is the carrying value of the develupient asset as of December 31, 2018 a PS,000,000 © P8.800,000 b. 7,000,000 4 P11.000.000 Question 2: What is the net effect in the profit or Woss of 2048 in relation so the development cost? a. None < P2,000,000 b.(P200,000) 4. (P2.200,000) $109,000 in 2016 and P).100,000 in 2017) to develop a computer software product. PS00,000 of this amout’ was expended hefore technological feasibility was established in carly 2017. The product will earn future revenues 1 4,000,000 over its S-year life, as follows: 2017 1,000,000, 2018 ~ P1,000,000: 2019 - PS90.000: 2020 - PXO0,000, and 2021 -P400,000, rack Company incurred 21.505.C ‘What portion of the P 1,500,000 computer software costs should he expensed in 2017 a, 230,000 eB 389,000) b. 300,000 P1.190.000 1018, Lindt Ine. purchased a tradcaurk with a cost 9.40000. The trademark is classified as an V1 WIR and December 31, 2019. the following information is On June 2, indefinite-life intangible asset. At Iecember available for impairment testing 12 31.2018 1232019 Fair value less costs t0 sel 9.115.000 9,030,000 Value-in-use 9,370,000 9,550,000 The 2019income statement will report ‘a. no Impairment Loss of Recovery of Iniairiaent ¢ Recovery of Impairment of P 70,000 bb. Impairment Loss of P70.000 Recovery of Impsimen of 180.000 374 Page 20/3 Ee Tae Review Schoo! of Accountancy BTel. No 735-9807 & 734-3989ReSA/ Financial Accounting i Reporting Insangibl Ting Company has recognized two intangible vec: at their revalued amount, As of December 31, 2017, 1 carrying amounts are as follows: Asset A Asset B Ac valuation 20,000,000 P15,000,000 Remaining revaluation surplus 6,000,000 none Revaluation decrease recognized as an expense none (5,000,000) As of January 1, 2018, the assets were revalued by reference to their current market prices. The market values (of Asset A and Asset B on this date were P12,900,000 and P24,000,000. As at this date both assets have a ful life of ten years, ‘The assets ure being amortized on the straight-line method, L. What amount of gain or jossthat Jing Company recognize in relation to Asset A on January 1, a. None «, P3,000,000 b. P2,000,000 4, 5.000.000 Question 2: What amount of gain of loss should Jing Company’ recognize in relation to Asset B on January 1, 2018 a None P3,000,000 4, 5,000,000 Service Company markets products 10 real estate agents and to new homeowners, purchased a customers list for 600,000 on January 2, 2016. Because of turnover among realestate agents and because new homeowners radually become established homeowner, thelist is expected to have economic value for only four years. The company uses the siright-line method of amortizauion, On January 2017, the customer list was tested for cypairmient as a result of st 1 trndowsm i the elaiestate market in the area. 1s estimated that the customer list will generate future cash tows of P140,000, P120,000 and P80,000 in 2017, 2018 and 2019 respectively. and thatthe fair value (Iess costs to sell} of the customer list is P240,000, The market rate of inteceston this date is 8%. What amount of impairment loss on customer lists should Service Company recognize? a. none ©, P192.300 b, Pis3.983 4. 450,000 Maatin Company acquired Jenny Company on January 1, 2018, ‘The acquisition cost exceeds the market value of the net assets of Jenny Co, by 200,000, ‘The excess was attributed to an unidentifiable intangible asset that twas assigned (0 Jenny's separate reporting unit. uring the current year, 2018, the seperate reporting unit Feporied revenues of PS00,000. Publicly teed canpanies with operations similar to those of the separate reporting unit of Jenny had price to revenve ratios averaging 1.70, The fair values and book values ofthe assets and liabilities of the unit are as follows Bo a Values Idemifiable assets , 950,000 1,900,000 Goodwill 500,000 ” Liabilities 650,000 650,000, ‘What is the amount of goodwill impairment should Fenny ize baved on the above information? a. none , ¥390.000 b. 380,000 500,000 6 January 1, 2014, Japan Company signed a 8-year lease For warehouse space. The lease contract contains @ fenewal option for an additional 8-year period on January 1. 2017. On January 2. 2016. Japan completed TAbstantal improvements 10 the warehouse The cost of these improvements was 420,000 with an estimated useful life of 15 years Ifthe likelihood of renewal is highly probable, what is the carrying value of the improvement on December 31, 2018 statement of Financial position? a. P330,000 © 360,000 b, 336,000 368,000 sof ReSA ‘The Review School of Accountancy ‘Tel, No. 735-9807 & 734-3989