College of Accounting Education

3/F F. Facundo Hall, B & E Bldg.

Matina, Davao City Philippines
Phone No.: (082) 305-0645

SUBSTANTIVE TEST FOR INTANGIBLES

Definitions

Intangible asset An identifiable nonmonetary asset without physical substance.

The systematic allocation of the depreciable amount of an intangible asset over
Amortization
its useful life.
The amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or
Cost
construction, or, when applicable, the amount attributed to that asset when
initially recognized in accordance with the specific requirements of other PFRSs.
The amount for which that asset could be exchanged between knowledgeable,
Fair value
willing parties in an arm’s length transaction.
Money held and assets to be received in fixed or determinable amounts of
Monetary assets
money.
Original and planned investigation undertaken with the prospect of gaining new
Research
scientific or technical knowledge and understanding.
The application of research findings or other knowledge to a plan or design for
Development the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.

Two important aspects of the definition of an Intangible Asset are:

I. Identifiability – Identifiable means

(a) Is separable, it 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, asset or
liability OR

(b) Arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.

II. Inherent characteristics of assets are:

(a) Control - 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.

(b) Future Economic Benefits - 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.

(c) Cost – An asset shall only be recognized if its cost or value can be measured reliably.
Recognition and Initial Measurement

➢ An enterprise to recognize an intangible asset, whether purchased or self-created AT COST if, and
only if:

• It is probable that the future economic benefits that are attributable to the asset will flow to the
enterprise; and
• The cost of the asset can be measured reliably.

Initial Measurement and Subsequent Expenditures

➢ Intangible assets are initially measured at cost.

➢ Subsequent expenditure on an intangible asset after its purchase or completion should be
recognized as an expense when it is incurred
➢ However in very rare cases that it is probable that this expenditure will enable the asset to
generate future economic benefits in excess of its originally assessed standard of performance
and the expenditure can be measured and attributed to the asset reliably.
Measurement Subsequent to Acquisition

Cost model. After initial recognition the benchmark treatment is that intangible assets
should be carried at cost less any amortization and impairment losses.

Revaluation model. Intangible assets may be carried at a revalued amount (based on

fair value) less any subsequent amortization and impairment losses only if fair value can
be determined by reference to an active market. Such active markets are expected to be
uncommon for intangible assets.

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

Classification of Intangible Assets Based on Useful Life

Intangible assets are classified as:

• Indefinite life: No foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.
• Finite life: A limited period of benefit to the entity.

Measurement Subsequent to Acquisition of Intangible Assets with Finite Lives

The cost less residual value of an intangible asset with a finite useful life should be amortized over
that life:

• The amortization method should reflect the pattern of benefits.

• If the pattern cannot be determined reliably, amortize by the straight-line method.
• The amortization charge is recognized in profit or loss unless another PFRS requires that it
be included in the cost of another asset.
• The amortization period should be reviewed at least annually.
• The asset should also be assessed for impairment in accordance with PAS 36.

Measurement Subsequent to Acquisition of Intangible Assets with Indefinite Lives

• An intangible asset with an indefinite useful life should not be amortized.

• Its useful life should be reviewed each reporting period to determine whether events and
circumstances continue to support an indefinite useful life assessment for that asset.
If they do not, the change in the useful life assessment from indefinite to finite should be
accounted for as a change in an accounting estimate.
• The asset should also be assessed for impairment in accordance with PAS 36.

Internally Generated Intangible Assets

I. It is sometimes difficult to assess whether an internally generated intangible asset qualifies for
recognition because of problems in

(a) Identifying whether and when there is an identifiable asset that will generate expected future
economic benefits;
(b) Determining the cost of the asset reliably. In some cases, the cost of generating an intangible
asset internally cannot be distinguished from the cost of maintaining or enhancing the entity’s
internally generated goodwill or of running day-to-day operations.

II. To assess whether an internally generated intangible asset meets the criteria for recognition, an
entity classifies the generation of the asset into:

(a) A research phase (b) A development phase

III. If an entity cannot distinguish the research phase from the development phase of an internal project
to create an intangible asset, the entity treats the expenditure on that project as if it were incurred
in the research phase only.

PROBLEM 1

Transactions during 2015 of the newly organized Pink Corporation included the following:

Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete organization
of the corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out pamphlets
and candy to create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and
candy, P5,000.

Apr. 1 Patented a newly developed process with costs as follows:

Legal fees to obtain patent P 429,000

Patent application and licensing fees 63,500
Total P 492,500

It is estimated that in 6 years other companies will have developed improved processes,
making the Pink Corporation process obsolete.

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

May 1 Acquired both a license to use a special type of container and a distinctive trademark to
be printed on the container in exchange for 6,000 shares of Pink’s no-par common stock
selling for P50 per share. The license is worth twice as much as the trademark, both of
which may be used for 6 years.
July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be
developed in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product development totaling
P1,750,000 in 2015.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of patent

2. Cost of licenses

3. Cost of trademark

4. Carrying amount of Intangible Assets

5. Total amount resulting from the foregoing transactions that should be expensed when incurred

PROBLEM 2

On December 31, 2014, Silver Corporation acquired the following three intangible assets:

• A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that the
trademark will be renewed in the future, indefinitely, without problem.

• Goodwill for P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing reporting unit.

• A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years. Because of
market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2015, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.

b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000 per year
for the next 22 years. Book values and fair values of the assets and liabilities of the Hayo Manufacturing
reporting unit are as follows:

Book values Fair values

Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2016 and P80,000 in 2017.

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the appropriate
discount rate for all items is 6%):

1. Total amortization for the year 2015

2. Impairment loss for the year 2015

3. Carrying value of Trademark as of December 31, 2015

4. Carrying value of Goodwill as of December 31, 2015

5. Carrying value of Customer list as of December 31, 2015

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

PROBLEM 3

CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents certain types of air
pollution. Caboom does not manufacture or sell the products and processes it develops; it conducts research
and develops products which it patents, and then assigns the patents to manufacturers on a royalty basis.
The history of Patent No. 112170 is as follows:

Date Activity Cost

2005-2006 Research conducted to develop device P1,259,100

Jan. 2007 Design and construction of a prototype 262,800
Mar. 2007 Testing of models 126,000
Jan. 2008 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2009 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2011 Research aimed at modifying the design of the patented device 129,000
May 2015 Legal fees paid in a successful patent infringement suit against a
competitor 102,000

Caboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2013, it
revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the
cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s
reporting date is December 31, 2015.

Compute the carrying value of Patent No. 112170 on each of the following dates:

1. December 31, 2008

2. December 31, 2012

3. December 31, 2015

PROBLEM 4

BARTOLO COMPANY has provided information on intangible assets as follows:

• A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014. Bartolo estimates
the remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting
records at a net book value of P4,000,000 when Valenzuela sold it to Bartolo.

• During 2015, a franchise was purchased from Delco Company for P960,000. The contract which runs for
10 years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the
franchise for 2015 was P5,000,000. Bartolo takes a full year amortization in the year of purchase.

• The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000

Bartolo estimates that these costs will be recouped by December 31, 2018. The materials and equipment
purchased have no alternative uses.

• On January 1, 2015, because of recent events in the field, Bartolo estimates that the remaining life of the
patent purchased on January 1, 2014 is only 5 years from January 1, 2015.

1. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015?

2. As a result of the facts above, compute the total amount of charges against income for the year ended
December 31, 2015?

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

PROBLEM 5

Brandy Company has two cash generating units. On December 31, 2010, the assets of one cash generating
unit at carrying amount are:

Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation 2,600,000
Patent 850,000
Goodwill 100,000

The accounts receivable are regarded as collectible and the inventory’s fair value less cost to sell is equal to
the carrying amount. The patent has fair value less cost to sell of P750,000.

On December 31, 2010, Brandy Company undertook impairment testing of the cash generating unit and
determined the value in use of the unit at P4,050,000.

Questions:

1. What is the impairment loss of the cash generating unit on December 31, 2010?

2. What is the amount of inventory on December 31, 2010?

3. What is the amount of Accounts Receivable on December 31, 2010?

4. What is the amount of Patents on December 31, 2010?

5. What is the amount of Plant and Equipment, net at December 31, 2010?