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BLUE NOTES
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An intangible asset is an identifiable nonmonetary asset without physical substance. It must be controlled by the entity
as a result of past event and from which future economic benefits are expected to flow to the entity. (PAS 38, par. 8)

Essential Criteria in Intangible Asset Definition

1. Identifiability
An asset is identifiable when:
a. It is separable.
b. It arises from contractual or other legal rights.
 Identifiable Intangible Asset (if acquired through purchase and could be rented or sold separately)
Examples:
a. Patent
b. Copyright
c. Franchise
d. Trademark
e. Lease Rights
f. Computer Software
g. Broadcasting License
h. Airline Right
i. Fishing Right
 Unidentifiable Intangible Asset (if can only be identified with the entity as a whole)
Example:
a. Goodwill
2. Control
It is the power of the entity to obtain the future economic benefits flowing from the intangible asset and
restrict the access of others to those benefits.
Example: Control arising from legal rights such as trademark, copyright or patent
3. Future Economic Benefits
It may include revenue from sale, cost savings and other benefits.
Example: Use of legal right to use a new technology to reduce future production costs

Cost of an Intangible Asset

1. Acquired separately
a. The cost comprises the purchase price, import duties, and nonrefundable purchase taxes and any directly
attributable cost of preparing the asset for its intended use.
b. When payment is deferred beyond normal credit terms, its cost is the cash price equivalent.
2. Acquired as part of Business Combination
a. When the FV of identifiable intangible asset can be measured with sufficient reliability, the cost is based
on its FV on acquisition date
b. When there is an active market, the FV is based on quoted market price/current bid price.
c. When there is no active market, the FV is equal to the amount that would be paid by the entity for the
asset in an arm’s length transaction between knowledgeable and willing parties.
Example: Discounted Net Cash Flows

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3. Acquired by Government Grant(PAS 20)

Example: Airport land rights, licenses to operate radio or television stations, import licenses
a. Fair Value
b. Nominal amount or zero plus any directly attributable expenditure.
4. Internally generated
a. It comprises all directly attributable costs necessary to create, produce or prepare the asset to be capable
of operating it in the manner intended by the management.
Examples:
 Cost of materials and services used or consumed
 Cost of employee benefits
 Registration fee for a legal right
 Amortization of patents or licenses used to generate the asset

Examples of costs excluded in the cost of an intangible asset and expensed when incurred
 Cost of introducing a new product or service, advertising and promotional
 Relocation costs in a new location or with a new class of customers, reorganization costs
 Cost of staff training
 Administration and other general overhead costs
 Cost incurred while an asset has yet to be brought in the manner intended by the management
 Initial operating losses, start up costs

Recognition
1. It is probable that the future economic benefits that are attributable to the asset will flow to the entity.
2. The cost of the intangible asset can be measured reliably.

Initial Measurement
An entity shall measure an intangible asset initially at cost.

Subsequent Measurement
As its accounting policy, an entity shall choose either:
1. Cost model (Cost – Accum. Amortization – Accum. Impairment Losses)
2. Revaluation model (Revalued Amount – Subsequent Accum. Amortization – Subsequent Accum. Impairment
Losses)
Note: An intangible asset can only be carried at revalued amount if there is an active market for the asset.

Treatment of subsequent expenditure

General Rule : A subsequent expenditure on an intangible asset shall be recognized as an expense.
Exception : A subsequent expenditure may be capitalized when:
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.

Amortization is the systematic allocation of the depreciable amount of an intangible asset over the asset’s useful life.
1. Method
The amortization method shall reflect the pattern in which the economic benefits from the asset are
consumed. If such pattern cannot be determined reliably, the straight line method is used.
2. Residual Value
General Rule : The residual value of an intangible asset shall be presumed to be zero.

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Exception : a. When at the end of its useful life, there is a committed third party buyer.
b. When at the end of its useful life, there is an active market for its residual value.

Impairment
Impairment of intangible assets is recognized in accordance with PAS 36 on impairment of assets.

Useful Life
1. Factors in determining the useful life
a. Technical, technological and other type of obsolescence
b. Expected action by competitors or potential competitors
c. Expected usage of the asset by the entity
d. Typical product life cycle for the asset
e. Stability of the industry in which the asset operates
f. Level of maintenance expenditure required to obtain the expected future economic benefits from the
asset
g. The useful life of the asset may be dependent on the useful life of other assets of the entity
h. Period of control over the asset and legal or similar limits on the use of the asset
2. Assessment whether:
a. Finite or Limited Life (amortized over their useful life)
b. Indefinite Life (tested for impairment at least annually and whenever there is an indication of impairment)
There is no foreseeable limit to the period over which the asset is expected to generate net cash flows.
Note: The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the period of the
contractual or legal rights.
If the limited term can be renewed, the renewal period shall be included only in cases of renewal by the entity with
insignificant cost.

Derecognition
An intangible asset shall be derecognized from the SFP:
a. On asset disposal
b. When no future economic benefits are expected from its use and disposal
Gain/Loss from derecognition (Net disposal proceeds – CA of asset) shall be recognized as other
income/expense in the income statement.

Disclosures
An entity shall disclose the following for each class of intangible assets, distinguishing between internally generated
intangible assets and other intangible assets.
1. Whether useful lives are indefinite or finite, and if finite, the useful lives or the amortization rate.
2. The amortization method.
3. The gross carrying amount and any accumulated amortization (aggregated with accumulated impairment
losses) at the beginning and end of the period.
4. The line item in the income statement in which any amortization of intangible asset is included.
5. Additions, separately showing those internally generated, those acquired separately and those acquired
through business combination.
6. Intangible assets classified as held for sale in accordance with PFRS 5.
7. Increases and decreases in intangible assets resulting from revaluations.
8. Impairment losses and reversal of impairment losses.
9. Net exchange differences on translation.
10. The carrying amount of intangible asset with indefinite life and the reason supporting the assessment of

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indefinite life.
11. The carrying amount and remaining amortization period of intangible assets that are material to the entity’s
financial statements.
12. The carrying amount of intangible assets whose title is restricted or pledged as collateral security.
13. Contractual commitments for the acquisition of intangible assets.
14. Intangible assets acquired by way of government grant and initially recognized at fair value.
15. The amount of research and development expenditure recognized as expense during the period.

Illustrative Problems
1. Zekoki Company has developed a database of names and addresses of professional people who reach their 25 th
birthdays between the years 2008 and 2014 and intends to exploit this by selling the information to suppliers of
life enhancement products and solutions for junior executives. The company has incurred a total P500,000 to
develop the database.
The company has also incurred a total P800,000 of promoting the databases to vendors of such solutions, such as
adventure holiday companies. The company has also incurred P500,000 losses as there are substantial administrative
costs and no income yet. Zekoki Company intends to capitalize all the costs incurred in relation to the database
promotion and administrative costs.
What amount of intangible asset should Zekoki Company recognize?
Solution: Cost of developing the database 500,000

2. On June 30, 2014, Black Company purchased the net assets of Decker Company. The acquisition resulted in a
purchased goodwill of P1,500,000. During 2014, Black incurred additional costs of developing goodwill: P500,000
for employee training and P250,000 for hiring additional employees.
How much should Black report as goodwill in its December 31, 2014 statement of financial position?
Solution: Purchased goodwill 1,500,000

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