INTANGIBLE ASSETS (PAS 38)

Chapter Outline
 Definition and common types of intangible assets
 Valuation and costs of intangibles
 Accounting for finite-life intangibles and intangibles with indefinite lives.
 Accounting for patents, copyrights, franchise and licenses, trade names and trademarks,
and start-up costs.
 Accounting for R&D and computer software costs.
 Accounting for goodwill

WHAT IS INTANGIBLE ASSET?

➢ An identifiable nonmonetary asset without physical

substance.

➢ must be controlled by the entity as a result of past event and from which future
economic benefits are expected to flow from the entity.

PPE= assets with physical substance

Intangible Asset= Has no physical substance

ESSENTIAL CRITERIA
✓ Intangible
✓ Identifiability
✓Control
✓ Future economic benefit

IDENTIFIABILITY
✓ Separable - if enterprise could rent, sell, exchange, licensed and transferred, either
individually or together with a related asset or liability.

✓ arises from contractual or other legal rights - regardless of whether these rights are
transferable or separable from the entity or from other rights and obligations. There must be a
contract or legal right that will give rise to the intangible asset.
 CONTROL
✓ Entity was able to enjoy the future economic benefits from the asset and prevent
others from enjoying the same benefits.

(Kapag may control-it is only the entity that can use the asset, no one can use without the
consent of the entity)

✓ Intangible assets’ future economic benefit normally would stem from legal rights that are
enforceable in a court of law

✓ In absence of legal rights, it is more difficult to demonstrate control.

Legal right= registered under your name

FUTURE ECONOMIC BENEFIT

✓ May include revenue from the sale of products or services, cost savings or other benefits
resulting from the use of the intangible asset by the entity.

✓ Requires the exercise of sound judgement based on verifiable information.

Intangible Assets

Assets –

a. with future economic benefits,

b. no physical substance,
c. with high degree of uncertainty concerning the future benefit.

(Judgement is to be made in determining the probability of the occurrence of future economic

benefit)
(That will dictate whether or not to recognize intangible asset)
(Future economic benefit must certainly flow to the entity or highly probable)

Examples of Intangibles:

*Patent *Trademark
*Copyright *Goodwill
*Franchise *Computer software
*Tradenanme
Start-up cost= Expe
 Valuation of Intangibles

* Intangibles are recorded at cost and are also reported at cost at the end of an accounting
period.

*Intangibles with limited life are subject to amortization and possible impairment test.

*Intangibles with indefinite life are only subject to impairment test at least annually.

Subsequent measurement

*Cost model
*Revaluation model- only if there is reliable basis of determining the fair value

PPE= Depreciation
Wasting asset= Depletion
Intangible Asset= Amortization
(Means of systematic Cost allocation over the periods that benefit from the asset)

Costs of Intangibles

*Costs of Intangibles include acquisition costs plus any

other expenditures necessary to make the intangibles ready for the intended uses (i.e.,
purchase price, legal fees, filing fees etc.; not including internal R&D).

Purchase price + Directly attributable cost

*Essentially, the accounting treatment of valuation for intangibles closely parallels that
followed by tangible assets.

Examples

1. Issuance of stock to acquire intangibles.

2. Lump-sum purchase of intangibles. Costs will be allocated in accordance with the fair market value
of each individual intangible.

Intangibles Assets with Finite lives

The costs are subjected to amortization
(a process of cost allocation) over the shorter of the legal or useful life, not to exceed 20
years.
 Amortization of Intangibles

*The impairment test needed only when events indicate that the book value may not be
recoverable.

*Amortization Method: Straight-line method.

(If the entity can determine reliably the pattern of use of the asset the amortization shall be
based on the pattern by which future economic benefit has been exhausted)

*Other method can be applied if it is more appropriate than the S-L method.

*Residual value: Usually zero.

Proforma of Intangibles Assets

Journal Entry:

Amortization Expense xxx

Intangible Asset xxx
(Accumulated Amortization)

(para mapreserve yung original cost ng intangible asset kasi required disclosure kung
magkano yung cost ng intangible asset)

Intangibles Assets
with Indefinite lives

✓ Trade names
✓ Trademarks
✓ Goodwill
✓ in-process Research & Development

 The costs are not subject to amortization.

 Impairment test is required at least annually

1. Patents

*Patent and Trademark Office for a period of 20 years.

 *A patent gives the holder the exclusive right to produce, use and sell a product or process
without interference or infringement from others.

(Patent is registered with the Philippine patent office)

(Legal life of patent= 20 years)

(Kapag nagaamortize ng patent it is shorter between useful life and legal life)

*Cost of patent: If purchased from an inventor, the cost will include the purchase price plus any
legal fees (to successfully protect the patent).

*In addition, any legal fees occur after the acquisition of a patent which successfully defend the right
of the patent should also be capitalized.

(The cost of successful and unsuccessful price of the patent is expensed)

*The cost of a patent should be amortized over the legal life or the useful life, whichever is
shorter.

Internally developed patent= The cost of the patent will be the cost required to register the legal
fees, filling fees together with the drawing required to be filed with the patent office

If purchased- The cost of the patent shall be equal to the purchase price plus directly attributable
cost

*If events indicate the book value of a patent may not be recoverable, an impairment test is required

*If a patent becomes worthless, the net value of the patent should be written off as loss.

(The loss due to write off will be equal to the carrying value of the patent at the date that you deemed
that the patent to be worthless)

*If a patent is internally developed, no cost can be capitalized.

(Cost is only equal to only filling fees, legal fees and drawings required)

*Most of the research and development (R&D) costs are expensed.

2. Copyrights

*A federally granted right to authors, sculptors, painters, and other artists for their creations.
*A copyright is granted for the life of the creator plus 50 years.
(Lifetime+ 50 years mula noong namatay siya)

*It gives the creator and heirs an exclusive right to reproduce and sell the artistic work or published
work.

*If purchased, the cost includes the purchase price plus any legal fees/directly attributable cost.

* If developed by the owner (the creator), no cost can be capitalized/ equal only sa filling or
registration fees.

*Amortization: Straight-line method or a unit-of-production method.

(Amortize the copyright if you believe that the copyright has a limited life)

*Impairment test needed only if events indicate that book value may not be recoverable.

(If the life is so long or indefinite, amortization will not be appropriate but testing for possible
impairment

3. Franchise & License

*A franchise is a contractual agreement under which the franchiser grants the franchisee the right to
sell certain products or service or to use certain trade names or trademarks.

*A license is a contractual agreement between a governmental body (i.e., city, state, etc.) and a
private enterprise to use public property to provide services.

License= ang Franchisor si government kasi ang property involve, public property
Franchise= ang Franchisor private person or private individual, private property involve

Costs: Franchise fees plus any legal fees should be capitalized.

Amortization: over the shorter of the contractual life or the useful life, not to exceed 40 years.

*Impairment test is needed only if events indicate that the book value may not be recoverable.

(continuing franchise fee is already expense incurred lumalabas yung cost lang ng
franchise na irerecord ni franchisee as an intangible asset is limited to initial franchise fee)

4. Trademarks &
Trade Names
*A word, a phrase, or a symbol that distinguishes a product or an enterprise from another (i.e.,
company names, XEROX,…)

* Cost: Similar to that of copyrights.

*Life: register for 10 years life. The registration can be renewed every 10 years for unlimited times.

*Amortization: no amortization necessary.

*Impairment test is required at least annually.

5. Start-Up Costs (including

Organization Costs)

*Start-up costs: Any costs incurred for the preparation of introducing a new product or new service
or start business in a new territory.

*Org. Costs: Costs associated with the formation of a corporation including fees to underwriters (for
stock issuance), legal fees, promotional expenditures, etc.

*These costs should be expensed as incurred. (Not intangible asset)

6. Research and
Development (R&D)

*The practice was to either expense or capitalize R&D related expenditures.

*Requires to expense and disclose all R&D costs if the results of R&D are for internal use.

(To determine kung capitalizable ba o hindi yung research and development)

(as a general rule: Yung expenditure related research and development are expense incurred)
(Kung paghihiwalayan lahat ng expenditure related sa research phase expense talaga yon.)
(Merong strict capitalization requirement or criteria para kay development cost para maging
capitalizable, kapag nameet yung capitalization requirement niya posibleng maging capitalizable as
intangible asset yung development cost)

(Kapag hindi mapaghiwalay o madistinguish yung research kay development= itetreat siya as research
and ieexpense as incurred )

*R&D costs include salaries of personnel involved in R&D, costs of materials used, equipment, facilities
and intangibles used in R&D activities.
*If equipment has an alternative usage, the equip. should be capitalized and only the depreciation
expense will be included in the R&D expense.
(If equipment has alternative use= record as PPE)
(Yung amount chargeable to research and development is only equal to the depreciation)
Depreciation= chargeable kay research and development
Cost =PPE

(Kapag walang alternative use yung PPE= yung buong cost niya research and development yon)
(Malalaman na may alternative use yon kung may recoverable value)

R&D: An Example

Cash expenditures related to the R&D are as follows:

R&D salaries and wages P 100,000
R&D material &supplies used 50,000
R&D equip. purchased* 120,000
Payments to others for service performed related to R&D 30,000
Patent filing and legal fees for completed project 25,000

 The equipment purchased will be used in other projects and the depreciation on the equipment in
2016 was P 10,000. R&D expenses include the followings:

 R&D salary: P100,000; R&D material:P50,000; depre. Expense: P10,000; payments to others:
P30,000. The following expenditures are capitalized:

 Equipment: P120,000 ; Patent: P25,000.

 R & D Contracts

*Costs of R&D performed under contracts for others are capitalized as inventory or receivable.

*Income from these contracts can be recognized based on percentage-of completion or complete
contract method as discussed for the long-term construction contracts.

Purchased R&D

*When acquiring another company, the purchase price is allocated to tangible assets, intangibles
(developed technology) and in-process R&D.

*The remaining will be the goodwill.

*The fair value of in-process R&D is capitalized as indefinite-life intangible asset for business
acquisition made in fiscal years beginning on or after 12/15/2016

*The capitalized in-process R&D should not be amortized but is subject to impairment test.

International Financial Reporting Standards – R&D (PAS 38)

▪ Research expenditures are expenses as incurred.

▪ Development expenditures meet certain criteria (i.e., development costs can be measured , the
product is technically and commercially feasible and the economic benefits are probable) are capitalized
as an intangible asset.

(Yung research as a general rule expense kasi mataas yung uncertainty level/ risk)
(Kapag development may research findings na iaapply nalang)

7. Computer Software Costs

*Computer software costs including planning, designing, coding, testing, documentation and
preparation of training materials.

*Expense most of the costs if the software is to be sold.

*It requires these costs be expensed as R & D expenses prior to the establishment of technological
feasibility of the software.

(Computer softwares are intangible assets pro kapag nagkaroon ng commercial production, hindi na
siya intangible asset magiging part na ng inventory)
 Costs Associated With a Software

▪ Costs occurred after the establishment of technological feasibility but before the software is ready for
general release are capitalized as an intangible asset.

▪ Costs occurred after the software is ready for general release and production are recognized as
produce costs (will be expensed as CGS later).

(Sa software kapag naestablish na yung technical feasibility bago yung commercial production, yung
cost sa pagitan noon intangible asset yon pero kapag nandon na sa commercial production, yung cost
incurred doon inventory na yon)

8. Goodwill

* Cannot be separated from the business.

*Can only be recognized if the whole business was purchased and the purchase price is greater than
the market value of the net assets (i.e., market value of assets − market value of liabilities).

(Nagiisang intangible asset na unidentifiable)

(Unidentifiable siya pero maiidentify kapag nadispose entirely yung business because the goodwill
relates entirely to the business as a whole not to individual asset)
(Goodwill is only recognized as a result of business combinations)

Factors Contribute to Goodwill

✓Superior management team
✓Outstanding sales organization
✓Favorable tax condition
✓Effective advertising
✓Good labor relations
✓Outstanding credit rating

Methods of Measuring Goodwill

Theoretically, estimate the value of each factor which contributes to the goodwill (not practical).
There are two alternatives used in measuring goodwill:
a. Master valuation approach.
b. Capitalization of excess earnings power.

a. Master Valuation Approach

 Goodwill1 = Purchase price of a business - market value of net assets of the business.  Market
value of net assets  = M.V. of assets - M.V. of liabilities.
 1. Goodwill is measured as the excess of cost over the fair value of the identifiable net assets
acquired.

b. Capitalization of Excess Earnings Power

Excess earnings power = the difference between what a firm earns and what is normally
earned for a similar firm in the same industry.
Goodwill = Discounting the excess earnings over the estimated life of the excess earnings

Example
Excess earning = P10,000
Discount Rate = 10%
Estimated life = 10 years

Goodwill = P10,000 x 6.145 = P61,450

annuity, 10 -period, 10%

Excess Earnings = annual average earnings of a firm (excluding extraordinary items) − normal
annual earnings of a similar firm in the industry.

Normal earnings = industry rate of return on assets  the market value of the acquired firm’s net
assets.

Goodwill

* Recording of Acquisition:
Assets (at market value) xxx
Goodwill xxx
Liability (at market value) xxx
Cash xxx

Goodwill (contd.)

*Amortization of goodwill is abolished effective July 2002.

*Goodwill is subject to impairment tests at least annually.

Negative Goodwill

*Negative Goodwill: Cannot be recognized.

(in the case when price paid is less than the market value of the net assets)

*The negative goodwill is used to reduce the costs assigned to the noncurrent assets acquired. The
reduction is proportionately to the relative market value of the noncurrent assets.
 Impairment of Intangible Assets

*All principles apply to impairments of long-lived assets also apply to intangible assets.

*Thus, when changes in circumstances indicate that the book value of the intangibles may not be
reconcilable (i.e., fair value of intangible < carrying amount), a write-down should be performed to
recognize the loss.

Example:
Carrying amount of a copyright P1,200,000
Fair value 500,000
Loss on Impairment P700,000

The journal entry to record the loss:

Loss on Impairment 700,000
Copyright 700,000

SUMMARY OF THE CHAPTER