Pamantasan ng Lungsod ng Pasig

College of Business and Accountancy

12-B Alcalde Jose Kapasigan Pasig City

Intangible Assets and Liabilities

Prepared by:
Alejandro, Marco B.
Medallada, Hannah Lyka E.
Raymundo, Christine Joyce G.
Palarpalar, Jade E.
Santos, Sofia Anne P.

Submitted to:
Ms. Amor B. Sande

February 2021
 Intangible Assets

Intangible Assets
Intangible Assets are identifiable non-monetary assets without physical substance.
Essential elements of an intangible asset
1. Identifiability - an intangible asset is identifiable when it:
a. is separable, i.e., capable of being separated and divided from the entity and sold,
transferred, licensed, rented, or exchanged, either individually or together with a related
contract, identifiable asset or liability, regardless of' whether the entity intends to do so;
or
b. arises from binding arrangements including contractual or other legal rights,
regardless of whether those rights are transferable or separable from the entity or from
other rights and obligations.
2. Control - the entity has the ability to benefit from the intangible asset or prevent others from
benefitting from it.
Control of an intangible asset normally arises from legal rights that are enforceable in a
court of law. However, legal enforceability of a right is not a necessary condition for control
because an entity may be able to control the future economic benefits or service potential in
some other way.
3. Future economic benefits or service potential – the future economic benefits or service
potential flowing from intangible asset may include revenue from the sale of products of
services, cost savings, or other benefits resulting from the use of the asset by the entity. For
example, the use of intellectual property in a production or service process may reduce future
production or service costs or improve service delivery rather than increase future revenues (e.g.,
an on-line system that allows citizens to apply or renew licenses more quickly on-line, resulting
in a reduction in office staff required to perform this function while increasing the speed of
processing).
Common examples of intangible assets are computer software, patents, copyrights,
franchise, motion picture films, trademarks or brand names, licenses, acquired import quotas,
lists of users of a service, and relationships with users of a service.

Recognition
An intangible asset is recognized if it meets the definition of an intangible asset and the
recognition criteria for assets.

Initial Measurement

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 An intangible asset is initially measured at cost.
The measurement of cost depends on the mode of acquisition, which is similar to those of
PPE and investment property. A summary is provided below:
Mode of Acquisition Measurement of Initial Cost
a. Purchase  Purchase price plus Direct costs (including non-
refundable taxes but excluding trade discounts and
rebates).
 If payment is deferred, the cost is the cash price
equivalent.
b. Non-exchange transactions  Fair value at the acquisition date
c. Exchange  With commercial substance (order of priority):
a. FV of asset given up (plus cash paid/ minus
cash received).
b. FV of asset received.
c. CA of asset given up (plus cash paid/minus cash
received).
d. Entity Combination  Fair value at the acquisition date

Peculiar measurement is made when the intangible asset is internally generated (self-
generated).
e. Internal Generation - to assess whether an internally generated intangible asset meets the
criteria for recognition, an entity classifies the generation of the asset into: (a) research phase;
and (b) development phase.
1. Research - is original and planned investigation undertaken with the prospect of gaining
new scientific and technical knowledge and understanding.
Expenditures during the research phase are recognized as expense.
Examples of research activities:
i. Activities aimed at obtaining new knowledge;
ii. ii. The search for, evaluation and final selecti011 applications of research findings or
another knowledge;
iii. The search for alternatives for materials, devices, products) processes, systems or
services; and
iv. The formulation, design, evaluation, and final selection of possible alternatives for
new or improved materials, devices, products, processes, systems, or services.

2. Development - is the application of research findings or other knowledge to a plan or

design for the production of new or substantially improved materials, devices, products,
processes, systems, or services before the start of commercial production or use.
Expenditures during the development phase are capitalized if the entity can
demonstrate all of the following:
a. Technical feasibility of completing the intangible asset;
b. Intention to complete the intangible asset;

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 c. Ability to use or sell the intangible asset;
d. Probable future economic benefits or service potential;
e. Availability of adequate resources needed to complete the development and to
use or sell the intangible asset; and
f. Reliable measurement of the cost of the intangible asset.

 If it is not clear whether an expenditure is a research or a development cost, it shall be

treated as research cost.
 Expenditures already charged as expenses cannot be Subsequently capitalized, i.e.,
reinstatement of expenditure previously recognized as an expense is prohibited.
 Internally generated brands, mastheads, publishing titles, customer lists, and similar items
shall not be recognized as intangible assets.
 Selling, administrative and other general overhead, costs of Inefficiencies, initial
operating losses, and training costs are expensed and shall not form part of the cost of an
intangible asset.
 Subsequent expenditures on recognized intangible assets generally expensed, unless they
meet the definition intangible asset and the asset recognition criteria.
 The accounting for replacement of a part of an intangible asset is the same as those of
PPE and investment property.

Subsequent Measurement
An intangible asset is subsequently measured at cost less any accumulated amortization
and any accumulated losses.

Amortization
Amortization is the systematic allocation of the depreciable amount of an intangible asset over its
useful life.
For purposes of amortization, intangible assets are classified according to their assessed
useful life as follows:
a. Indefinite life - an intangible asset is considered to have an indefinite life if there is no
foreseeable limit to the period over which it is expected to provide economic benefits or
service potential to the entity.
Intangible assets with indefinite life are not amortized but tested for impairment at
least annually.
b. Finite life — an intangible asset is considered to have a finite life if it has a limited period
of benefit to the entity.
Intangible assets with finite useful life are amortized using the straight line
method over a period of 2 to 10 years’ amortization starts when the intangible asset is
available for use and ceases when the asset is derecognized or classified held for sale,
whichever comes earlier. Amortization. Does cease when the asset is no longer used,
except when it is full depreciated or classified as held for sale.

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 The residual value is assumed to be zero except there is a third-party commitment
to purchase the asset at end of its useful life or there is an active market where the entity
expects to sell the asset at the end of its useful life.
The amortization period and amortization method Shall be reviewed at each
reporting date. Changes in useful life or amortization method shall be accounted for as
changes in accounting estimates.

Impairment
An entity is required to test for impairment an intangible asset with indefinite useful life or an
intangible asset not yet available for use at least annually or whenever there is an indication of
impairment.
An entity shall test for impairment an intangible asset with definite useful life only when
an indication of impairment exists. Indications of impairment shall be assessed at each reporting
date.
The accounting for impairment of intangible assets, and reversal thereof, is the same as
those of investment property and PPE.

Derecognition
An intangible asset is derecognized when it is disposed or when no future economic
benefits or service potential is expected from the asset.
On derecognition, the difference between the carrying amount and the net disposal
proceeds, if any, is recognized as gain or loss in surplus or deficit.

Illustration: Journal entries

Initial and Subsequent Measurement:
On January 1, 20x1, Entity A acquires a computer software for P1,000,000. The
software’s useful life is 5 years.
1/1/x1 Computer Software 1,000,000
Cash-Modified Disbursement System (MDS), 1,000,000
Regular
12/31/x1 Amortization-Intangible Assets 200,000
Accumulated Amortization-Computer 200,000
Software
(1M/5yrs.)

On December 31, 20x1, Entity A assesses an indication impairment and estimates a

recoverable amount of P700,000.

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12/31/x1 Impairment Loss-intangible Assets 100,000
Accumulated Impairment Losses-Computer 100,000
Software (700k RA – 800k CA)

On January 1, 20x2t Entity A sells the computer software for P720,000.

1/1/x2 Cash Collecting Officers 720,000
Accumulated Amortization-Computer Software 200,000
Accumulated Impairment Losses-Computer 100,000
Software 1,000,000
Computer Software 20,000
Gain on Sale of Intangible Assets

Intangible Assets Summary

 Intangible Assets are identifiable non-monetary assets without physical substance.

 Essential elements: (1) Identifiability (separable or arises from arrangements); (2)
Control; and (3) Future economic benefits or service potential.
 Intangible assets are initially measured at cost. The measurement of cost depends on the
mode of acquisition, which is similar to those of PPE and investment property.
 Internal generation:

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  Research cost - recognized as expense.
 Development cost - capitalized only if all of the conditions listed in the GAM for NGAs
are met.
 If it is not clear whether an expenditure is a research or a development cost, it is treated
as research cost.
 Reinstatement of costs already expensed is prohibited.
 Internally generated brands, mastheads, publishing titles, customer lists, and similar items
are not recognized as intangible assets.
 Subsequent expenditures on recognized intangible assets are generally expensed, unless
they meet the definition of an intangible asset and the asset recognition criteria.
 Subsequent measurement:
 Indefinite life - not amortized but tested for impairment at least annually.
 Finite life - amortized using the straight line method over a Period of 2 to 10 years. The
residual value is assumed to be zero except when the entity has the ability to sell the asset
at the end of its useful life.

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 Liabilities

Liability
Liability is a present obligation arising from past event, the settlement of which is expected to
result in an outflow of resources embodying economic benefits or service potential.
Present obligation means that as of the reporting date, an obligating event must have
already occurred. An obligating event is an event that creates either (a) a legal obligation or (b) a
constructive obligation.
 Legal Obligation - is an obligation that results from a contract, legislation, or other
operation of law.
 Constructive Obligation – is an obligation that results from an entity’s actions (e.g.,
past practice, published policies) that create a valid expectation from others that the
entity will accept and discharge certain responsibilities.

Liability Recognition Criteria

A liability is recognized only when all of the following are met:
a. The item meets the definition of a liability (i.e., present obligation);
b. It is Probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; and
c. The obligation has a cost or value (e.g., fair value) that can be measured reliably.

Financial Liabilities
A financial liability is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another entity;
b. A contractual obligation to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity instruments.
Examples of financial liabilities: Accounts Payable, Notes Payable, Interest Payable, Loans
Payable, Bonds Payable, and Bail Bonds Payable.

Initial Recognition
A financial liability is recognized when an entity becomes a party to the contractual
provisions of the instrument.

Initial Measurement

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 Financial liabilities are initially measured at fair value transaction costs, except for
financial liabilities at fair through surplus or deficit (e.g., designated financial liabilities
derivative liabilities) whose transaction costs are expensed.
Transaction costs are incremental costs that are attributable to. The acquisition, issue, or
disposal of a financial instrument.

Subsequent Measurement
Financial liabilities are subsequently measured at amortized cost, except for financial
liabilities at fair value through surplus or deficit which are subsequently measured at fair value.
Illustration:
January 1, 20xI, the BTr issues a 5-year, 5%, P1,000,000 bonds for P970,000.
Transaction costs on the issuance (bond issue costs) amount to P12,124. The effective interest
rate adjusted for both the bond discount and bond issue costs is 6%.
The initial measurement of the bonds payable is determined as follows:
Face amount P1,000,000
Bond discount (1M – 970k) (30,000)
Bond issue costs (12,124)
Carrying amount – 1/1/x1 957,876
or
Net issuance proceeds 970,000
Bond issue costs (12,124)
Carrying amount – 1/1/x1 957,876

Bond issue costs are not expense outright, but rather a deduction when determining the
carrying amount of the bonds (similar to the bonds discount). Bond issue costs are amortized to
interest expense over the term of the bonds (together with any bond discount or premium). The
amortization of bond issue costs increases interest expense.

1/1/x1 Cash in Bank-Local Currency, Bangko Sentral ng 970,000

Pilipinas 30,000

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 Discount on Bonds Payable-Domestic 1,000,000
Bond Payable-Domestic
To recognize the issuance of bonds payable by the
BTr
1/1/x1 Bond Issue Cost-Domestic 12, 124
Cash in Bank-Local Currency, Bangko Sentral ng 12,124
Pilipinas
To recognize the incurrence of bond issue
cost by the BTr

Amortization Table:
Date Interest Interest Amortization Present Value
Payments Expense
1/1/x1 957,876
12/31/x1 50,000 57,743 7,473 965,349
12/31/x2 50,000 57,921 7,921 973,270
12/31/x3 50,000 58,396 8,396 981,666
12/31/x4 50,000 58,900 8,900 990,566
12/31/x5 50,000 59,434 9,434 1,000,000

12/31/x1 Interest Expense 57,473

Discount on Bonds Payable-Domestic 5,322
Bonds Issue Cost-Domestic 2,151
Cash in Bank-Local Currency, 50,000
Bangko Sentral ng PIlipinas
To recognize the interest expense on the
bonds payable

Derecognition of Financial Liability

A financial liability is derecognized when it is extinguished, such as when it is
discharged, waived, cancelled, or it expires.

Provisions, Contingent liabilities and Contingent assets

Provision - is a liability of uncertain timing or amount.
A provision is recognized if all the recognition criteria for a liability are met (i.e., present
obligation, probable outflow, and reliable measurement). If one or more of the criteria are not
met, the item is a contingent liability, not a provision, and therefore not recognized as liability.
Contingent Liability is:

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 1. A possible obligation that arises from past events, and whose existence will be confirmed
only by the occurrence or nonoccurrence of one or more uncertain future events not
wholly within the control of the entity; or
2. A present obligation that arises from past events, but is not recognized because:
i. It is not probable that an outflow of resources embodying economic
benefits or service potential will be required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient
reliability.
Contingent Asset - is a possible asset that arises from past events, and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.

Contingent Probable Possible Remote

Liability Recognize and Disclose Disclose only Ignore
Asset Disclose only Ignore Ignore

Measurement
A provision is measured at the entity’s best estimate of the amount needed to settle the
liability at the reporting date. Risks and uncertainties shall be taken into account in reaching this
best estimate.
If the effect of time value of money is material, the provision is measured at the present
value of the settlement amount discounted at a pre-tax rate.
Gains from the expected disposal of assets shall not be taken into account in measuring a
provision.
Provisions shall be reviewed at each reporting date, and adjusted to reflect the current
best estimate. If it is no longer probable that an outflow of resources embodying economic
benefits or service potential will be required to settle the obligation, the provision shall be
reversed.
A provision shall be used only for expenditures for which the provision was originally
recognized.

Reimbursements
If another party is expected to reimburse the settlement amount of a provision, a
reimbursement asset is recognized and presented in the statement of financial position separately
from the provision’ However, in the statement of financial performance, the expense related to
the provision may be presented net of the reimbursement.
The amount recognized for the reimbursement shall exceed the amount of the provision.

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Application of the Recognition and Measurement Rules
a. Future Operating Net Deficits - No provision shall be recognized for expected net
deficits from future operating activities. Such expectation indicates that certain assets
used in these activities may be impaired. These assets shall be tested for impairment.
b. Onerous Contracts - A contract is deemed onerous (i.e., burdensome) if the unavoidable
costs of settling the obligations under the contract exceed the economic benefits expected
to be received from it.
The obligation under an onerous contract is recognized as a provision.
c. Restructuring - is a program that is planned and controlled by management, and
materially changes either:
a. The scope of an entity’s activities; or
b. The manner in which those activities are carried out.
A legal obligation to restructure exists if, at the reporting date, the entity has
entered into a binding agreement to sell or transfer an operation.
A constructive obligation to restructure exists if, at the reporting date, both the
following are present:
a. Detailed formal plan for the restructuring; and
b. The plan is announced to those affected by it.
A restructuring provision includes only the direct costs resulting from the
restructuring. It does not include costs associated with the ongoing activities of the entity,
retraining or relocating continuing staff, marketing, or investment in new systems and
distribution networks.

Intangible Assets Summary

 A liability is recognized only when all of the following are met:

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 a. The item meets the definition of a liability;
b. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation and
c. The obligation has a cost or value (e.g., fair value) that can be measured reliably.
 Financial liabilities are initially measured at fair value minus transaction costs and
subsequently measured at amortized cost, except for financial liabilities at fair value
through surplus or deficit which are initially and subsequently measured at fair value.
 Provision is a liability of uncertain timing or amount
 Contingent liability is one that meets some but not all of the liability recognition criteria,
A contingent liability is not recognized but disclosed only, if its occurrence or settlement
is reasonably possible; otherwise, it is ignored.
 Contingent asset is not recognized but disclosed only, if its occurrence or realization is
probable; otherwise, it is ignored.
 A provision is measured at the entity’s best estimate of the amount needed to settle the
liability at the reporting date. If the effect of time value of money is material, the
provision is measured at present value.

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