PAS 38 Intangible Assets

2020 Edition

Lecture Aid

By: Zeus Vernon B. Millan

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Intangible assets
• An intangible asset is an identifiable non-monetary asset
without physical substance. Normally refer to intangible
resources.

• Goodwill acquired in a business combination is outside

the scope of PAS 38 because it is unidentifiable.
Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Essential criteria in the definition of intangible
assets

1. Identifiability – separable or arises from contractual

rights
2. Control – power to obtain (or restrict others from
obtaining) the economic benefits from an asset.
3. Future economic benefits – 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.
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
Recognition

An intangible asset shall be recognized if management can

demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic
benefits will flow to the entity; and
3. The cost of the asset can be measured reliably.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Initial measurement

An intangible asset shall be measured initially at cost.

Measurement of cost depends on how the intangible asset is
acquired. Intangible assets may be acquired through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Separate acquisition

The cost of a separately acquired intangible asset

comprises:
1. Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade
discounts and rebates; and
2. Any directly attributable cost of preparing the asset for
its intended use.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Acquisition as part of a business combination
• The cost of intangible asset acquired in a business
combination is its fair value at the acquisition date.

Acquisition by way of a government grant

Intangible assets acquired by way of government grant may
be recorded at either:
1. fair value
2. alternatively, at nominal amount or zero, plus direct
costs incurred in preparing the asset for its intended use

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
 Exchanges of assets
• If the exchange has commercial substance, the intangible asset is
initially recognized using the following order of priority:
a. Fair value of the asset Given up (Plus cash Paid or minus cash
received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash Paid or minus
cash received)
• If the exchange lacks commercial substance, the intangible asset is
initially recognized using (c) above.
• An exchange transaction has a commercial substance if the
expected future cash flows from the asset received significantly differ
from those of the asset given up. 8
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:
a. Research costs – include costs of searching new knowledge
and identifying and selecting possible alternatives.
b. Development costs – include costs of designing from selected
alternative and using knowledge gained from research.

• If an entity cannot identify in which phase a cost is incurred, the cost

is regarded as incurred in research phase.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
R&D Costs
1. Costs incurred in research phase are expensed immediately.
2. Costs incurred in development phase are expensed
immediately, unless they meet all of the following conditions for
capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
R&D Costs
The following are not R&D expenses but rather regular expenses.
a. Costs incurred during commercial production:
i. Trouble-shooting during commercial production
ii. Periodic or routine design changes to existing products
iii. Modification of design for a specific customer
iv. Design, construction and operation of plant that is feasible for
commercial production
v. Engineering follow through in an early phase of commercial
production
vi. Quality control during commercial production
b. Advertising and other marketing expenses
c. Training costs 11
Items of PPE used in R&D activities

• If the item of PPE can be used in various R&D activities or other

purposes, the cost of the PPE is capitalized and depreciated. The
amount of depreciation is included as R&D expense.
• If the item of PPE can only be used on one specific R&D project,
the cost of the PPE is expensed immediately in its entirety as R&D
expense.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Items not recognized as intangible assets
• The cost of internally generated brands, mastheads
(logos, headers, banners), publishing titles, customer
lists, goodwill and items similar in substance are
expensed when incurred.

Subsequent expenditures
• Subsequent expenditures on an intangible asset are
generally recognized as expense.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Reinstatement of costs in subsequent period

• Expenditure on an intangible item that was initially

recognized as an expense shall not be recognized as part
of the cost of an intangible asset at a later date.

Organizational costs
• Are costs incurred in establishing a new business. These
are expensed when incurred.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Measurement after recognition

After initial recognition, an entity shall choose as its

accounting policy either the

a. Cost model (at cost), or

b. Revaluation model (at its fair value) – applicable only if
the intangible asset has an active market.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Amortization

• Intangible assets with finite useful life are amortized

over the shorter of the asset’s useful life and legal life.
• Intangible assets with indefinite useful life are not
amortized but tested for impairment at least annually.
• The default method of amortization is the straight line
method.
• Residual value of intangible asset is assumed to be zero.
• PAS 38 requires annual review of the amortization
method, assessments and estimates.
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 1: FOR CLASSROOM DISCUSSION
PROBLEM 2: FOR CLASSROOM DISCUSSION

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 17

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Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 18