INTANGIBLE ASSETS

Intangible Assets These are identifiable non-monetary assets without physical substance

Identifiability As asset is identifiable if it either is separable or arises from

contractual or other legal rights.
Essential Control The entity has the ability to benefit from the intangible asset or
Criteria prevent others from benefitting from it.
Future Economic These may include revenue from sales of products or services,
Benefits cost savings or other benefits resulting from the entity’s use of
the asset

Initial Measurement: Cost

Subsequent Measurement: Either Cost Model or Revaluation Model

Cost Model Revaluation Model

Cost Revalued Amount
Less: Accumulated Amortization Less: Subsequent Amortization
Less: Accumulated Impairment Loss Less: Subsequent Impairment Loss

MODES OF ACQUISITION:

MODES OF ACQUISITION INITIAL MEASUREMENT

Separate Acquisition
Business Combination
Government Grant
Exchange (with commercial substance)
Exchange (without commercial substance)
Internal Generation (Self-Creation)
Purchase cost + Direct Costs
Fair Value at the acquisition date
Fair Value or Nominal Amount
1. Fair Value of Asset Given Up
2. Fair Value of Asset Received
3. Carrying Amount of Asset Given
Up
Carrying Amount of Asset Given Up
Research – expensed (except R&D acquired
in a business combination)
Development – expensed; capitalize only if
all the conditions are met.

RULES ON AMORTIZATION:

Definite Life/Limited Life/Finite Life Indefinite Life

Amortize over useful life Not Amortized
Tested for impairment whenever there is Tested for impairment at least
an indication of impairment at the end annually & whenever there is an
of reporting period. indication of impairment

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 - The method of amortization reflects the pattern in which future economic
benefits from the asset are expected to be consumed by the entity. If such
pattern cannot be reliably determined, straight line method is used.

- Residual value is zero, except:

• Third party is committed to buy the intangible asset
• There is an active market

SPECIFIC INTANGIBLE ASSETS

1. Patent – an exclusive right granted to an INVENTOR enabling the grantee to control the
manufacture, sale or other use of the invention for a specified period of time.

- Patent can be either purchased or developed.

- If developed, the cost should include only the licensing and other related legal
fees in securing patent rights.
- Legal fees and other costs of successfully prosecuting or defending a patent
should be charged outright as an expense. Any cost of unsuccessful litigation
on patent should also be charged outright as an expense including the
unamortized cost of the patent.
- Amortization of patent
1. Cost of acquired or developed patent should be amortized over its
legal life (20 years) or useful life whichever is shorter.
2. If competitive patent is acquired, cost of competitive patent is
amortized over the remaining life of the old patent.
3. If related patent is acquired to extend life of old patent, cost of related
patent + unamortized cost of old patent is amortized over the extended
life.

2. Trademark is a symbol, sign, or name used to mark a product to distinguish it from

other products.
- Trademark can be either purchased or developed.
- If purchased, the cost of trademark is purchase price or cash price equivalent
- If developed, the cost of trademark includes expenditures such as filing fees,
registry fees, and other expenses incurred in securing the trademark.
- The legal life of a trademark is 10 years and maybe renewed for periods of 10
years each. The cost of trademark is not amortized but subject to test of
impairment at least annually as a result of the almost automatic renewal.
Trademark may be properly classified as an intangible asset with an indefinite
life. However, if its life is no longer considered indefinite, it should be
amortized over its remaining useful life.

3. Goodwill is an intangible asset that is not specifically identifiable, has an indeterminate

life, is inherent in a continuing business and relates to the entity as a whole.

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 - If purchased, recognize as an ASSET. The cost of purchased goodwill is
determined by the following computations:

a. Residual approach: The excess of purchase price over fair value of net
tangible & identifiable assets is considered as goodwill.
b. Direct approach

Direct Approach Formula

Average Earnings
Less: Normal Earnings
Purchase of average excess earnings Average Excess Earnings
Multiplied by: No. of Years
Goodwill
Average Earnings
Less: Normal Earnings
Capitalization of average excess earnings Average Excess Earnings
Divided by: Capitalization Rate
Goodwill
Average Earnings
Divided by: Capitalization Rate
Capitalization of average earnings Net assets , including goodwill
Less: Net assets, excluding goodwill
Goodwill
Average Earnings
Less: Normal Earnings
Present Value method Average Excess Earnings
Multiplied by: PV Factor
Goodwill
- If developed internally, goodwill is not recognized.
- Goodwill shall not be amortized, however, it shall be tested for impairment at
least annually and whenever there is an indication that it may be impaired.

4. Copyright is an exclusive right granted by the government to the author, composer, or

artist enabling the grantee to publish, sell, or otherwise benefit from the literary, musical,
or artistic work.
- If purchased, cost of copyright is cash + directly attributable cost necessary for
the intended use
- If internally generated, cost of copyright includes all expenses incurred in the
production of the work including those required to establish or obtain the right
- The copyright should be amortized over the shorter between the remaining
legal life and remaining useful life.

5. Franchise
- Cost = initial franchise fee + directly attributable costs necessary for the intended
use
- Periodic franchise fee is expensed outright
- If franchise is for a definite period, the cost of franchise shall be amortized over
the useful life or definite period, whichever is shorter

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 - If franchise is granted indefinitely, cost of franchise is not amortized but tested
for impairment at least annually.

6. Leasehold is the right acquired by the lessee by virtue of a contract of lease to use the
specific property owned by the lessor for a definite period of time in consideration for a
certain sum of money in the form of rent
- Amortize over the life of the lease
- Leasehold improvements are classified as PPE and depreciated over the lease
term or useful life of the improvements, whichever is shorter.
- If there is an option to renew & too uncertain, depreciate over the original lease
term or useful life whichever is shorter
- If there is an option to renew is probable or certain, depreciate over the extended
lease term or useful life, whichever is shorter.

7. Internally Developed Computer Software - the cost incurred on the research stage in
creating the software should be charged outright to expense when incurred until a
technological feasibility has been established for the product. Technological feasibility
is established when a company had produced either a detailed program design of the
software or a working model. After establishing technological feasibility, the cost of
software to be capitalized should include the costs of coding and testing and the cost to
produce the product masters.

The cost of the computer software should be allocated based on the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity. If such
pattern cannot be determined reliably, the straight line method is used.

RESEARCH AND DEVELOPMENT COSTS

Research: original and planned investigation undertaken with the prospect of gaining scientific or
technical knowledge and understanding
1. Laboratory research aimed at obtaining or discovering new knowledge
2. Searching for application of research finding and other knowledge
3. Conceptual formulation and design of possible product or process alternative
4. Testing in search for product or process alternative

Expenditure on research or on the research phase of an internal project shall be

recognized as expense when incurred.

Development: the application of research findings or other knowledge to a plan or design for
the production of new or substantially improved material, device, product, process, system, or
service, prior to the commencement of commercial production.
1. Design, construction, and testing of preproduction prototype and model
2. Design of tools, jigs, molds, and dies involving new technology
3. Design, construction, and operation of a pilot plant that is not of a scale
economically feasible to the entity for commercial production.
4. Design, construction, and testing of a chosen alternative for new or improved
product or process

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 Expenditure on development phase of an internal project shall be recognized as expense
when incurred unless an entity can demonstrate all of the following:
1. There is a technical feasibility of completing the intangible asset (a prototype is
produced)
2. There is an intention to complete the intangible asset
3. There is ability to use or sell the intangible asset
4. There is an existence of a market for the output of the intangible asset
5. Availability of resources or funding to complete development and to use or sell
the asset
6. The ability to measure reliably the expenditure attributable to the intangible asset
during its development.

NOTE: Expenditures for research and development which have alternative future use, either in
additional research projects or for productive purposes, can be capitalized. This means that costs
incurred for materials, equipment and intangible asset related to research and development
activities which have alternative future use can be capitalized. Subsequently, the following should
be charged to research and development expense:
a. Cost of materials used
b. Depreciation of equipment used in research and development
c. Amortization of intangible asset used in research and development

Acquired in-process R&D is recognized as an asset at cost even if a component is research.

Subsequent expenditures may be expensed or capitalized depending on the recognition criteria
for an intangible asset.

The following are examples not considered research & development include:
a. Engineering follow through in an early phase of commercial production
b. Quality control during commercial production including routine testing
c. Trouble shooting in connection with breakdowns during production
d. Routine on-going efforts to refine, enrich, or improve qualities of existing product
e. Adaptation of an existing capability to a particular requirement or customer need
f. Periodic design of tools, jigs, molds and dies
g. Routine design of tools, jigs, molds, and dies
h. Activity, including design and construction engineering , related to construction ,
relocation, rearrangement or start-up of facilities and equipment

Compilation by:

Jay Lourd De Veyra, CPA

Arleen Rocabo, CPA

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