CHAPTER 37

IDENTIFIABLE INTANGIBLE ASSETS

Patent
 A patent is an exclusive right granted by the government to an inventor enabling
him to control the manufacture, sale or other use of invention for a specified
period of time.
 The legal life of patent is 20 years. This is an accordance with RA. No. 8293, or
the Intellectual Property Code of the Philippines, which took effect on January 1,
1998.
 A patent cannot be renewed but the life can be extended beyond the legal life by a
new patent for improvements and changes.
 Under US GAAP, a patent is classified as technology based intangible asset.

Cost of patent
If the patent is acquired by purchase, the cost comprises:
 Purchase price
 Import duties
 Nonrefundable purchase taxes
 Any directly attributable cost of preparing the asset for the intended use

 If the patent is internally developed, the cost normally includes the licensing and
other related legal fees in securing the patent rights.
 As a rule, all related research and development costs shall he expensed as
incurred.
 However, from the time technological feasibility, any additional development cost
to develop the patent to full manufacturing stage may be capitalized as patent cost
or separately accounted for as development cost.
 The capitalized cost isrecognized development as intangible asset and amortized
over the useful life of the patent.
 The reason for the capitalization is that at this point in time, thepatent is now
technically and commercially feasible.

Cost of litigation
 Legal fees and other costs of successfully prosecuting or defending a patent shall
be expensed.
 The reason is that such litigation cost is intended to maintain only rather than
increase or enhance the future benefits from the asset.
 Needless to say, if the litigation is unsuccessful, the legal costs and the remaining
cost of the patent shall be written as lose.

Amortization of patent
With regard to the amortization of patent, the following rules shall be observed:
 a. If a patent is internally developed the original cost shall be amortized over the legal
life or liseful life, whichever is shorter.
 b. If the patent is acquired by an entity from an original patentee, the cost shall be
amortized over the remaining legal life or useful life, whichever is shorter.
 If a competitive patent is acquired to protect an original patent, the cost of the
competitive patent shall be amortized over the remaining life of the old patent.
 If a related patent is acquired in order to extend the life of the old patent, the cost, of
the related patent and any unamertized cost of the old patent shall be amortized over
the extended life.
 If there is no extension of life, the new patent shall be amortized over its own life, and
the cost of the old patent is to be amortized over the remainder of its life.

Impairment of patent
 Since a patent is an intangible asset with finite useful life, the cost is amortized.
 However, the patent should be tested for impairment whenever there is an
indication of impairment at the end of reporting period.

Illustration
On January 1, 2020, an entity acquired a patent for P2,400,000. The patent has a useful
life of 10 years and remaining legal life of 12 years.
On December 31, 2020, there is an indication that the patent may be impaired. The
patent is expected to generate cash flows of P300,000 per year for the remaining useful
life of 9 years. The appropriate discount rate is 9%. The present value of an ordinary
annuity of 1 for 9 periods at 9% is 6.00. The patent has no determinable fair value less
cost of disposal. .

1. To record the patent acquisition on January 1, 2020;

Patent 2,400,000
Cash 2,400,000

2. To record the patent amortization for 2020:

Amortization of patent (2,400,000/10) 240,000
Patent 240,000

3. To record the impairment loss on December 31, 2020:

Impairment loss 360,000
Patent 360,000

Carrying amount - December 31, 2020

(2,400,000 - 240,000) . 2,160,000
Present value of cash flows or value in use
(300.000 x 6.00) 800 000
Impairment loss 360,000

4. To record the patent amortization for 2021:

 Amortization of patent (1,800,000/9) 200000
Patent 200000

Trademark
 A trademark is a symbol, sign, slogan or name used to mark a product to
distinguish it from other products.
 The terms trademark, tradename and brandname are interchangeably used.
 Under US GAAP, a trademark is a marketrelated intangible asset.
 When a trademark is purchased,the costincludes the purchase price plus costs
directly attributable to the acquisition.
 When a trademark is internally developed, the cost includes expenditures required
to establish it, including filing fees, registry fees and other expensesincurred in
securing the trademark such as design cost of the trademark.
 If the trademark is successfully prosecuted or defended, the litigation cost is an
outright expense.
 The reason is that such cost is simply intended to maintain, rather than enhance or
increase, the future economic benefits from the asset.

Impairment of trademark
 R. A. No. 8293 or the Intellectual Property Code of the Philippines provides legal
protection for a trademark.
 The legal life of trademark is 10 years and may be renewed for periods of 10
years each.
 Considering the almost automatic renewal of a trademark, an entity may properly
classify a trademark as an intangible asset with an indefinite useful life.
 The cost of a trademark is not amortized but subject to test for impairment at least
annually and whenever there is an indication that it may be impaired.

Illustration
At the beginning of current year an entity acquired a trademark for P3,000,000. The
trademark has a remaining legal life of 8 years.
However, it is anticipated that the trademark would be in routinely renewed in the
future. Thus, the trademark considered to have an indefinite life. Accordingly, no
amortization is required for the trademark. However, the trademark must be tested for
impairment annually.
The trademark is expected to generate cashflows of P250,000 per year. The appropriate
discount rate is 10%.
Mathematically, the present value of a stream of indifinite cashflows is simply computed
by dividing the annual cash flow by the discount rate.
Journal entries
1. To record the acquisition:
Trademark 3,000,000
Cash 3,000,000

2. To record the impairment loss

Impairment 500,000
Trademark 600,000

Carrying amount or value in use 3,000,000

Present value of cash flows
(250,000/10%) 2,500,000
Impairment loss 500,000

Copyright
 A 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.
 Under US GAAP, a copyright is considered an artistic related intangible asset.
 The cost assigned to copyright consists of all expenses incurred in the production
of the work including those required to establish or obtain the right.
 When a copyright is purchased, the cost includes the cash paid plus directly
attributable cost necessary for the intended use.

Amortization of copyright
 Theoretically, the cost of the copyright shall be amortized over the useful life.
 The useful life is that period in which benefits, sales and royalties are expected.
 In practice, it is often difficult to estimate the number of years in which benefits
will be received.
 Thus, it is usually advisable to write off the cost of the copyright against the
revenue of the first printing.
 Under the Intellectual Property Code of the Philippines, the term of protection for
copyright is during the life of the author and for 50 years after death.
 The copyright should be reviewed for impairment by assessing at the end of each
reporting period whether there is an indication that it may be impaired.

Franchise
  Under a franchise agreement, one party called the franchisor grants certain rights
to another party called the franchisee.
 Under US GAAP, a franchise is a contract-based intangible asset. The franchise
agreement may be:
a. Between the government and a private entity or individual.
b. Between private entities or individuals.

Between government and private entity

If the franchise is between the government and a private entity or individual, the latter is
permitted to use public property in performing the services.
Examples of such franchise are:
a. The use of public water for interisland shipping
b. The use of public land for telephone and electric lines
c. The use of streets and highways for a bus line

Between private entities

 If the franchise is between private entities or individuals, the franchisee acquires
the right to use the trademark, patent and process of the franchisor.
 Examples are the right to operate a fried chicken drive-in under the tradename
Max or Aristocrat or the exclusive right to distribute or sell a particular brand
product like Rolex time pieces, or Sony color television sets, or the right to
operate a McDonald or Jollibee restaurant.
 The franchise in either case may be granted for a definite period or an indefinite
period.

Franchise cost
 The cost of the franchise includes the lump sum payment for the acquisition of the
franchise plus directly attributable costs necessary for the intended use, such as
legal fees and expenses incurred in connection with the acquisition of the right.
 The lump sum payment is known as the initial franchise fee and therefore the
initial cost of the franchise.
 If the franchise agreement requires the franchisee to make periodic payment to the
franchisor, such payment is considered as outright expense. This payment is
known as the periodic franchise fee.

Amortization of franchise
 If the franchise is granted for a definite period, the cost of franchise shall be
amortized over the useful life or definite period whichever is shorter.
 Of course, a definite franchise is tested for impairment at the end of reporting
period when there is an indication that it may be impaired.
 If the franchise is granted indefinitely or perpetual thebcost of the franchise shall
not be amortized but tested for impairment at least annually.

Illustration - Periodic franchise fee

For example, the franchisee pays the franchisor a periodic fee of 5% on the gross sales of
the franchisee each year.
If the franchisee realized gross sales of P5,000,000 for the current year, the periodic
franchise fee is 5% of P5,000,000, or P250,000.

The franchisee will simply record the payment of the periodic

fee as follows:
Franchise fee expense 250,000
Cash 250,000

Illustration - Initial franchise fee

At the beginning of current year, an entity purchased a franchise from Jollibee Company
to sell Jollibee products for P5,000,000 for 20 years.
The initial franchise fee is payable in cash, P500,000, when the contract is signed and the
balance in five equal installments every year-end, evidenced by a 12% promissory note.
The agreement provided that the franchisor would assist in the location of ante for the
construction of building, make a project study for the viability of the project and
provide training of management and employees.
Jollibee Company has already performed substantially all the services required under the
contract.

Books of franchisee
1. To record the initial franchise fee:
Franchise 5,000,000
Cash 500,000
Note payable 4,500,000

2. To ecord the payment of the first installment at year-end:

Note payable 900,000
Interest expense (4,500,000 x 12%) 540,000
Cash 1,440,000

3. To record the amortization of franchise::

Amortization of franchise 250,000
Franchise (5,000,000/20) 250,000

Lease right
 The accounting for lease is now governed by IFRS 16.
  Under the new lease standard, a lessee is required to initially recognize a right of
use asset for the lease term and a lease liability for the obligation to make lease
payments.
 The right of use asset is presented as a separate line item in the statement of
financial position.

Leasehold improvement
 Leasehold improvement is alteration or modification on the leased property made
by the lessee.
 Leasehold improvement is not included in the cost of right of use asset but
accounted for separately.

 Examples are building, walk, pavement, landscaping; driveway and other

structure made on a leased land, and lighting installations, repairs, partitions,
cabinets, shelves, and ventilating system made on a leased building prior to
occupancy.

 Legally, leasehold improvement reverts to the lessor upon termination of the lease
contract.
 Leasehold improvement is classified under property, plant and equipment of the
lessee.
 Leasehold improvement shall be depreciated over the lease term or useful life of
the improvement, whichever is shorter.
 The residual value of the leasehold improvement shall be ignored in
computing depreciation because legally the improvement becomes the property of
the lessor upon termination of the lease.
 A renewal option that is too uncertain should be ignored in determining the lease
term.
 But where renewal of the lease contract is highly probable or certain, the
extensionis consideredin determining the extended lease term.

Broadcasting license with indefinite useful life

 The entity has acquired a broadcasting license that expires in five years. The
broadcasting license is renewable every 10 years if the entity provides at least an
average level of service to the customers and complies with relevant legislative
requirements.
 The license may be renewed indefinitely at little cost. The entity intends to renew
the license indehnitely and evidence supports its ability to do so.

 The broadcasting license should be treated as having an indefinite useful life

because it is expected to contribute to the net cash inflows indefinitely.
 Therefore, the broadcasting license should not be amortized
 but tested for impairment annually and whenever there is
 an indication that it may be impaired.
Broadcasting license with finite useful life
 The entity has acquired a broadcasting license that expires in 3 years. The
licensing authority has decided that it will no longer renew broadcasting license
but rather will auction the license.
 The entity expects that the broadcasting license will continue to contribute to the
net cash inflows until the license expires after 3 years.
 In this case, the useful life of the broadcasting license in no longer indefinite
because the license cannot be renewed anymore. Thus, the broadcasting license
should be amortized over the remaining useful life of 3 years and immediately
tested for impairment.

Airline right
 An entity has acquired a route authority or an airline right that may be renewed
ever 5 years. The acquiring entity intends to comply with the applicable rules and
regulations surrounding renewal.
 Route authority renewals are routinely granted at a minimal cost and historically
route authority has been renewed when the airline has complied with the
applicable rules and regulations.
 In this case,the airline right should be regarded as having an indefinite useful life
because the entity expects to provide service indefinitely.
 Therefore, the airline right should not be amortized but tested for impairment
annually and whenever there is an indication that it may be impaired.

Customer list
 Literally, a customer list is a customer database containing the name, contract
information, order history and other vital and social statistics, such as birth, death
and even sickness.
 PAS 38, paragraph 63, provides that internally generated customer list shall not be
recognized as an intangible asset.
 However, an acquired customer list may be recognized as an intangible asset and
amortized over the useful life.

 The customer list should also be reviewed for impairment by assessing at the end
of each reporting period whether there is an indication that it may be impaired.
 The recognition of an acquired customer list as an intangible asset may be subject
to question or debate.
 The purchase of customer list does not provide control by an entity over the
expected future benefits.
 Undoubtedly,customerscannotbe forcedto buy from the entity. The customers can
go elsewhere for their needs.
Organization cost
The term organization cost represents cost incurred in forming or organizing a
corporation.

a. Legal fees in connection with the incorporation, such as drafting of articles of

incorporation and by-laws andncorporate registration.
b. Incorporation fees
c. Share issuance cost, such as printing of share certificate, cost of stock and transfer
book, seal of the corporation, underwriting and promotional fees, and accounting and
legal fees in connection with issuance.

 PAS 38, paragraph 69, provides that start up costs which include legal and
secretarial costs in establishing a legal entity shall be recognized as expense when
incurred.
 Accordingly, organization cost shall be expensed immediately.
 However, share issuance costs shall be debited to the share premium account
arising therefrom.

 If the share premium is not sufficient to absorb such costs, the excess shall debited
to "share issuance costs" account to be presented as "contra equity" or as a
deduction from other share premium first and retained earnings second.

Website development cost

 Under SIC 32, a web site that has been developed for the purpose of promoting
and advertising an entity's products and services does not meet the requirement to
be recognized as an intangible asset.
 Therefore, web site development cost shall be expensed as incurred.