INTANGIBLE ASSETS

PAS-38
Intangible asset: An identifiable nonmonetary asset without physical substance. An asset is a
resource that is controlled by the enterprise as a result of past events (for example, purchase or
self-creation) and from which future economic benefits (inflows of cash or other assets) are
expected.
Internally generated GOODWILL is not recognized
Attributes of an intangible asset:
 identifiability
 control (power to obtain benefits from the asset) LEGAL RIGHTS
 future economic benefits (such as revenues or reduced future costs)
An intangible asset is identifiable when it:
 is separable (capable of being separated and sold, transferred, licensed, rented, or
exchanged, either individually or as part of a package) or
 arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
Two Main Characteristics:

•They lack physical existence.

• They are not financial instruments.
Normally classified as long-term asset.

Common types of intangibles:

•Patents legal life 20 yrs, Useful life whichever is shorter
•Copyrights LITERARY Amortized: PRORATED: # UNITS
WORK
•Franchises or licenses
•Trademarks or trade names
•Leasehold or lease rights
•Computer software If integreated sa computer amortized
Ways of acquisition of Intangible assets:
 by separate purchase
 as part of a business combination
 by a government grant
 by exchange of assets
 by self-creation (internal generation)
Recognition criteria:
 it is probable that the future economic benefits that are attributable to the asset will flow to
the enterprise; and
 the cost of the asset can be measured reliably.

Initial Measurement
Intangible assets are initially measured at cost. [IAS 38.24]
If acquired separately, its cost comprises of purchase price (cash price), including any import
duties and non-refundable purchase taxes after deducting trade discounts and rebates and any
directly attributable cost of preparing the asset for its intended use.

If the payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash
price equivalent. The difference between this amount and the total payments is recognized as
interest expense over the credit period.

If acquired in a business combination, the cost of intangible asset is based on its fair value on the
date of acquisition.
Quoted market price
Fair value
Amount paid at arm’s length transaction
If acquired by way of government grant, it is initially recorded at its fair value.

1
If acquired through exchange, it is measured at
 fair value of asset given up, if the exchange has commercial substance
 carrying cost of asset given up, if the exchange has no commercial substance

Internally developed Intangibles:

 Generally expensed.
 If to be capitalized, only those direct costs incurred in developing the intangible, such as
legal costs should be recognized.
Classification of Intangible Assets Based on Useful Life

Intangible assets are classified as: [IAS 38.88]

 Indefinite life: No foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.
 Finite life: A limited period of benefit to the entity.

Measurement Subsequent to Acquisition:

Subsequent Expenditure
Subsequent expenditure on an intangible asset after its purchase or completion should be
recognized as an expense when it is incurred, unless it is probable that this expenditure will enable
the asset to generate future economic benefits in excess of its originally assessed standard of
performance and the expenditure can be measured and attributed to the asset reliably. [IAS
38.60]
Intangible Assets with Finite Lives

The cost less residual value of an intangible asset with a finite useful life should be amortized on a
systematic basis over that life: [IAS 38.97]

Intangible Assets with Indefinite Lives

An intangible asset with an indefinite useful life should not be amortized. [IAS 38.107]
Its useful life should be reviewed each reporting period to determine whether events and
circumstances continue to support an indefinite useful life assessment for that asset. If they do not,
the change in the useful life assessment from indefinite to finite should be accounted for as a
change in an accounting estimate. [IAS 38.109]

Patent gives the holder exclusive use for a period of 20 years.

 Capitalize costs of purchasing a patent.
 Expense any R&D costs in developing a patent. Capitalize only legal cost in registering the
patent.
 Amortization, over the legal life or useful whichever is shorter.
 Competitive patent acquired should be amortized over the remaining life of original
patent.
 Related patent acquired to extend the life of original patent, the original and related
patent should be amortized over the extended life.
 Related patent acquired not to extend the life of original patent, should be amortized over
its own estimated useful life.
Copyright includes: plays, literary works, musical works, pictures, photographs, and video and
audiovisual material.
 is granted for the life of the creator plus 50 years after his death.
 Write off over the revenue of the first printing.
Franchise (or license)
 with a limited life should be amortized to expense over the life of the franchise.
 with an indefinite life should be carried at cost and not amortized but tested for impairment.
Leasehold and Lease rights, Capitalized and amortized over the life of the lease
Leasehold improvement- to be accounted as PPE, to be depreciated over the life of the lease or
life of improvement, whichever is shorter. Residual value shall be ignored in the computation of
depreciation expense.
Trademark or trade name has legal protection for indefinite number of 10 year renewal periods.
 No amortization, but tested for impairment.
GOODWILL, Most unidentifiable intangible asset.
 Internally created goodwill should not be capitalized.
 Only recorded when an entire business is purchased because goodwill cannot be
separated from the business as a whole.
 Goodwill is recorded as the excess of ...

2
 purchase price over the FMV of the identifiable net assets acquired.
Determining the value of Goodwill:
Residual approach, Goodwill = Payments > Fair value of Identifiable net assets
of the acquired entity.
Direct approach (based on excess earnings)
 purchase of average excess earnings
 capitalization of excess earnings
 capitalization of average earnings
 present value of average excess earnings
Mergers and Acquisitions
Organization cost:
 outright expense
 however, direct costs incurred to sell shares should be debited to share premium arising
from sale there from, if not enough, charge to expense. technical & commercial feasibility b4 product
Research and Development costs, outright expense, except that if development cost could be
identified separately from research, it could be capitalized only if it could demonstrate the strict
requisites.
Computer software, treated as
 Inventory, if intended for resale in the conduct of business
 PPE, if if purchased as integral part of computer controlled machine tool.
 Intangible asset, if not for resale and not integral part of the related hardware.

1. Jan Company incurred costs in 2009 as follows:

Equipment acquired for use in the research and cannot
Be used to another project P900,000
Depreciation on the equipment above using straight line 210,000 if magamit pa sa iba included
Materials used in R & D 300,000
Compensation costs of personnel in R & D 400,000
Outside consulting fees for R & D work 220,000
Indirect costs appropriately allocated to R & D 260,000
What is the total amount of research and development that should be reported in
Jan’s 2009 statement of comprehensive income?
a. P2,080,000 b. P1,390,000 c. P1,180,000 d. P880,000

2. On January 2, 2009, Tweety Company purchased Sylvester Company at a cost that resulted in
recognition of goodwill of P1,000,000, having an expected benefit period of 10 years. During the
first quarter of 2009, Tweety spent an additional P400,000 on expenditures designed to maintain
goodwill. Due to these expenditures, at December 31, 2009, Tweety estimated that the benefit
period of goodwill was 20 years. In its December 31, 2009 statement of financial position, what
amount should Tweety report as goodwill? expense becoz internally generated goodwill
a. P1,400,000 b. P1,000,000 c. P950,000 d. P900,000

3. Fritz Company developed a new machine that reduces the time required to insert the fortunes
into its fortune cookies. Because the process is considered very valuable to the fortune cookie
industry, Fritz Company patented the machine. The following expenses were incurred in
developing and patenting the machine:
Research and development laboratory expenses 500,000
Metal used in the construction of the machine 160,000
Blueprints used to design the machine 60,000
Legal expenses to obtain patent 240,000
Wages paid for the employees’ work on the research and development,
and building of the machine (60% of the time was spent in actually
building the machine) PPE 600,000
Expense of drawing required by the patent office to be submitted with
the patent application 30,000
Fee paid to government patent office to process application 50,000
How much of the expenditures should be capitalized as cost of patent?
a. 320,000 b. 670,000 c. 900,000 d. 380,000

4. In 2007, Jason Company incurred research and development costs as follows:

Materials and equipment 3,000,000
Personnel 2,000,000
Indirect costs 1,500,000

3
 These costs relate to a product that will be marketed in 2008. It is estimated that these costs will
be recouped by December 31, 2010. What is the amount of research and development costs
that should be expensed in 2007?
b. 6,500,000 b. 3,500,000 c. 1,500,000 d. 5,000,000

5. X Company incurred the following costs during 2009:

Quality control during the commercial production including routine testing of products 58,000
Laboratory research aimed at discovery of new knowledge 68,000
Testing for evaluation of new products 24,000 R&D-if not part of
Modification of the formulation of a plastics product 6,000 production
Engineering follow through in an early phase of commercial production 15,000

Adaptation of an existing capability to a particular requirement of customers’ needs as part of

the continuing commercial activity 13,000
Trouble shooting in connection with breakdowns during commercial production 29,000
Searching for application of new research findings 19,000

What is the total amount to be reported as research and development expense for 2009?
a. P92,000 b. P98,000 c. P117,00 d. P232,000

6. On July 1, 2009, MN Company signed an agreement to operate a franchise of Jolifoods, Inc.

for an initial franchise fee of P600,000. Of this amount, P200,000 was paid when the agreement
was signed and the balance is payable in four equal annual payments starting July 1, 2010. The
payment is not refundable and no future services are required for the franchise. MN’s credit
rating indicates that it can borrow money at 14% for a loan of this type]

Information on present value factors is as follows: Present value of P1 at 14% for 4 periods –
P0.59; Present value of an ordinary annuity of P1 at 14% for 4 periods – P2.91.

What is the cost of the franchise acquired on July 1, 2009?

a. P436,000 b. P491,000 c. P600,000 d. P676,000

INTANGIBLE ASSETS
Life Treatment
Finite/ Definite Amortized: shorter b/n Useful life & Legal life
Infinite/ indefinite Tested for impairment annually
PATENT
1. Related Patent
a. it will extend the life of the both the orig patent
amortized over the extended life of the patent amortized by original
original patent +extension
b. it will not extend the life of the amortized over the remaining legal life or useful
original patent life of the related patent, whichever is shorter
amortized over the remaining life of the original
2. Competing patent
patent
3. Legal defense cost
a. Successful defense Expensed
Legal cost expensed, carrying amount of
b. Unsuccessful defense patent on the date of unsuccessful defense
written off, recognized as loss

7. Jade Company spent P200,000 on research and development cost for an invention during 2003.
On January 1, 2005, the invention was patented at a nominal cost that was expensed in 2005. The
legal life of the patent was 15 years and the estimated useful life was 9 years. In January 2, 2009, w/ever is
shorter
Jade paid P250,000 for legal fees in an unsuccessful defense of the patent. What should be the
amortization expense for 2009? expense , no initial cost
a. P0 b. P22,730 c. P27,780 d. P50,000

8. On January 3, 2001, the Estonia Company spent P480,000 to apply for and obtain a patent on
a newly developed product. The patent had an estimated useful life of 10 years. At the
beginning of 2005, the company spent P90,000 in successfully prosecuting an attempted

4
 infringement of the patent. At the beginning of 2006, the company incurred additional costs of
P200,000. It is expected that the future economic benefits will flow to the enterprise as a result
of this expenditure through cost savings and the asset’s use is estimated to be extended by
additional 5 years. On July 1, 2009, a competitor obtained rights to a patent which made the
company’s patent obsolete. Patent amortization in 2005 is
a. P75,600 b. P63,000 c. P57,000 d. P48,000 480k/10=48k

9. Use the same information given. How much is the patent amortization for the year 2006?
a. P44,000 b. P51,500 c. P103,000 d. P130,000 480k-(48k*5)+200k/(5+5ys)=44k

10. Use the same information given. How much is the loss on patent obsolescence recognized in
the year 2009?
440k-(44k*3.5)
a. P268,000 b. P286,000 c. P334,750 d. P343,750

11. Mighty company spent P600,000 for the research and development of a patent during the
latter part of 2016. This was registered on January 1, 2017 with a total cost of P400,000, with a
legal life of 20 years and an estimated economical life of 10 years. A related patent was
acquired on January 1, 2019 for P220,000 that is believed to extend the life of the original
patent to twelve years from the date of original issuance. Legal cost of P100,000 was spent on
December 31, 2019 for successfully defending the original and the related patent. But on July
1, 2020, Mighty lost to a lawsuit against the patents it carry after spending P140,000 for legal
costs.
How much is the amortization for 2017?
400k/10
a. 50,000 b. 100,000 c. 20,000 d. 40,000
12. How much is the amortization for the year ending December 31, 2019?
a. 45,000 b. 102,000 c. 54,000 d. 85,000 440k-(40k*3)=320k+220k=540k/(12-2years)=54k
13. How much is the loss on patent to be recognized on July 1, 2020, if any?
a. 459,000 b. 486,000 c. 140,000 d. 867,000 CA 540K-54K-27K
14. How much is the total charge against income relating to the patent that is recognized in 2020?
a. 459,000 b. 626,000 c. 599,000 d. 1,058,000 459K+27K+140K(legal cost)

Theories
1. A consideration in determining the useful life of an intangible asset is not the
a. Legal, regulatory, or contractual provision
b. Provision for renewal or extension
c. Expected action of competitors
d. Initial cost

2. An entity has two patents that have allegedly been infringed by competitors. After
investigation, legal counsel informed the entity that it had a weak case on patent A34 and a
strong case in regard to patent B20. Both patents have a remaining legal life of 8 years.
How should the entity account for these legal costs incurred relating to the two patents?
a. Expense costs for A34 and capitalize costs for B20
b. Expense costs for both A34 and B20
c. Capitalize costs for both A34 and B20
d. Capitalize costs for A34 and expense costs for B20

3. The cost of purchasing rights for a product that might otherwise have seriously competed
with one of the purchaser’s patented products should be
a. Charged off in the current period.
b. Amortized over the legal life of the purchased patent.
c. Added to factory overhead and allocated to production of the purchaser’s product.
d. Amortized over the remaining estimated life of the patent for the product whose market
would have been impaired by competition from the newly patented product.

4. A purchased patent has a remaining legal life of 15 years. It should be

a. Expensed in the year of acquisition.
b. Amortized over 15 years regardless of the useful life.
c. Amortized over its useful life if less than 15 years.
d. Amortized over 20 years.

5. Which of the following should be expensed as incurred by the franchisee for a franchise with
an estimated useful life of ten years?
a. Amount paid to the franchisor for the franchise.

5
 b. Payment to a company, other than the franchisor, for that company’s franchise.
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise.capitalized
d. Periodic payments to the franchisor based on the franchisee’s revenue.

6. A lessee incurred costs to construct walkways and landscaping costs to improve leased
property. The estimated useful life of the walkways and landscaping costs is fifteen years.
The remaining term of the nonrenewable lease is twenty years. The walkways and
landscaping costs should be
a. Capitalized as leasehold improvements and depreciated over twenty years.
b. Capitalized as leasehold improvements and depreciated over fifteen years. w/ever is shorter
c. Capitalized as leasehold improvements and expensed in the year in which the lease
expires.
d. Expensed as incurred.

7. Goodwill represents the excess of the cost of an acquired entity over the
a. Sum of the fair values assigned to identifiable assets acquired less liabilities assumed.
b. Sum of the fair values assigned to tangible assets acquired less liabilities assumed.
c. Sum of the fair values assigned to intangible assets acquired less liabilities assumed.
d. Sum of the fair values assigned to plant assets les liabilities assumed.

8. Which is incorrect pertaining to an intangible asset?

a. A resource controlled by an enterprise as a result of past events.
b. Held for use in the production or supply of goods or services, for rental to others or for
administrative purposes.
c. An identifiable nonmonetary asset without physical substance.
d. A resource from which future economic benefits are expected to flow to the enterprise.

9. Which statement is incorrect concerning the amortization of an intangible asset?

i. Intangible assets with indefinite life are not amortized but tested for impairment at
least every two years. it should be every year
ii. Intangible assets with finite life are amortized over their useful life. w/ever is shorter
a. I only b. II only c. Both I and II d.Neither I nor II

10. All of the following items are intangible assets, except

a. Computer software c. Organizational cost expense outright
b. Registered patent d. Copyright that is protected

11. A purchased patent that has a remaining legal life of 15 years should be
a. Amortized over its useful life if less than 15 years
b. Amortized over 15 years regardless of useful life
c. Expensed in the year of acquisition
d. Amortized over 20 years.

12. Which of the following should be expensed as immediately by a franchisee for a franchisee
with a useful life of 10 years?
a. Initial franchise fee
b. Legal cost paid to franchisee’s lawyer to obtain the franchise
c. Periodic franchise fee payments to the franchisor continuing franchise or royalty
d. Future payments of the promissory note issued as settlement of the initial franchise fee.

13. Which intangible asset is amortizable?

Trademark Copyright
a. Yes Yes
b. Yes No
c. No Yes
d. No No

14. Goodwill should

a. Not be amortized but tested for impairment at least annually.
b. Be recognized as expense
c. Be amortized against the retained earnings
d. Be amortized systematically over the useful life.