| i | INTANGIBLE ASSET i ible asset as aply defines an intangi PA ero eh ctr asset without physical substance is “the i ible asset must tates that “the intangibl seer hyn evel of at even and om which future economic benefits are expected to flow to the entity.” Accordingly, there are three essential criteria in the definition of an intangible asset, namely: a. Identifiability b. Control c. Future economic benefits Tasntifiability The definition of an intangible asset requires that an intangible asset must be identifiable in order to distinguish i it clearly from goodwill. An asset is identifiable when: a. The asset is sable, Separability means that the asset is capable of being separated from the entity and sold, transferred, licensed, re} ed, either individually or together with a related asset or ability. b- The asset arises from eontraetial or othe} légalltights. This is regardless of whether these rights at transferable or separable from the entity or from rights and obligations.ay Another element in the definition of an intangible asset is that it must be under the control of the entity as a result of a PesteuenE ae ae ne eect, Control is the power of the entity to obtain the future economic nefits flowing from the intangible asset and restrict the ‘access of others 10 those benefits. In other words, the entity must be able to enjoy the future economic benefits from the asset and prevent others from enjoying the same benefits, The capacity of an entity to control the future economic nefits from an intangible asset normally would stem from gal rights enforceable in a court of law as in the case of trademark, copyright and patent. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not always a necessary condition for control since an entity may be able to control the future economic benefits in some other way, For example, one method of control is keeping something secret through employee confidentiality. The skill of employees arising out of the benefits of training costs cannot be recognized as intangible asset because the entity does not conirol the future actions of the staff. Similarly, market share and customer loyalty cannot normally be recognized as intangible asset because an entity cannot control the actions of the customers. Customers cannot be forced to buy from the entity and can go elsewhere. : Future economic benefits Future economic benefits may include revenue from the sale of roducts or services, cost savings or other benefits resulting fom the use of the asset by the entity, ca For example, the use of intellectual p rocess or the legal right to use a ne ture production costs rather than 859iti intangible asset Recognition of an int An intangible asset shall be recognized if the following conditions are present : a. It is probable that future economic benefits attributable to "the asset will flow to the entity, 3 b. ‘The cost of the intangible asset can be measure ay tail Judgment is usually exercised in assessing the degree of certainty ‘of the future economic benefits. The judgment is based on external evidence. Initial measurement of intangible asset intangil hall S 38, paragraph 24, provides that an intangible asset s| paechny aa at cost. The cost of an intangible asset depends on the following: Separate acquisition b cquisition as part of a business combination & Acquisition by way of a government grant d, e Acquisition by exchange : ) Acquisition by self-creation or internal generation If an intangible asset is acquired Separately, the cost of the intangible asset can be méasured relial 'Y, particularly so if the purchase . monetary asset. The asset comprise: a. Purchase price ‘ ». Import duties and port dutie: idable purchase By ©. Directly attributable costs o i en Preparing the asset for the Directly attributable costs include the fol a i or other cost of a separately acquired intangible Nowing: Cost of employee ben, rectly from bringing the asset to its work . Profensional fee ariei to its working condition, "tM bringing the asset efit arising di ing condition, Cost of testing whether the asset ix functioning property. 860 eeCosts which are not capitalizable 8. Cost of introducing « new product or peien, including cost of advertising and promotional activi 4 b. Cost of eonduetang Vuninese in ne location or with a new of customer, including costs of staff training inistration and other general overhead cost t incurred while an asset capable of operating in a Manner intended by management has yet to be brought into use Initial operating lose COW INV7ION Bye ; eo ioalnesuGinea Wan intangible assot is acquired in a ination, the cpt the tng tnt ae Se pe Sr mi Sn te ‘The intangible asset acquired by way of government grant may be initially recorded at either a >. plus any expenditure directly ring the asset for ite 1 asset for its intended use. Acquisitionbyexchange = ee If the exchange transaction lacks intangible asset is om the carrying aman ® An exchange transaction the cash 's of the asset received do not | cathet intangible ass Internally generated rated intangible asset comprises Gide ecessary to create, produce and i ole of operating it in the manner i r crake attabutable prepare the asset to be cap intended by management. ‘ Examples of directly attributable costs are: f materials and services used or consumed in ? aoe the intangible asset ; b. Cost of employee benefit arising from the generation of the intangible asset Fee to register a legal right d. Amortization of patent and license used to generate the intangible asset However, the following expenditures are not capitalized as cost of an internally generated intangible asset: a. Selling, administrative and other general overhead, unless this expenditure can be directly attributed to preparing the asset for use. b. Clearly identified inefficiency and initial operating loss incurred before an asset achieves planned performance. c. Expenditure on training staff to operate the asset, PAS 38, paragraph 63, exp! generated brand, masthead, items similar in substance si asset. licitly provides that internally publishing title, customer list and hall not be recognized as intangible Such items cannot be identified Separately from the cost of developing the business as a whole. Instead, such items are seen as being com; : ni f generated goodwill. ie ‘ponents of internally Accord: re Accordingly, such expenditures shall be expensed when 862 | }Recognition as an expense An expenditure on an intangible item that does not meet the recognition criteria for an intangible asset shall be expensed when incurred, Examples of expenditures that are expensed when incurred include: a. Start up cost Start up cost may consist of organization cost such as legal and secretarial cost incurred in establishing a legal entity. Start up cost also includes preopening cost or expenditure to open a new facility or business, an: Preoperating cost or expenditure for commencing new operation or launching new product, b. Training cost ¢. Advertising and promotional cost d. Business relocation or reorganization cost Subsequent expenditure As a rule, a subsequent expenditure on an intangible asset shall be recognized as expense. ‘The reason is that most subsequent expenditures are likely to maihtain only the expected future economic benefits embodied in the intangible asset. However, the subsequent expenditure may be capitalized or added to the cost of the intangible asset if the following recognition criteria for an intangible asset are met: a. It is probable that future economic benefits attributable specifically to the subsequent expenditure will flow to the entity. b. The subsequent expenditure can be measured reliably, The nature of an intangible asset is such th 1 at, in many cases, it is not possible to determine whether sub. will flow to the entity from the intangibl. le asset, Therefore, only rarely will a subsequent expen intangible asset result to an addition to the c intangible asset. 863* e ets Identifiable intangible 485 ifiable intangible assets. ins to identifiab 4 ifically pertains t0 i PAS 38 ee = se acquired thr ough purchase, there is If the intangible { that would make the asset a transfer of legal righ identifiable. t could be sold, transferred, licensed, set Moreover, if the aestty, the intangible asset is identifiable. rented or sold separatel Examples of identifiable intangible assets are: Patent Copyright Franchise ‘Trademark or brandname . Customer list wren ss a » Sao aeecmmeetgiaans fishing right Unidentifiable intangible asset An intangible asset is unidentifiable if it cannot be sold, transferred, licensed, rented or exchanged separately. The intangible asset is inherent in a co ole ass t ntinuing business and can only be identified with the entity as a whole. 2 stele intangible asset squarely describes a Classification of intangible assets a Intangible assets ‘with depinitenife, dpical examples include cee ttm, Computer softens eit franchise b. Intangible Assets with i,Measurement after recognition An entity shall choose either the cost model or revaluation model as an accounting Policy. — An intangible asset shall be carried at cost, less :nY accumulated amortization and any accumulated impairment loss, ; Revaluation model ~An intangible asset shall be carried at a revalued amount, | less any subsequent amortization and any Subsequent accumulated impairment loss. The revalued amount is the fair value at the date of revaluation and is determined by reference to an active market, Thus, an intangible asset can only be carried at revalued amount if there is an active market for the asset. Amortization and impairment of intangible assets ‘\PAS 38, para; graph 97, states that intangible assets with limited or fii nite life are amortized over their useful life. However, intangible assets with finite useful life are tested for impairment whenever there is an indication of impairment at the end of reporting period. Paragraphs 107 and 108 stat indefinite life are not ai impairment at least annual indication that the intangibl. AMORTIZATION Amortization ‘tematic allocation of the amor amount of an intangible asset over the usshil life ‘The amortizable amount is the cost of the intangible asset less residual value. The amortization is recorded by debiting amortization expense and crediting the intangible asset account, Normally, the intangible asset account, the periodic amortization but an accu account may be maintained, : e that intangible assets with ‘mortized but are tested for *, ly and whenever there is an le asset may be impaired. 865Amortization period : s i ble asset shall be Tt The amortizable amount of an intang!t ” Hii th : basis over the amortized on a systematic ay C0: : the asset is avail r use, Amortization shall begin when tion and condition for He meaning, when the asset is in the loca’ th the intended use. fe. Ri ae hen the intangible asset is Amortization shall cease wh derecognized or when the asset is classified as held for sale. T Useful life 3 ‘The useful life of an intangible asset must be assessed as either indefinite or finite. b. If finite, the useful life may be expressed in terms of years or the number of units to be produced. : : Th The useful life of an intangible asset is indefinite when there Bi is no foreseeable limit to the period over which the asset is acc expected to generate net cash flows. et In other words, the useful life is indefinite when there are Th no legal, contractual, competitive and other factors that ase would limit the useful life of the intangible asset. Itt Factors affecting useful life = a. Technical, technological, commercial or other type of if } obsolescence | b. Expected action by competitors or potential competitors “4 ¢. Expected usage of the asset by the entity d. Typical product life eycle for the asset 2 Su &. Stability of the industry in which the asset operates 4 £ Level of maintenance expenditure required to ebtein the De Tn ie economic benefits from the asset ‘ useful life of the asset may be dey seful life of other assets of the entity Pendent on the w a. h. Period of control ove by t the asset and legal or similar li its on the use of the asset, such as expiry dates Pony ae 866Amortization method The method of amortization shall reflect the pattern in which the future economic benefits from the asset are expected to be consumed by the entity. However, if such pattern cannot be determined reliably, the straight line method of amortization shi used. Residual value ‘The residual value of an intangible asset shall be presumed to zero, except: a. When a third party is committed to buy the intangible asset at the end of the useful life. b. When there is an active market for the intangible asset so that the expected residual value can be measured and it is probable that there will be a market for the asset at the end of the useful life. The residual value is reviewed at each financial year-end. A change in the residual value is accounted for as a change in accounting estimate. Change in amortization method and useful life The amortization method and the useful life of an intangible asset shall be reviewed at each financial year-end. If the expected useful life of the intangible asset is significantly different from previous estimate, the amortization period shall be changed accordingly. If there has been a feted, change in the expected pattern of economic benefits from the asset, the amortization method shall be changed to reflect the new pattern. Such changes shall be accounted for as changes in accounting estimate and therefore treated currenily and prospectively. Derecognition of an intangible asset a. On disposal of the asset b. When no future economic benefits are expected from use and disposal of the asset 867GOODWILL Goodwill is undeniably a uni statements. Goodwill is often referred to as the jm intangible assets. Goodwill is unique in the sense # cannot be bought and sold. ‘The goodwill can only be identified with the entity as a whole. que asset presented in the financial ost intangible of all hat goodwill standing alone Goodwill isan 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. What is goodwill? Goodwill arises when earnings exceed normal earnings by reason of good name, capable staff and personnel, high credit standing, reputation for fair dealings, reputation for superior products, favorable location and a list of regular customers. In other words, goodwill is created by a good relationship between an entity and the customers: 4. By building up a reputation by word of mouth for high quality products or high standard of service. b. By responding promptly and helpfully to queries and complaints of customers. © Through the personality of the staff and their attitude to the customers. Goodwill « Goodwill is continually. changing. One act of bad customer relations might di i one act of good relations might improve gendeeee oem and 868Recognition of goodwill In sie sn ction should be made (iEWeen Developed goodwill or internal gooduill i that goodwill wh ers ant if sated z because of good name, capable staff and Petsonnei, supe products, favorable location and high credit: standing, Such "homegrown" goodwill is not recorded. ‘The measurement of internal goodwill may prove to be difficult > and a great deal of subjectivity and mMisrepresentation might occur. PAS 38, Paragraph 48, provides that internally generated Roodwill shall not be recognized as an asset. Purchased goodwiti is the goodwill paid for and arises when Pum Soe eid fora ~ ness 18 purchased. People wishing to set up a business either would start the business from seratch or buy an existing business. When an entity acquires an existing business, it will have to Pay not only for the net tangible and identifiable intangible assets but also the goodwill of the business. Purchased goodwill is recognized as an asset because it has been paid for. Measurement of goodwill The measurement of goodwill is not really a problem for accountants who will simply record the goodwill in the accounts of the new business. ‘The value of goodwill is a matter for the purchaser and seller to agree upon in fixing the purchase price of the business. Two approaches may be followed in measuring goodwill, namely residual approach and direct appdual approach Resi idual approach, goodwill is measured by Under the residual appin ie entity with the net tangil the purchase price eaadhe ate nd identiGble assets, meaning total asse! good: minus liabilities assumed. The net assets acquired must be measured at fair value. e net asset “resi sh" because ent is known as the "residual approach Perea dath the residual after deducting the fair value of fet tangible and identifiable assets from the purchase price agreed upon between the buyer and the seller. Illustration - Residual approach ‘An entity purchased an ongoing business for P9,000,000 cash. ‘The assets and liabilities of the acquired business measured at fair value are: Assets Cash 500,000 Accounts receivable 1,500,000 Inveataty, 2,500,000 Property, plant and equipment. _ 4,000,000 Patent 1,300,000 - 9,800,000 Liabilities Accounts payable 1,600,000 Notes payable 1,000,000 Accrued expenses 200,000 2,800,000 Net assets at fair value 7,000,000 [Purchase price 00 | Net assets acquired at fair value conten \ BY 1,000,000 | wt gi afc BBG DONS, 870 fice es ac iain TS encesJournal entry to record the purchase Cash 500,000 Accounts receivable 1,500,000 Inventory 2,500,000 Property, plant and equipment 4,000,000 Patent. 1,300,000 Goodwitt 2,000,000 zs Accounts payable Teed Notes payable eee Cosh 9,000,000 Under the direct approach, goodwill is measured on the basis of the future earnings of the entity. An attempt i which are the ade to value the anticipated excess earnings "ssential component of goodwill. ‘The direct approach seems to be a systematic and logical ‘way of measuring goodwill because if future earnings exceed normal earnings, the excess earnings are indicative of the fact that there is an unidentifiable intangible asset that is causing the excess earnings. Such unidentifiable intangible asset is called goodwill, A sophisticated application of the direct the following information: approach requires a. A normal rate of return for industry. The normal rate which usually attracts im Tepresentative entities in the of return is that rate of return estors in a particular industry b. The fair value of ta: ingible assets and any identifiable intangible assets, ¢. The estimated future normal earnings of the entity, 4d. The probable duration of any excess ear: to goodwill. | 871luster > roach ion ~ Direct apP’ Miustration ng data are available in relation to the comp ing data are utation The fallow ee aeasea 7,500,000 ill Net easing oT 12% Normal rate of return oie . receding the sale: Past earnings for 5 years P) 950,000 2018 975,000 2019 950,000 2020 1,075,000 2021 1,050,000 2022 —, 5,000,000 — ‘Average camings ofthe 5-year period (6,000,000/5) 1,000,000 — Method 1 - Purchase of “average excess earnings” ‘The goodwill is measured at average excess earnings for 5, Years, eal 100,000 | 25% ee 222.000 |]Method 3 ~ Capitalization of “average earnings” ‘The goodwill is measured at average earnings capitalized at 10%. \ Average earnings 1,000,000 Divide by capitalization rate — 10% | Net assets, including goodwill or purchase price 10,000,000 Net assets, excluding goodwill (7,500,000) | (ost 2,500,000 Method 4 ~ Present value method Under this method, the goodwill is the discounted value or Present value of the average excess earnings that are expected to become available in future periods, Average excess earnings 100,000 | Multiply by the present value of an ordinary { | annuity of 1 for 5 years at 12% 3.605 | | Goodwill Impairment of goodwill PAS 38, paragraph 107, mandates that goodwill shall not be | amortized because the useful life is indefinite. det However, goodwill shall be tested for unpairment at least annually and whenever there is an indication that it may be impaired, “Moreover, goodwill shall be tested for im operating segment level or any lower level An impairment loss recognized for goodwill shall no be reversed in a subsequent period. 7 me The impairment of goodwill is exte in Chapter 32. pairment at the 873 BeeNegative goodwill 4: \nye y Vege gras consideration transferred for the aoa roe tha thee fait value ofthedentiiable assets aa sa abil: eoeumed, the difference 19 negative Modwill! 34, provides that such negative goodwill S yh PERS 3, paragrap on bargain purchase. ‘is recognized as £0" The standard has already dropped the term negative goodwill. ‘ Ilustration An entity purchased an ongoing business for 8,000,000 cash. ‘The assets and liabilities of the acquired business measured at fair value are: 500,000 Cash . ‘Accounts receivable 2,000,000 Inventory 2,500,000 taal 3,000,000 Plant and equipment 6,000,000 ; Accounts payable (1,000,000) 4 Bonds payable (4,000,000) | Net assets at fair value 9,000,000 Purchase price 8,000,000 \ Net assets acquired at fair value 9,000,000 4 Negative goodwill (1,000,000) 4 ee Seo a Journal entry a Cash 500,000 a Accounts receivable 2,000,000 5 Inventory 2,500,000 s Land 3,000,000 & Plantand equipment 6,000,000 > Accounts payable 1,000,000 5 Bonds payable 000 4,000,000 feat 8,000,000 Gain on bargain purcha: “000, eR ouRe; 1,000,000 874Disclosures related to intangible assets 1. Whether useful lives are indefinite or finite, and if finite, the useful lives or the amortization rate, 2. The amortization method. 8. The gross carrying amount and any accumulated Amortization at the beginning and end of the period. 4. The line item in the income statement in which any amortization of intangible asset is included. 5. Additions, separately showing those internally generated, acquired separately and acquired through business combination. 6. Intangibie assets classified as held for sale 7. Increases and deer ‘eases in intangible assets resulting from revaluations. 8. Impairment losses and reversal of impairment losses. 9. Net exchange differences on translation. 10. The carrying amount of intangible asset with indefinite life and the reason for the indefinite life. 11, The carrying amount and remaining amortization period of intangible assets that are material 12. The carrying amount of intangible asset whose title is restricted or pledged as collateral security. 13. Contractual commitments for intangible assets. 14. Intangible assets acquired by way of government grant and initially recognized at fair value. 15. The amount of research and development expenditure recognized as expense during the period. 875