ACC 1101 FINANCIAL

ACCOUNTING AND
REPORTING 1
TOPIC 6: INTANGIBLE ASSETS
What are intangible assets ?
• Intangible assets asset is an identifiable non-monetary asset without
physical substance/form.

• Examples of intangible assets include:

• Patents
• Copyrights
• Trademarks Skilled staff is not an
intangible asset since
• Technology the entity lacks of
• Licensing rights control over the skilled
• Franchise staff.
• Goodwill
Initial Recognition of Intangible Assets
• Intangible assets are recognized as assets if all of the following criteria
are met:
a) Definition of intangible assets, i.e. identifiably and control
b) Recognition criteria, i.e. probable future economic benefits are
attributable to the asset will flow to the entity and the cost of the
asset can be measured reliably

• Intangibles such as research cost is treated as an expense in the

period it is incurred.
Initial Recognition of Intangible Assets
• Internally generated intangibles (such as internally generated brand,
trademark, customer list, goodwill and similar items) are not
recognized as assets since it is difficult to identify and separate them
from the business as a whole; and their cost cannot be measured
reliably.
• However, purchased brand, trademark, customer list and similar items
can be recognized as intangible assets since the definition of
intangible assets and recognition criteria are met.
• Research is not recognized as an asset due to uncertainty in the
future economic benefit.
Initial Measurement of Intangible Assets
Intangible asset is initially recognized at cost which comprises:

a) its purchase price, including import duties and

non-refundable purchase taxes, after deducting trade
discounts and rebates; and
b) any directly attributable cost of preparing the asset for
its intended use. (costs of employees benefits,
professional fees and costs of testing)
Example
Focus Eye Bhd acquired franchise to produce a new range of contact
lenses for RM1,000,000. In addition, Focus Eye Bhd is required to
purchase a special equipment which cost RM500,000. The equipment
is expected to be used for five years.
The franchise is considered an intangible asset because it is identifiable (it is
separable from the whole of the business), the entity has control over the
intangible (benefits can be obtained from the use of the intangible and others
have no access to the intangible) and it is expected that future economic benefits
will flow to the entity from the sale of the contact lenses. The franchise is
recognized as intangible asset since its cost can be measured reliably (the
purchase price).
Continue…
• The equipment is treated as an item of plant, property and
equipment because it has physical resource (a steel and concrete
structure) purchased by Focus Eye Bhd (past event), used at the
entity’s discretion (control) to produce contact lenses and used for
five years (more than one year). Since the cost of the machine can be
measured reliably (the purchase price), the machine can be
recognised as plant, property and equipment, and it is depreciated
over its expected useful life.
Continue (journal entry)
DR Intangible Assets 1,000,000
CR Cash/Bank 1,000,000
(purchase of franchise)

DR Property, plant and equipment 500,000

CR Cash/Bank 500,000
(purchase of equipment)
Accounting for Intangibles
• Intangible assets that are purchased are recorded at cost.
• Most purchased intangibles are expensed through amortization, the
allocation of the cost of an intangible asset to expense over its useful
life.
• Only intangibles with a definite life are amortized.
• Definite life: There is foreseeable limit to the period over which an
intangible asset is expected to generate net cash inflows for the
entity.
Accounting for Intangibles
• Intangible assets with an indefinite life are tested for impairment
annually.
• Indefinite life: There is no foreseeable limit to the period over which
an intangible asset is expected to generate net cash inflows for the
entity.
• Impairment occurs when the fair value of an asset is less than the
book value.
• A company records a loss when an impairment occurs.
Example
A trademark that is useful in distinguishing its new product was
acquired in 2010 for RM1,000,000. The trademark is renewable every
10 years with minimal cost. All evidence indicates that the trademark
product will generate cash flows for an indefinite period of time.

• The trademark is regarded as having indefinite life because it is

expected that the trademark product will generate cash flows for an
indefinite period of time. Therefore, the trademark will not be
amortized and the useful life of the trademark should be reviewed
each reporting period to determine whether events and
circumstances continue to support an indefinite useful life assessment
for the trademark.
Example
• A patent for its new product was purchased for RM700,000 on 1
January 2013. It is estimated that the useful life of the patent is seven
years.

The patent is considered as having a finite life since it has limited period
of time in generating net cash inflows. Therefore, the patent is
amortized on a systematic basis over its useful life of seven years.
Accounting for intangible assets
Intangible assets
( Useful life )

Finite Life Infinite Life

Amortized Impairment test

1. Patents
• A patent is an intangible asset that is a federal government grant
conveying an exclusive 20-year right to produce and sell an invention.
• The invention may be a process, product, or formula.
• The acquisition cost of a patent is debited to the Patent account.
Patents
Assume Smart Touch Learning pays $200,000 to acquire a patent on January 1. Acquisition
entry:
Patents
Assume Smart Touch Learning pays $200,000 to acquire a patent on January 1. The useful
life of the patent is determined to be five years.
Patents
Adjusting entry to record amortization:

A company may credit an intangible asset directly when recording amortization expense, or
it may use Accumulated Amortization.

© 2018 Pearson Education, Inc. 10-17

2. Copyrights and Trademarks
• A copyright is the exclusive right to reproduce and sell a book, a
musical composition, a film, another work of art, or intellectual
property.
• Granted for the life of the creator plus 70 years.
• A trademark (also called a trade name) is an asset that represents
distinctive identifications of products or services, such as the Nike
“swoosh” or the McDonald’s “golden arches.”
3. Franchises and Licenses
• Franchises are privileges granted by a business to sell goods or
services under specified conditions.
• McDonald’s and Subway are well-known business franchises.
• Licenses are privileges granted by a government to use public
property in performing services.
4. Goodwill
• Goodwill is the value paid above the net worth of a company’s assets
and liabilities.
• Special features of goodwill:
• It is recorded by an acquiring company when it purchases another company
for more than the market value of the net assets acquired.
• Goodwill is not amortized.
Goodwill
White Company acquired Mocha Company on January 1, 2018. The sum of the market
values of Mocha’s assets was $9 million, and its liabilities totaled $1 million, so Mocha’s net
assets totaled $8 million. Suppose White paid $10 million to purchase Mocha.
Goodwill
White’s entry to record the purchase of Mocha:

© 2018 Pearson Education, Inc. 10-22

Reporting of Intangible Assets