CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Lesson 8.1 – PAS 38: Intangible Assets

Intangible Asset is an identifiable non-monetary asset without physical substance.
The asset must be controlled by the entity as a result of events in the past and
something from which the entity expects future economic benefits to flow.
- Elements of intangible assets:
o Identifiability – an asset is identifiable if it is either
 Separable – or capable of being separated or divided from the
entity and sold, transferred, exchanged separately or with
related contract, identifiable asset or liability.

 Arises from contractual or other legal rights whether they are

transferable or separable. From the entity

o Control – it means the entity must be able to enjoy the future

economic benefits and prevent the access of others to those benefits.
However legally enforceable right is not always a necessary
condition, some examples of which are:
 Market share and customer loyalty cannot be considered
intangible asset since the entity cannot control the actions of
its customers.

 Skills of employees developed from training provided by the

entity, for it does not control the future actions of its
employees

o Future economic benefits – may come from the sale of products or

services or from reduction in expenditures (savings) or from the
entity’s use of the asset.

- Recognition Criteria:
o It is probable that the future economic benefits will flow to the entity.
o The cost can be measured reliably

- Assets with both intangible and tangible elements – the entity uses
judgment:
o If the intangible component is an integral part of the asset as a whole,
the intangible element is treated as property, plant and equipment
o If not an integral part, it is treated as intangible asset.
 Example is a computer software of a computer-controlled machine that
cannot operate without the software is an integral part of the related hardware
and therefore it should be treated as PPE.
- Measurement and mode of acquisition of intangible assets – It is initially
measured at cost
o Separate acquisition – purchase price which includes legal fees and
any costs incurred in getting the asset ready for use.

o Acquisition as part of a business combination (acquisition or

takeover) – its fair value at the date of acquisition.

o Acquisition by way of a government grant and the grant itself

may be recorded initially either
 at cost (which may be zero) or
 at fair value
 at nominal amount plus direct costs incurred in preparing the
asset for its intended use.

o Exchanges of assets – if intangible asset received is either:

 With commercial substance – if entity’s subsequent cash
flows are expected to change as a result of the exchange.
 Fair value of asset given up
 Fair value of asset received
 Carrying amount of the asset given up
 Lacks commercial substance – carrying amount of asset given
up (no gain or loss)

o Internally generated intangible assets – can be classified as:

 Research phase – costs incurred during this phase are
expensed. Some examples are:
 Activities aimed at obtaining new knowledge
 The search for, evaluation and final selection of,
applications of research findings or other knowledge
 The search for alternatives for materials, devices,
products, processes, systems or services.
 The formulation, design evaluation and selection of
possible alternatives for new or improved materials
devices, products, systems or services.
  Development phase – is application of research findings or
other knowledge to a plan or design for the production of new
or substantially improved materials, devices, products,
processes, systems or services before the start of commercial
production or use. Costs incurred are capitalized if the
following are present in the intangible asset:
 Technical feasibility of completion
 Intention to complete
 Ability to use or sell
 Probable future economic benefits
 Availability of adequate resources needed to complete
the development
 Reliable measurement of the costs

- Subsequent measurement – after the initial measurement, the entity can

choose either the following, which should be applied to an entire class of
intangible assets:
o Cost model – carried at its cost less any accumulated amortization
and any accumulated impairment losses
o Revaluation model – carried at its fair value at the date of
revaluation less any subsequent accumulated amortization and
subsequent accumulated impairment losses
 When intangible asset is revalued upwards, amount should be
credited to equity under revaluation surplus.
 If revaluation surplus is a reversal of a revaluation decrease
that was previously charged against income, the increase can
be recognized as an income.
 Where the carrying amount of an intangible asset is revalued
downwards, it should be charged as an expense unless the
asset has previously been revalued upwards. Revaluation
decrease should be first charged against any previous
revaluation surplus in respect of that asset.
Illustration:
An intangible asset is measured by a company at fair value. the asset was revalued
by P400,000 in 2019 and there is a revaluation surplus of P400,000 in the statement
of financial position. at the end of 2020, the asset is valued again and a downward
valuation of P500,000 is required. Required: State the accounting treatment for the
downward valuation.
Answer:
The downward valuation of P500,000 can first be set against the revaluation surplus
of P400,000. The revaluation surplus will be reduced to zero and a charge of
P100,000 made as an expense in 2020.

- Useful life of intangibles:

o Finite – can determine reliably the length of or number of production
or similar units consisting of the intangible asset’s useful life. Only
this type is amortized.
o Indefinite – if there is no foreseeable limit to the period over which
the asset is expected to provide future economic benefits. It means
that its useful life has an end but cannot be forecasted.
 Should not be amortized
 Should be tested for impairment at least annually.

- Amortization – is the systematic allocation of the depreciable amount of an

intangible asset over its useful life.
o It is similar to depreciation in tangible asset.
o Intangible asset is amortized over the shorter of its useful life and
legal life if any.
o Starts when asset is available for use and stops when asset is
derecognized (sold or disposed of), classified as held for sale or fully
amortized.
o It is recognized as an expense
o Amortization method used should reflect the pattern in which the
asset’s future economic benefits are consumed. If such pattern cannot
be predicted reliably, straight line method should be used.
o Residual value is assumed zero unless a third party is committed to
buying it at the end of useful life and it is probable that there will be a
market at the end of its useful life.
o It should be reviewed annually.

- Disposal/Retirement of Intangible Asset:

o Should be eliminated from the statement of financial position when it
is disposed of or when there is no further expected economic benefit
from its future use.
o Gain or loss should be taken to profit or loss as a gain or loss on
disposal.
- Financial Statement Presentation:
o Intangible assets are aggregated and presented as one line item under
the heading “Intangible Assets” or “Other Intangible Assets” in the
statement of financial position
o The breakdown of the line item is disclosed in the notes.
o Presented separately from goodwill

- Disclosure – for each class of intangible assets, distinguishing between

internally generated and other intangible asset, the following are disclosed:
o Whether the useful lives are indefinite or finite. If the latter, indicate
the useful lives or the amortization rates used
o Amortization method used
o Gross carrying amount and any accumulated amortization at the
beginning and end of the period
o The line items of the statement of comprehensive income in which
any amortization of intangible assets is included
o A reconciliation of the carrying amount at the beginning and end of
the period showing increases and decreases to intangible assets and
related accumulated amortization and impairment losses.
o Changes in accounting estimates in accordance with PAS 8
o Intangible assets assessed as having indefinite useful life and reasons
supporting the assessments
o Those acquired by way of government grants and initially recognized
at fair value
o Any restriction on title (pledges, etc.)
o Contractual commitments to acquire the asset
o Revaluation surplus recognized on revalued intangible assets and
methods and assumptions used in its estimates of fair value
o Aggregate amount of research and development expenditures
Lesson 8.2 – PAS 40: Investment Property
Investment Property is property (land or building or part of a building) held (by the
owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for: a.) use in the production or supply of goods or
services or for administrative purposes (PPE) or b.) sale in the ordinary course of
business (Inventory) or c.) classified as held for sale.
- Examples of investment property:
o Land held for long-term capital appreciation rather than for short-term
sale in the ordinary course of business
o Land held for a currently undetermined future use
o A building owned by the entity and leased out under operating lease.
o A building that is vacant but is held to be leased out under one or
more operating leases
o Property that is being constructed or developed for future use as
investment property.

- Partly Investment Property and Partly Owner-Occupied – example is

building partly being rented out and partly being used as office space of the
entity. It is accounted for as follows:
o If the portions could be sold separately:
 Investment Property for the portion being rented out under
operating lease.
 Property, Plant and Equipment for the owner-occupied portion
o If the portions could not be sold separately:
 Investment Property if the owner-occupied portion is
insignificant
 Property, Plant and Equipment for the owner-occupied portion
is significant

- Investment property in consolidated financial statements

o Property, Plant and Equipment - If leased out by a member of the
group to another member of the group (parent or subsidiary)
o Investment Property – in the lessor/owner’s individual financial
statement

- Initial Measurement
o Acquisition by purchase: at cost: purchase price and directly
attributable costs incurred in bringing the asset to its intended
condition
 o Acquisition by deferred payment: cost is at cash price equivalent.
The difference between the total payments and cash price is
recognized as interest expense.
o Exchanges of assets:
 With commercial substance – if entity’s subsequent cash
flows are expected to change as a result of the exchange.
 Fair value of asset given up
 Fair value of asset received
 Carrying amount of the asset given up
 Lacks commercial substance – carrying amount of asset given
up (no gain or loss)

- Subsequent Measurement:
o Cost model
 Assets held by lessees as right-of-use assets are measured at
cost
 Should be measured at depreciated cost less any accumulated
impairment losses
 Should disclose the fair value of its investment property
o Fair value model
 The entity that chooses this model should measure all of its
investment property at fair value, except in extremely rare
cases where it cannot measure reliably some of it, it should
apply cost model.
 A gain or loss arising from a change in the fair value should
be recognized in net profit or loss for the period it arises
 The fair value should reflect market conditions at the end of
the reporting period.
 Assets measured under this model are not depreciated

- Transfers – this happens when there is a change in use, either to or from

investment property.
o Commencement of owner-occupation, from investment property to
PPE
o End of owner-occupation, from PPE to investment property
o Commencement of an operating lease, from inventories to investment
property
o Commencement of development with a view to sell, from investment
property to inventories.

- Derecognition:
o When investment property is disposed of.
 o When no future economic benefits are expected from it
o On derecognition, the difference between the carrying amount and the
net disposal proceeds is recognized as gain or loss in profit or loss.

- Self-constructed Investment Property:

o Accounted for the same way as acquisition by purchase.
o Initial costs include all directly attributable costs of constructing and
preparing the property for its intended use, materials, labor and
construction overhead
o Abnormal amount of wastage material, labor or other resources
incurred are excluded.
o Subsequently measured using either cost model or fair value model.

- Disclosures:
o Whether the entity uses the cost or fair value model
o The criteria used to distinguish investment property from PPE and
inventory.
o The extent to which the fair value of investment property is based on
a valuation by an independent valuer, if not obtained, the fact should
be disclosed.
o The amounts recognized in profit or loss for rental income and related
expenses
o The existence and amounts of restrictions on investment property
o Contractual obligations to purchase, construct or develop investment
property or for repair, maintenance or enhancements.
o Additional disclosures under fair value model:
 Reconciliation showing increases and decreases in investment
property
 A reconciliation between the valuation obtained and the
adjusted valuation
 Disclosure of any investment property whose fair value on
initial recognition cannot be reliably measured, and thus
measured under cost model.
o Additional disclosures under cost model
 Depreciation method used, the useful life and depreciation rate
used
 Reconciliation showing increases and decreases in investment
property and related accumulated depreciation and
accumulated impairment loss.