ACCOUNTING FOR

INTANGIBLE ASSETS
(PAS 38)

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 Definition of Intangible Assets
• Intangible asset: An identifiable
nonmonetary asset without physical
substance.

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 Nature of Intangibles
• Identifiable
• Without physical substance
• Assets C.A.P.
• Non-monetary

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 Nature of Intangibles
• Controlled by the enterprise;
• Arising out of a past event; and
• Probability of inflow of benefits.

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 2 Criteria for Recognition
• Probability of inflow of
economic benefits to the entity;.
• Measurability of its cost or
equivalent value.

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 Three (3) Essential Recognition
Criteria of Intangible Assets

• Identifiability
• Controllability
• Future economic benefits

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 What is meant by identifiable
• ‘Identifiable’ means:
– It is separable or the asset is capable of
being separated from the entity and sold,
transferred, licensed, rented or
exchanged, either individually or together
with a related contract, asset or liability
regardless of whether or not the entity
intends to do so;

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 What is meant by identifiable
• ‘Identifiable’ means:
– It 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.

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 What is meant by identifiable
• Not applicable to‘goodwill’
• ‘Identifiable’ criteria:
– is separable from the entity;
– capable of being transferred; and
– arises from contractual or other
legal rights

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 What is meant by “control”
• It is the power of the entity to obtain
the future economic benefits from the
asset and restrict access of others to
those benefits.

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 Sources of Control
• Control usually proceeds from:
– Legal rights that are enforceable in a
court of law;
– In the absence of legal rights, it is more
difficult to demonstrate control;
– 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

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ways.
 Sources of Control
• Notes:
– Market and technical knowledge may
give rise to future economic benefits to
the entity if these are protected by legal
rights or by a legal duty of employees to
maintain confidentiality.
– Skill of employees, arising out of training
and market share and customer loyalty
cannot be considered as intangible
assets because no control exists.
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 What is meant by “future
economic benefits”
• It usually include revenue from the
sale of products or services, cost
savings or other benefits resulting from
the use of the asset by the entity.

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 Recognition Criteria-
General Rule
• Criteria (IAS 38)
– It is probable that future economic
benefits attributable to the asset will flow
to the entity;
– The cost of the asset can be reliably
measured.

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 Modes of Acquisition
• Intangible assets may be/
acquired/through/by/as:
– Separately;
– Internally generated;
– Part of business combination
– Acquired on deferred payment plan
– Government grant;
– Exchange with other NCA.

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 Recognition & initial
measurement
When an intangible asset is acquired
Separately, cost include:
– Purchase price;
– Import duties;
– Non-refundable purchase taxes;
– Any directly attributable costs such as
– Legal & professional fees; and

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– Employee benefits
 Incidental Costs which are
expensed when incurred
• Cost incurred before asset’s actual use
• Administrative and other general OH
• Initial operating losses.
• New product introduction costs, including
ads and promotional activities;
• Staff training and other costs of conducting
business in a new location

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 Internally Generated
Intangible Assets
• Cost include all directly attributable
costs necessary to create, produce
and prepare the asset to be capable
of operating it in the manner
intended by management.

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 Directly Attributable Cost
Includes (REAM):
• Registration fees of a legal right;
• Employee benefits arising from the
generation of the intangible asset;
• Amortization of patents and licenses that
are used to generate the intangible assets.
• Materials and services consumed or used
in generating the intangible assets;

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 Expenditures which are not
capitalized as part of cost
• Administrative, selling and other general
overhead unless directly attributable to
prepare the asset for use
• Cost of identified inefficiencies and initial
operating losses incurred before an asset
achieves planned performance;
• Expenditure to train staff to operate the
asset.

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 Recognition & initial
measurement
Determining when to commence
capitalising costs depends on
whether the asset was generated in
the research or development phase

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 Recognition & initial
measurement
• Research: Original, planned
investigation to gain knowledge,
understanding
• Development: Knowledge applied to
a plan or design to pre-commercially
produce something new or
improved.

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 Recognition & initial
measurement
When an intangible asset is created
in the development phase, expensed
research amounts can neither:
– be capitalised, nor
– have its equity adjusted.

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 Research Activities & Costs
• Laboratory research aimed at discovering or
obtaining new knowledge.
• Searching for application of research finding
and other knowledge.
• Conceptual formulation and design of possible
product or process alternatives.
• Testing in search for or evaluation of product or
process alternatives.

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 Development Activities & Costs
• Design, construction and testing of
preproduction prototypes and models.
• Design of tools, jigs, molds and dies involving
new technology;
• Design, construction and operation of a pilot
plant that is not of scale economically feasible
for commercial production.
• Design, construction and testing of a chosen
alternative for new or improved product or
process.

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 Commercial Activities
• Engineering follow through in an early phase of
commercial production;
• Quality control during commercial production
including routine testing;
• Trouble shooting in connection with
breakdowns during production.
• Routine on going efforts to refine, enrich or
improve qualities of existing products;
• Adaptation of an existing capability to a
particular requirement or customer need;

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 Commercial Activities
• Periodic design changes to existing products;
• Routine design of tools, jigs, molds and dies;
• Activity, including design and construction
engineering related to construction, relocation
rearrangement or startup of facilities and
equipment;
• Adaptation of an existing capability to a particular
requirement or customer need;

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 Capitalization
Criteria (TEA2CH)
For a development outlay to be
capitalised, the entity must meet all of the
following criteria:
• Technical feasibility
• Existence of a market
• Ability to measure costs reliably.
• Ability to use or sell
• Completion and selling intention
• Has available resources

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 NOT INTANGIBLE
ASSETS (PAS 38)
• List of Customers (lists)
• Internally generated Brands
• Mastheads.
• Publishing titles &
• Similar assets
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 PAS 38 Specific Provision
• These items cannot be identified
separately from the cost of
developing the business as a whole;
• Such items are considered as
components of internally generated
goodwill and shall be expensed as
incurred.

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 Recognition & initial
measurement
Although not identifiable as an asset,
internally generated goodwill is:
• recognised only when acquired as part
of a business combination, and then
• initially measured at cost.

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 Costs which are also
expensed when incurred
The following are also expensed
when incurred:
• Start up costs
• Training cost
• Advertising and promotional costs
• Relocation or reorganization costs

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 Intangible Assets Acquired in a
Business Combination
Cost is equal to (FAQ):
– Fair value on the date of acquisition if a
“purchase” business combination;
– Arm’s length fair value, If no active
market exist.
– Quoted market price* if there is an
active market, current bid price
provides the most reliable fair value.

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 Acquisition on deferred
payment plan
When acquired on deferred payment plan:
– Cash equivalent price (CEP);
– Difference between CEP and the total
payments (TP) is recognized as
interest expense over the credit period.
– If no cash equivalent price exist, CEP
is equal to the present value of the TP.

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 If Acquired by way of a government
grant (say, radio/TV station
operating licences, airport rights)
recognise both
• the asset and
• the grant
at fair value.

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 Intangible Assets Acquired by
way of a Government Grant
Initially recorded at either (FAN):
– Fair value on the date of acquisition; or
– At
– Nominal amount or zero, plus any
expenditure that is directly attributable
to prepare the asset for its intended
use.

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 Intangible Assets Acquired in
Exchange for other NCA
Initially recorded in the following order:
– Fair value of the asset given up
– Fair value of the asset received

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 Subsequent Expenditures
on Intangible Assets
• General Rule: Recognized as expense
• Except if it is probable that future
economic benefits that are attributable
to the subsequent expenditure will flow
to the entity and it can be measured
reliably.

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 Measurement Subsequent
to Initial Acquisition
• Use (initial) cost or revaluation (fair
value) model? (PAS 38 para 72)
• Unique assets can be measured
only at cost (PAS 38 para 78)

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 Measurement after initial recognition
Amortisation of intangible assets
Useful lives of intangible assets:
– Finite with amortisation the same as for
depreciating property, plant and
equipment, but with differences re the
straight-line method and zero residual
value assumptions, or
– Indefinite and thus with no amortisation
charge and subject to annual impairment
tests.

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 Retirements and disposals:
Disclosures
• Retirements and disposals are
identical to that for property, plant &
equipment under PAS 16.
• Disclosures are required for each
class of intangibles, distinguishing
between internally generated and
other intangibles.
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 Accounting for Cost
Incurred Subsequently
• General Rule: Expensed
• Except if the following criteria are met:
– It is probable that future economic
benefits attributable to the expenditure
will flow to the entity;
– The amount can be reliably measured.

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 Reasons why subsequent
Expenditures are expensed
• It is impossible to determine whether
subsequent expenditures is likely to
enhance or maintain the economic benefits
that will flow to the entity.
• It is often difficult to attribute such
expenditures directly to the intangible asset
or to the business as a whole.

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 Amortization of
Intangible Assets
• Amortization is the systematic
allocation of the cost or revalued
amount of an intangible asset,
less any residual value, as an
expense over the asset’s useful
life .

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 Amortization of
Intangible Assets
• Intangible assets with limited or finite life
are amortized over their useful life.
• Intangible assets with indefinite or infinite
life are not amortized but tested for
impairment at least annually.
• The useful life is indefinite when there is no
foreseeable limit to the period over which
the asset is expected to generate cash
flows.
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 Amortization of
Intangible Assets
• The life is indefinite when there are no
legal, contractual, competitive and other
factors that would limit the useful life of the
intangible asset.
• The depreciable amount of an intangible
asset shall be amortized on a systematic
basis over its useful life.
• Amortization shall begin when the asset is
available for use.

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 Amortization of
Intangible Assets
• Amortization should be stopped
when the asset is derecognized or
when the asset is classified as
held for sale.

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 Amortization of
Intangible Assets
• The useful life of an intangible asset
that arises from contractual or other
legal rights shall not exceed the
period of the contractual or legal
rights but may be shorter depending
on the period over which the entity
expects to use the asset.

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 Amortization of
Intangible Assets
• If the contractual or other legal
rights are conveyed for a limited
term that can be renewed, the
useful life shall include the
renewal period only if there is
evidence to support renewal by
the entity without significant cost.
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 Rules on Amortization
• The method of amortization shall
reflect the pattern in which the
economic benefits from the asset are
consumed.
• If such pattern cannot be reliably
determined, the straight line method
of amortization shall be used.

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 Rules on Amortization
• The residual value of an intangible
asset shall be presumed zero, unless
a third party is committed to buying it
or there is an active market so that
residual value can be measured and it
is probable that there will be a market
for the asset at the end of its useful
life.

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 Rules on Amortization
• The residual value is reviewed
at each financial year-end and
may increase to an amount
equal to or greater than the
asset’s carrying amount.

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 Factors Affecting Useful Life
• Technical, technological and other type of
obsolescence
• Expected action by competitors or potential
competitors
• Expected usage of the asset by the entity
• Typical product life cycle for the asset
• Stability of the industry in which the asset
is used

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 Factors on Useful Life
• Level of maintenance expenditure
required to obtain the expected future
economic benefits from the asset
• The useful life of the asset may be
dependent on the useful life of other
assets of the entity
• Period of control over the asset and
legal or similar limits on the use of the
asset, such as expiry dates of related
leases.
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 Derecognition of
Intangible Assets
• An intangible asset shall be
derecognized or eliminated from
the statement of financial position
on disposal or when no future
economic benefits are expected
from its use and disposal.

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 Derecognition of
Intangible Assets
• Gains and losses arising from the
derecognition of an intangible asset
shall be determined as the difference
between the net disposal proceeds
and the carryng amount of the asset,
and shall be recognized in revenue
but treated as other income.

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 Treatment of Website
Development Cost
• Under SIC32, a website that has
been developed for the purpose of
promoting and advertising an entity’s
products and services does not meet
the requirement of PAS 38 to
generate future benefits. Therefore,
website development costs shall be
expensed as incurred.
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 Impairment of
Intangible Assets
• Impairment of intangible assets is
recognized in accordance with PAS 36
on impairment of assets.
• An impairment loss on an intangible
asset is recognized if its recoverable
amount is less than the carrying
amount.

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 Impairment of
Intangible Assets
• The recoverable amount of the
intangible asset is the higher of its
fair value less cost to sell and
value in use. Fair value is the
price agreed upon between
independent parties in an arm’s
length transaction.
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 REQUIRED DISCLOSURES
• Whether useful lives are indefinite or
finite, if finite, the useful lives or the
amortization rate.
• The amortization method.
• The line item in the income statement
in which any amortization of
intangible asset is included.

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 REQUIRED DISCLOSURES
• The gross carrying amount and
any accumulated amortization
(aggregated with accumulated
impairment losses) at the
beginning and end of the period.

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 REQUIRED DISCLOSURES
• Additions, separately showing those
internally generated, those acquired
separately, and those acquired
through business combination.
• Intangible assets classified as held
for sale in accordance with PFRS 5.

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 REQUIRED DISCLOSURES
• Increases in decreases in
intangible asset resulting from
revaluations.
• Impairment losses and
reversal of impairment losses.

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 REQUIRED DISCLOSURES
• Net exchange differences on
translation.
• The carrying amount of intangible
asset with indefinite life and the
reason supporting the assessment
of indefinite life.

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 REQUIRED DISCLOSURES
• The carrying amount and remaining
amortization period of intangible
assets that are material to the entity’s
financial statements.
• The carrying amount of intangible
assets whose title is restricted or
pledged as collateral security.

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 REQUIRED DISCLOSURES
• Contractual commitments for the
acquisition of intangible assets.
• Intangible assets acquired by way of
government grant and initially recognized
at fair value.
• The amount of research and development
expenditure recognized as expense during
the period.

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 What is 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.
• Legal life of patent is 20 years from the date of
filing the application. This is in accordance with
RA 8293.
• It is considered as a technology-based intangible
asset.

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 Cost of Patent
• If the patent is acquired by purchase, the cost
include the purchase price and any directly
attributable expenditure necessary in preparing
the asset for its intended use.
• If the patent is internally developed, the cost
includes the licensing and other related legal fees
in securing the patent rights.
• As a rule, all related research and development
costs shall be expensed as incurred.

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 Patent cost
• Engineering and consulting costs to develop the
patent and cost of design changes required by the
patent authority shall be capitalized as patent cost
from the time that a patent application has been
made.
• This is because, at this point, the patent is
considered technically and commercially feasible.
• Legal fees and other costs of successfully
prosecuting or depending a patent shall be
expensed immediately.

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 Amortization of Patent
• The original cost shall be amortized over the legal
life or useful life whichever is shorter.
• If a patent is acquired 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
original patent.

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 Amortization of 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 unamortized 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
unamortized cost of the old patent is amortized
over the remainder of its life.

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 Artistic Related Copyright
• It is an exclusive right granted by the government
to the author, composer or artist, enabling him to
publish, sell or otherwise benefit form his literary,
musical or artistic work.
• Its cost include all expenses incurred in the
production of the work including those required to
establish or obtain the right.
• Amortized over its useful life.
• Preferably charge cost against revenue on first
printing.

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 Franchise
• A contract-based intangible asset;
• It may be between the government and a private
entity or individual;
• Between private entities or individuals;
• Cost includes the lump sum payment for the
franchise and all legal fees and expenses incurred in
connection with the franchise acquisition.
• The lump sum payment is also known as initial
franchise fee and also the initial cost of the
franchise. Periodic franchise fee is expensed as
incurred.
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 Amortization of other IA
• Franchise, over its useful life or definite period
whichever is shorter.
• If granted perpetually, not amortized and tested
for impairment.
• Leasehold right, amortize over the term of the
lease, expensed when immaterial in amount.
• Leasehold improvements are depreciated.
• Trademark, tested for impairment although legal
life is 10 years, its renewable.

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 Common Identifiable
Intangible Assets
• Copyright
• Other specific rights
• Leasehold or lease rights
• Trademark
• Computer Software
• Patent
• Fishing Rights
• Franchise

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 Impairment of Assets
• As a rule, the recoverable amount
of an asset should be determined
individually.
• Except if it is not possible to
estimate it individually, in which
case, the entity should determine
the recoverable amount of the cash
generating unit to which the asset
belongs (asset’s cash generating
unit).

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 Cash Generating Unit
• A cash generating unit is the smallest
identifiable group of assets that generate
cash inflows from continuing use that are
largely independent of the cash inflows
from other assets or group of assets.
• When the impairment loss is recognized
for a cash generating unit, this loss shall
be allocated to the assets of the unit in
the following order:

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 Cash Generating Unit
• First to goodwill;
• Then to other noncash assets of the
cash generating unit prorata based on
carrying amount.
• The carrying amount of an asset shall
not be reduced below the highest of fair
value less cost to sell, the value in use
and zero.

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 MULTIPLE CHOICE
QUESTIONS QUIZZER

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 QUESTION NO. 1

ANSWER: D

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 QUESTION NO. 2

ANSWER: A

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 QUESTION NO. 3

ANSWER: D

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 QUESTION NO. 4

ANSWER: C

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 QUESTION NO. 5

ANSWER: B

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 QUESTION NO. 6

ANSWER: A

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 QUESTION NO. 7

ANSWER: D

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 QUESTION NO. 8

ANSWER: B

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 QUESTION NO. 9

ANSWER: A

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 QUESTION NO. 10

ANSWER: C

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 QUESTION NO. 11

ANSWER: C

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 QUESTION NO. 12

ANSWER: A

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 QUESTION NO. 13

ANSWER: A

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 QUESTION NO. 14

ANSWER: A

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 QUESTION NO. 15

ANSWER: D

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 QUESTION NO. 16

ANSWER: B

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 QUESTION NO. 17

ANSWER: A

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 QUESTION NO. 18

ANSWER: C

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 QUESTION NO. 19

ANSWER: D

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 QUESTION NO. 20

ANSWER: C

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 QUESTION NO. 21

ANSWER: D

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 QUESTION NO. 22

ANSWER: C

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 QUESTION NO. 23

ANSWER: C

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 QUESTION NO. 24

ANSWER: C

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 QUESTION NO. 25

ANSWER: D

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 NEXT TOPIC:
BORROWING
COSTS

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 That’s all
folks!!

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