Philippine Accounting

Standard 38
Intangible Assets
 PAS 38 Intangible Assets

To specify the accounting treatment for intangible assets

Objective Not dealt with in another standard

PAS 38 does NOT apply to:

Goodwill acquired in a business combination (PFRS 3)

Intangible assets held for inventory (PAS 2)
Intangible assets classified as held for sale (PFRS 5)
 What are Intangible Assets?

 Identifiable non-monetary assets without physical substance

Control of an Intangible Asset Future economic benefits

Recognition

Future economic benefits Cost reliably measurable

 Purchase price
 Directly attributable costs
 Assets with both intangible & tangible elements

YES Property, Plant & Equipment

Intangible Integral
Component Part?
NO Intangible Assets
 Financial Statement Presentation

GOODWILL Intangible Assets

 Internally generated intangible assets

Development 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

C
 Probable future economic benefits
A
P  Intention to complete and use or sell it
I
T  Resources adequate and available to complete and use or sell
A
 Ability to use or sell the asset
L
I  Technical feasibility
Z
E  Expenditures reliably measurable
 Internally generated intangible assets

Research Original and planned investigation undertaken with the prospect of

gaining new scientific or technical knowledge and understanding

XxX DO NOT CAPITALIZE XxX

(expense in P/L as incurred)

Goodwill  Do not recognize as an asset

Other assets  Brands, customer list, publishing titles  Do not Capitalize

 Internally generated intangible assets

Initial measurement

COST

 Directly attributed or allocated

 From the date of meeting the criteria
 Conditions for capitalization of development
costs have been met
Intangible Assets Subsequent measurement

Cost model Revaluation model

COST FAIR VALUE

Subsequent Accumulated
Accumulated Amortization
Amortization

Accumulated Impairment Loss Subsequent Accumulated

Impairment Loss
Intangible Assets Useful Life

Finite Indefinite

e.g. Software , e.g. Brands

Licenses

 Assume residual value = zero  Do not amortize

 Revise amortization at the end  Review useful life at the
of each financial year-end end of each financial year
Illustration:
On January 1,20x1, Entity A purchases a patent from Entity B for P300,000. Entity B, the original
owner, has held the patent for 5 years. Entity A estimates that the patent has a remaining useful life of 16
years.

The annual amortization expense is computed as follows:

Cost 300,000
Residual amount --
Depreciable amount =300,000
Divided by:(Shorter of its useful life & 20 years) 15
Annual Amortization Expense =20,000

The carrying amount of the intangible asset on December 31,20x2(after 2 years) is determined as follows:

Cost 300,000
Accumulated Amortization(20,000x2) 40,000
Carrying amount-12/31/20x2 =260,000

Alternative solution: 300,000 x 13 remaining life after 2 years / 15 = 260,000

Year 0 Year 3

Patent 300,000 Patent 260,000

Cash 300,000 Cash 260,000
To record purchase of patent To record purchase of patent

Amortization Expense-Patent 20,000 Amortization Expense 20,000

Patent 20,000 Patent 20,000
To record annual amortization Expense To record annual amortization Expense

Year 1

Patent 280,000
Cash 280,000
To record purchase of patent

Amortization Expense-Patent 20,000

Patent 20,000
To record annual amortization expense
Illustration:
The Company has a software on its balance sheet as an Intangible asset. It cost P15,000.The Company
estimates that the software will have a useful life of just 3 years. At the end of its useful life, the company
reckons that there will be no residual value. The Company will use straight-line method to report the annual
amortization expense of the software.

The annual amortization expense is computed as follows:

Cost 15,000
Residual value 0
Depreciable amount =15,000
Divided by:(useful life) 3
Annual amortization expense =5,000
 Journal entries:
Year 0 Year 2
Software 15,000 Software 5,000
Cash 15,000 Cash 5,000
to record the purchase of software to record the purchase of software

Amortization expense-Software 5,000 Amortization expense-Software 5,000

Software 5,000 Software 5,000
to record the annual amortization to record the annual amortization

Year 1 Year 3
Software 10,000 Software 0
Cash 10,000 Cash 0
to record the purchase of software to record the purchase of software

Amortization expense-Software 5,000

Software 5,000
to record the annual amortization
Intangible Assets
Derecognition

On Disposal No future economic

benefit

GAIN or LOSS

=Net Disposal Proceeds - Carrying Amount

**GAIN or LOSS is included in P/L**