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Intangible Assets - Part 1

The document discusses intangible assets, defining them as non-physical assets that are identifiable, controlled by an entity, and provide future economic benefits. It covers initial measurement of intangible assets depending on how they are acquired, such as cost for a separate acquisition or fair value for an acquisition in a business combination. It also discusses subsequent expenditure capitalization criteria and amortization methods over an intangible asset's useful life or legal life, whichever is shorter.

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Avery Paul Mateo
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27 views

Intangible Assets - Part 1

The document discusses intangible assets, defining them as non-physical assets that are identifiable, controlled by an entity, and provide future economic benefits. It covers initial measurement of intangible assets depending on how they are acquired, such as cost for a separate acquisition or fair value for an acquisition in a business combination. It also discusses subsequent expenditure capitalization criteria and amortization methods over an intangible asset's useful life or legal life, whichever is shorter.

Uploaded by

Avery Paul Mateo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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INTANGIBLE

ASSETS -
PART 1
AP Pason
Technical
Knowledge
1. To know nature of intangible assets
2. To know initial and subsequent measurement of
intangible assets
3. To know the amortization of intangible assets
Definition of Intangible Asset

Identifiable non-monetary asset


without physical substance.
Nature of Intangible Assets

TO QUALIFY AS AN INTANGIBLE ASSET,


an item must meet ALL of the following
criteria:
Identifiability
Control
Future economic benefits
Identifiability

An item is identifiable when:

it is separable
it arises from contractual or other legal
rights
Control

An item must be under control of the


entity.

Control is when the entity enjoys future


economic benefits from the item and prevent
others from enjoying the same benefits.
Future Economic Benefits

Include:

Revenue
Cost savings
Other benefits resulting from use of
the asset
Accounting for Intangible
Assets

Recognize if:

Probable flow of future economic


benefits
Measured reliably
Initial Measurement

AT COST, but cost depends of the manner of


acquisition, such as:

Separate acquisition
Acquisition in a business combination
Acquisition by way of government grant
Acquisition by exchange of assets
Internally generated intangible asset
Separate Acquisition

Cost consists of:

Purchase price
Any directly attributable cost of preparing
the asset for its intended use
Separate Acquisition

Directly attributable costs consist of


Cost of employee benefits and
professional fees arising directly from
bringing the asset to its working
condition
Cost of testing whether asset is
functioning properly.
Acquisition in a Business
Combination

Cost is the fair value of the asset.


Acquisition by Way of
Government Grant

Cost is:
the fair value of the asset; OR
nominal amount (presumably zero) plus any
Any directly attributable cost of preparing
the asset for its intended use
Acquisition by Exchange of
Assets

With commercial substance:
FV of asset given up + cash paid - cash
received

Without commercial substance


CV of asset given up + cash paid - cash
received
Internally Generated
Intangible Assets

Two phases:
Research phase - expensed when incurred
Development phase - capitalized, if six
conditions have been met

*Further discussion in part 3.


ILLUSTRATION
ABC Company is developing a new production
process for the formulation of a new product.
Research costs incurred were P500,000. Total
costs incurred in the development phase is
P540,000, P260,000 of which is incurred before
October 15, 2019. On October 15, 2019,
technological and commercial feasibility was
established. The company is able to demonstrate
how how the new product will be manufactured and
sold by the entity. How much should be
capitalized?
ILLUSTRATION
ABC Company is developing a new production
process for the formulation of a new product.
Research costs incurred were P500,000. Total
costs incurred in the development phase is
P540,000, P260,000 of which is incurred before
October 15, 2019. On October 15, 2019,
technological and commercial feasibility was
established. The company is able to demonstrate
how how the new product will be manufactured and
sold by the entity. How much should be
capitalized?
P280,000
Expenditures After Initial
Recognition

Capitalized when any of the following is met:


Extension of useful life
Increase in net cash inflow (increase revenue
or decrease cost)
Improvement of quality of the output
ILLUSTRATION
On 1/1/20, Company registered a patent. The
patent has a useful life of 20 years.

On 3/1/20, Company sued a competitor for


copying its patented product. Legal fees amounted
to P20,000. Company won the lawsuit.

Is the P20,000 capitalizable?


ILLUSTRATION
On 1/1/20, Company registered a patent. The
patent has a useful life of 20 years.

On 3/1/20, Company sued a competitor for


copying its patented product. Legal fees amounted
to P20,000. Company won the lawsuit.

Is the P20,000 capitalizable?


NO!
Subsequent Measurement

Cost Model

Revaluation Model
Amortization

Amortized over period of economic benefits.

Period of economic benefits is the shorter


between:
Legal life
Useful ife
Amortization

Legal life - the period, given by law, in which the


entity can use the asset.
Amortization

Useful lives: Factors


Finite Expected usage
Indefinite Typical product life cycle
Obsolescence
Stability of the industry
Competitors
Limits (e.g. legal)
Dependency on the useful life
Amortization

Begins when the asset is available for use.

Meaning the asset is in the location and condition


for intended use.
Amortization

Methods:

Straight-line
Diminishing balance
Unit of production
Amortization

Recognized as:

Expense through profit or loss; OR


Capitalized through another asset
Amortization

Change in amortization method is treated as a


change in accounting estimate and therefore,
applied prospectively.
Thank you!

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