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PAS 38, PAS 40, PAS 41, and PFRS 1
INTANGIBLE ASSETS
Philippine Accounting Standards 38 (PAS 38)
• Derived from its international counterpart, the IAS 38 Intangible Assets
• The objective of this standard is to prescribe the accounting treatment for intangible assets that are
not dealt with specifically in another standard.
• This standard requires an entity to recognize an intangible asset, if and only if specified criteria are
met. This also specifies how to measure the carrying amount of intangible assets and disclosures
required.
Definitions
The following terms are used extensively in the standard (International Financial Reporting Standards, 2001):
• Amortization is the systematic allocation of the depreciable amount of an intangible asset over its
useful life.
• An asset is a resource:
a) controlled by an entity as a result of past events; and
b) from which future economic benefits are expected to flow to the entity.
• Carrying amount is the amount at which an asset is recognized in the statement of financial position
after deducting any accumulated amortization and accumulated impairment losses thereon.
• Cost is the amount of cash or cash equivalents paid, or the fair value of other consideration given to
acquire an asset at the time of its acquisition or construction, or, when applicable, the amount
attributed to that asset when initially recognized following the specific requirements of other IFRSs.
An example of this is the IFRS 2 Share-based Payment.
• Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value.
• Development is the 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.
• Entity-specific value is the present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life or expects to incur when
settling a liability.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (See IFRS 13 Fair Value
Measurement.)
• An impairment loss is an amount by which the carrying amount of an asset exceeds its recoverable
amount.
• An intangible asset is an identifiable non-monetary asset without physical substance. Monetary assets
are money held and assets to be received in fixed or determinable amounts of money.
• Research is an original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
• The residual value of an intangible asset is the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already
of the age and in the condition expected at the end of its useful life.
• Useful life is:
a) the period over which an asset is expected to be available for use by an entity; or
b) the number of production or similar units expected to be obtained from the asset by an
entity.
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Recognition and Initial Measurement
An intangible asset shall be recognized, if and only if:
• it is probable that the expected future economic benefits that are attributable to the asset will flow
to the entity; and
• the cost of the asset can be measured reliably.
An entity shall assess the probability of expected future economic benefits using reasonable and supportable
assumptions that represent management’s best estimate of the set of economic conditions that will exist over
the useful life of the asset.
The initial measurement of an intangible asset depends on how you acquired the asset. The table below shows
the summary for initial measurement of an intangible assets (Simlogic, s.r.o, 2018):
Mode of Acquisition Measurement
Separate purchase Cost*
Internally generated Direct attributable cost incurred after the assets met the criteria for
capitalizing development cost
As part of a business combination Fair value at the acquisition date
By a government grant Fair value or nominal account + directly attributable expenditures
Within exchange of assets Fair value; if not possible, then the carrying amount of asset given up
Table 1. Initial Measurement of Intangible Assets
Source: https://www.ifrsbox.com/ias-38-intangible-assets/
*Cost of a separately acquired intangible asset comprises:
• its purchase price, plus any duties and non-refundable taxes, less discounts and rebates; and
• any directly attributable costs of preparing the asset for its intended use.
Internally Generated Intangible Asset
In certain instances, a company incurs costs in developing an asset without physical substance. To assess
whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the
generation of the asset into:
• research phase; and
• development phase.
In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that
will generate probable future economic benefits. Therefore, this expenditure is recognized as an expense
when it is incurred.
Examples of research activities are:
a. activities aimed at obtaining new knowledge;
b. the search for, evaluation and final selection of, applications of research findings or other knowledge;
c. the search for alternatives for materials, devices, products, processes, systems, or services; and
d. the formulation, design, evaluation, and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems, or services
No intangible asset arising from research (or from the research phase of an internal project) shall be
recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized as
an expense when it is incurred.
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In the development phase of an internal project, an entity can, in some instances, identify an intangible asset
and demonstrate that the asset will generate probable future economic benefits. This is because the
development phase of a project is further advanced than the research phase.
Examples of development activities are (International Financial Reporting Standards, 2001):
a. the design, construction, and testing of pre-production or pre-use prototypes and models;
b. the design of tools, jigs, molds, and dies involving new technology;
c. the design, construction, and operation of a pilot plant that is not of a scale economically feasible for
commercial production; and
d. the design, construction, and testing of a chosen alternative for new or improved materials, devices,
products, processes, systems, or services.
An intangible asset arising from development (or from the development phase of an internal project) shall be
recognized, if and only if an entity can demonstrate all of the following (International Financial Reporting
Standards, 2001):
a) The technical feasibility of completing the intangible asset so that it will be available for use or sale;
b) Its intention to complete the intangible asset and use or sell it;
c) Its ability to use or sell the intangible asset;
d) Generate probable future economic benefits. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to
be used internally, the usefulness of the intangible asset;
e) The availability of adequate technical, financial, and other resources to complete the development
and to use or sell the intangible asset; and
f) Its ability to reliably measure the expenditure attributable to the intangible asset during its
development.
Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall
not be recognized as intangible assets. Internally generated goodwill shall likewise not be recognized as an
asset.
Subsequent Measurement
An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible
asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for
using the same model, unless there is no active market for those assets.
Cost Model
After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization and
any accumulated impairment losses.
Revaluation Model
After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the
date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated
impairment losses. For revaluations under IAS 38 Intangible Assets, fair value shall be measured by reference
to an active market. Revaluations shall be made with such regularity that at the end of the reporting period
the carrying amount of the asset does not differ materially from its fair value (International Financial Reporting
Standards, 2001).
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If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active
market for this asset, the asset shall be carried at its cost less any accumulated amortization and impairment
losses (International Financial Reporting Standards, 2001).
If the fair value of a revalued intangible asset can no longer be measured by reference to an active market,
the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference
to the active market less any subsequent accumulated amortization and any subsequent accumulated
impairment losses (International Financial Reporting Standards, 2001).
If an intangible asset’s carrying amount is increased as a result of a revaluation, the increase shall be
recognized in other comprehensive income and accumulated in equity under the heading of revaluation
surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation
decrease of the same asset previously recognized in profit or loss (International Financial Reporting Standards,
2001).
If an intangible asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be
recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the
extent of any credit balance in the revaluation surplus in respect of that asset. The decrease recognized in
other comprehensive income reduces the amount accumulated in equity under the heading of revaluation
surplus (International Financial Reporting Standards, 2001).
Useful Life
An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length
of, or the number of production or similar units constituting that useful life.
An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis
of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.
The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed the
period of the contractual or other legal rights, but may be shorter depending on the period over which the
entity expects to use the asset. If the contractual or other legal rights are conveyed for a limited term that can
be renewed, the useful life of the intangible asset shall include the renewal period(s) only if there is evidence
to support renewal by the entity without significant cost. The useful life of a reacquired right recognized as an
intangible asset in a business combination is the remaining contractual period of the contract in which the
right was granted and shall not include renewal periods (International Financial Reporting Standards, 2001).
Intangible Assets with Finite Useful Lives
The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis
over its useful life. Amortization shall begin when the asset is available for use, i.e., when it is in the location
and condition necessary for it to be capable of operating in the manner intended by management.
Amortization shall cease at an earlier date that the asset is classified as held for sale (or included in a disposal
group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognized.
The amortization method used shall reflect the pattern in which the asset’s future economic benefits are
expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line
method shall be used. The amortization charge for each period shall be recognized in profit or loss unless this
or another standard permits or requires it to be included in the carrying amount of another asset.
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The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless
(International Financial Reporting Standards, 2001):
a. there is a commitment by a third party to purchase the asset at the end of its useful life; or
b. there is an active market (as defined in IFRS 13) for the asset and:
i. residual value can be determined by reference to that market; and
ii. it is probable that such a market will exist at the end of the asset’s useful life.
The amortization period and the amortization method for an intangible asset with a finite useful life shall be
reviewed at least at each financial year-end. If the expected useful life of the asset is different from previous
estimates, the amortization period shall be changed accordingly. If there has been a change in the expected
pattern of consumption of the future economic benefits embodied in the asset, the amortization method shall
be changed to reflect the changed pattern. Such changes shall be accounted for as changes in accounting
estimates in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
(International Financial Reporting Standards, 2001).
Intangible Asset with Infinite Useful Lives
An intangible asset with an indefinite useful life shall not be amortized.
In accordance with IAS 36 Impairment of Assets, an entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its recoverable amount with its carrying amount:
a. annually; and
b. whenever there is an indication that the intangible asset may be impaired (International Financial
Reporting Standards, 2001).
The useful life of an intangible asset that is not being amortized shall be reviewed each period to determine
whether events and circumstances continue to support an indefinite useful life assessment for that asset. If
they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change
in an accounting estimate in accordance with IAS 8 (International Financial Reporting Standards, 2001).
Derecognition
An intangible asset shall be derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal.
The gain or loss arising from the derecognition of an intangible asset shall be determined as the difference
between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognized in
profit or loss when the asset is derecognized, and shall not be classified as revenue.
INVESTMENT PROPERTY
Philippine Accounting Standards 40 (PAS 40)
• Derived from its international counterpart, the IAS 40 Investment Property
• The objective of this standard is to prescribe the accounting for investment property and related
disclosure requirement.
Definitions
The following terms are used extensively in the standard (International Financial Reporting Standards, 2001):
• Carrying amount is the amount at which an asset is recognized in the statement of financial position.
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• Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to
acquire an asset at the time of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognized following the specific requirements of other IFRSs.
An example of this is the IFRS 2 Share-based Payment.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (See IFRS 13 Fair Value
Measurement).
• Investment property is a land or a building—or part of a building—or both 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; or
b) sale in the ordinary course of business.
• Owner-occupied property is a property held (by the owner or by the lessee as a right-of-use asset) for
use in the production or supply of goods or services or for administrative purposes.
The following are examples of investment property (International Financial Reporting Standards, 2001):
a. land held for long-term capital appreciation rather than for short-term sale in the ordinary course of
business;
b. land held for a currently undetermined future use (If an entity has not determined that it will use the
land as owner-occupied property or for short-term sale in the ordinary course of business, the land is
regarded as held for capital appreciation.);
c. a building owned by the entity (or a right-of-use asset relating to a building held by the entity) and
leased out under one (1) or more operating leases;
d. a building that is vacant but is held to be leased out under one (1) or more operating leases; and
e. a property that is being constructed or developed for future use as an investment property.
Recognition and Initial Measurement
An owned investment property shall be recognized as an asset, when and only when (International Financial
Reporting Standards, 2001):
a. it is probable that the future economic benefits that are associated with the investment property will
flow to the entity; and
b. the cost of the investment property can be measured reliably.
An owned investment property shall be measured initially at its cost. Transaction costs shall be included in the
initial measurement.
Subsequent Measurement
An entity shall choose as its accounting policy either the fair value model or the cost model and shall apply
that policy to all of its investment properties.
Fair Value Model
After initial recognition, an entity that chooses the fair value model shall measure all of its investment
properties at fair value. A gain or loss arising from a change in the fair value of the investment property shall
be recognized in profit or loss for the period in which it arises (International Financial Reporting Standards,
2001).
If an entity has previously measured an investment property at fair value, it shall continue to measure the
property at fair value until disposal (or until the property becomes owner-occupied property or the entity
begins to develop the property for subsequent sale in the ordinary course of business), even if comparable
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market transactions become less frequent or market prices become less readily available (International
Financial Reporting Standards, 2001).
Cost Model
After initial recognition, an entity that chooses the cost model shall measure investment property
(International Financial Reporting Standards, 2001):
a. in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations if it meets the
criteria to be classified as held for sale (or is included in a disposal group that is classified as held for
sale);
b. in accordance with IFRS 16 Leases if it is held by a lessee as a right-of-use asset and is not held for sale
in accordance with IFRS 5; and
c. in accordance with the requirements in IAS 16 for the cost model in all other cases.
Transfers
An entity shall transfer a property to, or from, investment property, when and only when there is a change in
use. A change in use occurs when the property meets or ceases to meet the definition of investment property,
and there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a
property does not provide evidence of a change in use.
Examples of evidence of a change in use include (International Financial Reporting Standards, 2001):
a. commencement of owner-occupation, or of development to owner-occupation, for a transfer from
investment property to owner-occupied property;
b. commencement of development to sale, for a transfer from investment property to inventories;
c. end of owner-occupation, for a transfer from owner-occupied property to investment property; and
d. inception of an operating lease to another party, for a transfer from inventories to investment
property.
For a transfer from investment property carried at fair value to owner-occupied property or inventories, the
property’s deemed cost for subsequent accounting in accordance with IAS 16 Property, Plant, and Equipment,
IFRS 16 Leases, or IAS 2 Inventories shall be its fair value at the date of change in use (International Financial
Reporting Standards, 2001).
If an owner-occupied property becomes an investment property that will be carried at fair value, an entity
shall apply IAS 16 for owned property and IFRS 16 for property held by a lessee as a right-of-use asset up to
the date of change in use. The entity shall treat any difference at that date between the carrying amount of
the property in accordance with IAS 16 or IFRS 16 and its fair value in the same way as a revaluation in
accordance with IAS 16 (International Financial Reporting Standards, 2001).
For a transfer from inventories to investment property that will be carried at fair value, any difference between
the fair value of the property at that date and its previous carrying amount shall be recognized in profit or loss
(International Financial Reporting Standards, 2001).
When an entity completes the construction or development of a self-constructed investment property that
will be carried at fair value, any difference between the fair value of the property at that date and its previous
carrying amount shall be recognized in profit or loss (International Financial Reporting Standards, 2001).
Disposals
An investment property shall be derecognized (eliminated from the statement of financial position) on
disposal or when the investment property is permanently withdrawn from use, and no future economic
benefits are expected from its disposal.
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Gains or losses arising from the retirement or disposal of investment property shall be determined as the
difference between the net disposal proceeds and the carrying amount of the asset and shall be recognized
under profit or loss (unless IFRS 16 requires otherwise on a sale and leaseback) in the period of the retirement
or disposal (International Financial Reporting Standards, 2001).
AGRICULTURE
Philippine Accounting Standards 41 (PAS 41)
• Derived from its international counterpart, the IAS 41 Agriculture.
• The objective of this standard is to prescribe the accounting treatment and related disclosure related
to agricultural activity.
Agriculture shall be applied to account for the following when they are related to agricultural activity
(International Financial Reporting Standards, 2001):
a. biological assets, except for bearer plants;
b. agricultural produce at the point of harvest; and
c. government grants.
Definitions
The following terms are used extensively in the standard (International Financial Reporting Standards, 2001):
• Agricultural activity is the management by an entity of the biological transformation and harvest of
biological assets for sale or conversion into agricultural produce or additional biological assets.
• Agricultural produce is the harvested produce of the entity’s biological assets.
• A bearer plant is a living plant that:
a) is used in the production or supply of agricultural produce;
b) is expected to bear produce for more than one (1) period; and
c) the likelihood of being sold as agricultural produce is remote, except for incidental scrap sales.
• A biological asset is a living animal or plant.
• Biological transformation comprises the processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in a biological asset.
• Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding
finance costs and income taxes.
• A group of biological assets is an aggregation of similar living animals or plants.
• Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s
life processes.
Recognition and Initial Measurement
An entity shall recognize a biological asset or agricultural produce, when and only when (International
Financial Reporting Standards, 2001):
a. the entity controls the asset as a result of past events;
b. it is probable that future economic benefits associated with the asset will flow to the entity; and
c. the fair value or cost of the asset can be measured reliably.
A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair
value less costs to sell where the fair value cannot be measured reliably.
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Agricultural produce harvested from an entity’s biological assets shall be measured at its fair value less costs
to sell at the point of harvest. Such measurement is the cost at that date when applying IAS 2 Inventories or
other applicable standards.
A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change
in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it
arises.
A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be
included in profit or loss for the period in which it arises.
The table below shows the examples of biological assets, agricultural produce, and products that are the result
of processing after harvest (International Financial Reporting Standards, 2001):
Biological asset Agricultural produce Products that are the result of
processing after harvest
Sheep Wool Yarn, carpet
Trees in a timber plantation Felled trees Logs, lumber
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea
Grape vines Picked grapes Wine
Fruit trees Picked fruits Processed fruit
Oil palms Picked fruits Palm oil
Rubber trees Harvested latex Rubber products
FIRST-TIME ADOPTION OF THE PHILIPPINE FINANCIAL REPORTING STANDARDS
Philippine Financial Reporting Standards 1 (PFRS 1)
• Derived from its international counterpart, the IFRS 1 First-time Adoption of International Financial
Reporting Standards
• The objective of this standard is to ensure that an entity’s first IFRS financial statements, and its interim
financial reports for part of the period covered by those financial statements, contain high-quality
information that (International Financial Reporting Standards, 2003):
a) is transparent for users and comparable over all periods presented;
b) provides a suitable starting point for accounting in accordance with the International Financial
Reporting Standards (IFRSs); and
c) can be generated at a cost that does not exceed the benefits.
Recognition and Measurement
An entity shall apply this PFRS in (International Financial Reporting Standards, 2003):
a. its first PFRS financial statements; and
b. each interim financial report, if any, that it presents in accordance with PAS 34 Interim Financial
Reporting for part of the period covered by its first PFRS financial statements.
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Opening PFRS Statement of Financial Position
An entity shall prepare and present an opening PFRS statement of financial position at the date of transition
to PFRSs. This is the starting point for its accounting in accordance with PFRSs (International Financial
Reporting Standards, 2003).
Accounting Policies
An entity shall use the same accounting policies in its opening PFRS statement of financial position and
throughout all periods presented in its first PFRS financial statements. Those accounting policies shall comply
with each PFRS effective at the end of its first PFRS reporting period (International Financial Reporting
Standards, 2003).
Estimates
An entity’s estimates in accordance with PRSs at the date of transition to PFRSs shall be consistent with
estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any
difference in accounting policies), unless there is objective evidence that those estimates were in error
(International Financial Reporting Standards, 2003).
Comparative Information
An entity’s first PFRS financial statements shall include at least three (3) statements of financial position, two
(2) statements of profit or loss and other comprehensive income, two (2) separate statements of profit or loss
(if presented), two (2) statements of cash flows, and two (2) statements of changes in equity and related notes,
including comparative information for all statements presented (International Financial Reporting Standards,
2003).
Explanation of Transition to PFRS
An entity shall explain how the transition from previous GAAP to PFRSs affected its reported financial position,
financial performance and cash flows (International Financial Reporting Standards, 2001).
References
International Financial Reporting Standards. (2001). IAS 41 Agriculture. Retrieved on November 5, 2018, from
https://www.ifrs.org/issued-standards/list-of-standards/ias-41-agriculture
International Financial Reporting Standards. (2003). IFRS 1 First-time Adoption of International Financial
Reporting Standards. Retrieved on November 5, 2018, from https://www.ifrs.org/issued-
standards/list-of-standards/ifrs-1-first-time-adoption-of-ifrs
International Financial Reporting Standards. (2001). IAS 38 Intangible Assets. Retrieved on November 5, 2018,
from https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets
International Financial Reporting Standards. (2001). IAS 40 Investment Property. Retrieved on November 5,
2018, from https://www.ifrs.org/issued-standards/list-of-standards/ias-40-investment-property
Simlogic, s.r.o. (2018). How to Account for an Intangible Assets under IAS 38. Retrieved on November 5, 2018,
from https://www.ifrsbox.com: https://www.ifrsbox.com/ias-38-intangible-assets
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