TOPIC 20: INTANGIBLE ASSETS

APPLICABLE PFRS: PAS 38 - INTANGIBLE ASSETS

DEFINITION (3) FUTURE ECONOMIC BENEFITS

Under PAS 38, an intangible asset is
defined as an identifiable nonmonetary Future economic benefits may include
asset without physical substance. revenue from the sale of products or
services, cost savings or other benefits
Based from this definition, these essential resulting from the use of the asset by the
criteria or characteristics were formed: entity.

(1) IDENTIFIABILITY (4) NON-MONETARY ASSET

This characteristic distinguishes intangible Non-monetary assets are assets which is

assets from goodwill. not possible to precisely determine its peso
amount because its value frequently
An asset is identifiable when: changes in response to changes in
economic and market conditions.
a) It is separable. This means that the asset
is capable of being separated from the (5) NO PHYSICAL FORM
entity and sold, transferred, licensed,
rented or exchanged, either individually SCOPE
or together with a related contract, asset PAS 38 applies to all intangible assets that
or liability regardless of whether the entity are not dealt with specifically in another
intends to do so. PFRS. PAS 38 does not apply to the
following:
b) It arises from contractual or other legal
rights. This is regardless of whether such ● Goodwill acquired in a business
rights are transferable or separable from combination (PFRS 3)
the entity or from other rights and ● Financial assets (PFRS 9)
obligations. ● Rights arising from exploration and
evaluation assets (PFRS 6)
(2) CONTROL ● Expenditure on the development and
extraction of non-regenerative
Control is the power of the entity to obtain resources (PFRS 6)
the future economic benefits flowing from ● Intangible assets held for sale in the
the intangible asset and restrict the access ordinary course of business (PAS 2)
of others to those benefits. ● Deferred taxes (PAS 12)
● Leases of intangible assets (PFRS 16)
NOTE: The capacity of an entity to control ● Assets arising from employee benefits
the future economic benefits from an (PAS 19)
intangible asset normally would stem from ● Contracts within the scope of PFRS 17
legal rights that are enforceable in a court Insurance Contracts and any assets
of law but not all the times. But in the for insurance acquisition cash flows
absence of legal rights, it is more difficult as defined in PFRS 17.
to demonstrate control. ● Non-current intangible assets
classified as held for sale (PFRS 5)
RECOGNITION ● Costs of introducing a new product or
service, including costs of advertising
An intangible asset after meeting the and promotional activities.
definition shall be recognized when: ● Costs of conducting business in a new
location or with a new class of
(a) It is probable that the future economic customer, including costs of staff
benefits that are attributable to the asset training.
will flow to the entity. ● Administration and other general
(b) The cost of the intangible asset can be overhead costs.
measured reliably. ● Costs incurred while an asset capable
of operating in a manner intended by
MEASUREMENT management has yet to be brought
into use.
INITIAL MEASUREMENT ● Initial operating losses.
An intangible asset shall be measured
INITIALLY at COST. Measurement of cost DEFERRED SETTLEMENT BASIS
depends on how the intangible asset is
acquired. It could be acquired through: If the payment for an intangible asset is
deferred beyond normal credit terms, the
SEPARATE ACQUISITION cost is the cash price equivalent. The
difference between the cash price and the
The cost of a separately acquired total payments is recognized as interest
intangible asset comprises: expense over the credit period.

● Purchase price including import ACQUISITION THROUGH BUSINESS

duties and non-refundable purchase COMBINATION
taxes after deducting trade discounts,
rebates and other similar discounts If an intangible asset is acquired in a
business combination, the cost of the
● Any directly attributable costs intangible asset is based on the fair value
necessary to bring the asset for its on the date of acquisition. The fair value of
intended use an intangible asset acquired in a business
combination can be measured with
Examples of directly attributable costs are: sufficient reliability to be recognized
separately from goodwill.
● Cost of employee benefits arising
directly from brining the asset to its If there is an active market, the quoted
working condition. price of an identical asset provides the
● Professional fees arising directly from most reliable evidence of fair value. The
bringing the asset to its working quoted price of a similar asset may also
condition provide evidence of fair value.
● Costs of testing whether the asset is
functioning properly If there is no active market, the fair value
of the intangible asset is equal to any
Examples of cost that are not part of the available quoted price for identical or
cost of intangible asset are: similar asset or may be determined by
discounting the estimated future cash
flows from the asset.
ACQUISITION THROUGH GOVERNMENT INTERNALLY GENERATED
GRANT
The cost of an internally generated
An intangible asset may be acquired by intangible asset is the sum of expenditure
way of a government grant, free of charge incurred from the date when the
or for nominal consideration. This may intangible asset first meets the recognition
occur when a government transfers or criteria. The cost of an internally
allocates to an entity intangible assets such generated intangible asset comprises all
as airport right and license to operate directly attributable costs necessary to
radio or TV. create, produce and prepare the asset to
be capable of operating it in the manner
The intangible asset acquired by way of intended by management.
government grant may be initially
recorded at either: Examples of directly attributable costs are:

● Fair value ● Cost of materials and services used or

consumed in generating the intangible
● Nominal amount or zero, plus any asset.
expenditure that is directly ● Cost of employee benefits arising from
attributable to preparing the asset for the generation of the intangible asset.
its intended use. ● Fees to register a legal right.
● Amortization of patents and licenses
EXCHANGE that are used to generate the
intangible asset.
If the exchange has commercial substance,
the intangible asset acquired initially However, the following expenditures are
measured using the following order of not components of the cost of an internally
priority: generated intangible asset:

(1) Fair value of the asset given up plus ● Selling, administrative and other
cash paid or minus cash received general overhead, unless directly
(2) Fair value of the asset received attributed to the asset.
(3) Carrying amount of asset given up plus ● Clearly identified inefficiencies and
cash paid or minus cash received initial operating losses incurred
before an asset achieves planned
If the exchange lacks commercial performance.
substance, the intangible asset is initially ● Expenditure on training staff to
measured at the operate the asset.

(1) Carrying amount of asset given up plus To assess whether an internally generated
cash paid or minus cash received intangible asset meets the criteria for
recognition, an entity classifies the
NOTE: When the asset lacks commercial generation into RESEARCH PHASE and
substance, there is no gain or loss on DEVELOPMENT PHASE
exchange. An exchange transaction has
commercial substance if the expected RESEARCH PHASE
future cash flows from the asset received
significantly differ from those of the asset Research is original and planned
given up. investigation undertaken with the
prospect of gaining scientific or technical ● How the intangible asset will generate
knowledge and understanding. Generally, probable future economic benefits.
research costs are EXPENSED. Among other things, the entity shall
demonstrate the existence of a market
Research activities include: for the output of the intangible asset
or the intangible asset itself.
● Laboratory research aimed at ● Availability of resources or funding to
discovering or obtaining new complete development and to use or
knowledge sell the asset.
● Searching for application of research ● The ability to measure reliably the
finding and other knowledge expenditure attributable to the
● Conceptual formulation and design of intangible asset during its
possible product or process development.
alternatives
● Testing in search or evaluation of Development activities include:
product or process alternatives
● Design, construction and testing of
DEVELOPMENT PHASE preproduction prototypes and models
● Design of tools, jigs, molds and dies
Development is the application of research involving new technology
findings or other knowledge to a plan or ● Design, construction and operation of
design for the production of new or a pilot plant that is not of scale
substantially improved material, device, economically feasible for commercial
product, process, system or service, prior production
to the commencement of commercial ● Design, construction and testing of a
production chosen alternative for new or
improved product or process
Development cost may be expensed or
capitalized depending on whether certain NOTES:
criteria or conditions are met.
Capitalization of development costs ● If an entity cannot distinguish the
depends if the entity can demonstrate ALL research phase from the development
of the following criteria: phase, the entity shall treat the
expenditure as if it were incurred in
● The technical feasibility of completing the research phase only.
the intangible asset so that it will be
available for use or sale. This is ● In process R&D acquired separately or
achieved when a prototype or model in a business acquisition is recognized
is produced. The entity has completed as asset even if a component is a
the testing of the model and it is now research. Accordingly, the subsequent
convinced that it has a product to sell expenditure is recognized as an
or use that is significantly better than expense if it is a research expenditure.
any other product available in the The subsequent expenditure is added
market. The entity plans to file a to the carrying amount of the in-
patent application for the product. process research and development
● The intention to complete the project if it is a development
intangible asset and use or sell it. expenditure that satisfies the
● The ability to use or sell the intangible recognition criteria for an intangible
asset. asset.
● The cost of PPE, materials and CONCEPT OF AMORTIZATION
intangible assets acquired and used in
R&D activities is included in R&D DEFINITION
expense as follows: Amortization is the systematic allocation
a. If the item of PPE, material or intangible of the depreciable amount of an intangible
asset has an alternative use, it is part asset over the asset's useful life. NOTE:
capitalized and will form part of R&D Amortization is an attempt at cost
expense upon usage or consumption (e.g. allocation rather than asset valuation.
depreciation)
b. If the item of PPE, material or intangible RULE ON AMORTIZATION
asset has no alternative use, the cost is
expensed immediately in its entirety as ONLY intangible assets with FINITE OR
R&D expense LIMITED LIFE are amortized over their
useful life. Intangible assets with
● Internally generated brands, INDEFINITE LIFE are NOT AMORTIZED
mastheads, publishing titles, customer but are TESTED FOR IMPAIRMENT at least
lists and goodwill are NOT annually and whenever there is an
INTANGIBLE ASSETS but expensed indication that the intangible asset may be
outright. impaired

SUBSEQUENT MEASUREMENT AMORTIZATION PERIOD

After initial recognition, an entity shall Amortization shall begin when the asset is
choose as its accounting policy either the available for use and ceases when the
COST MODEL or REVALUATION MODEL asset is derecognized or when classified as
which shall be used in all the other assets held for sale whichever is earlier.
within the same class.
FACTORS OF AMORTIZATION
COST MODEL
(a) AMORTIZABLE AMOUNT
An intangible asset shall be carried at cost, Cost less residual value.
less any accumulated amortization and
any accumulated impairment loss. (b) USEFUL LIFE
The useful life of an intangible asset must
EVALUATION MODEL be assessed as either indefinite or finite.

An intangible asset shall be carried at a FINITE USEFUL LIFE - An intangible asset

revalued amount, less any subsequent has a finite life if the entity can determine
amortization and any subsequent reliably the length of or number of
accumulated impairment loss. production or similar units constituting,
the intangible asset's useful life.
NOTE: An intangible asset can only be
carried at revalued amount if there is an INDEFINITE USEFUL LIFE - An intangible
active market for the asset. asset shall be regarded by the entity as
having indefinite useful life when, based
on an analysis of all 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.
(c) RESIDUAL VALUE amortization is required to be included in
the carrying amount of another asset.
The residual value of an intangible asset
shall be presumed to be zero, except: SUBSEQUENT COSTS ON INTANGIBLE
ASSETS
(1) When a third party is committed to buy
the intangible asset at the end of its useful AS A RULE, a subsequent expenditure on
life. an intangible asset shall be recognized as
(2) When there is an active market for the EXPENSE.
intangible asset so that its expected
residual value can be measured and it is The reason is that most subsequent
probable that there will be a market for expenditures are likely to maintain only
the asset at the end of its useful life. the expected future economic benefits
embodied in the intangible asset.
AMORTIZATION METHOD
However, the subsequent expenditure
According to PAS 38, the amortization used may be capitalized or added to the cost of
shall reflect the pattern in which the the intangible asset if the following
asset's future economic benefits are recognition criteria for an intangible asset
expected to be consumed by the entity. If are met:
that pattern cannot be determined reliably, ● It is probable that future economic
the STRAIGHT-LINE METHOD shall be benefits that are attributable to the
used. subsequent expenditure will flow to
the entity.
There is a rebuttable presumption that an ● The subsequent expenditure can be
amortization method that is based on the measured reliably.
revenue generated by an activity that
includes the use of an intangible asset is IMPAIRMENT OF INTANGIBLE ASSETS
inappropriate. The revenue generated by
an activity that includes the use of an Detailed discussion of impairment of
intangible asset typically reflects factors intangible assets is within Topic 21 -
that are not directly linked to the Impairment of Assets. As an introduction,
consumption of the economic benefits impairment of intangible assets depends
embodied in the intangible asset. whether the asset has a finite or indefinite
life.
This presumption can be overcome only in
the limited circumstances: • FINITE LIFE - An intangible asset is tested
● In which the intangible asset is for impairment when impairment
expressed as a measure of revenue or indicators are present.
● When it can be demonstrated that
revenue and the consumption of the • INDEFINITE LIFE - An intangible asset is
economic benefits of the intangible tested for impairment ANNUALLY and
asset are highly correlated. when impairment indicators are present.

PRESENTATION OF AMORTIZATION

The amortization charge for each period

shall be recognized in profit or loss unless
MAJOR CATEGORIES OF INTANGIBLE directly attributable cost of preparing the
ASSETS asset for its intended use.

(1) MARKETING-RELATED (C) WEBSITE DEVELOPMENT COSTS

(A) TRADEMARKS

A trademark is a symbol, sign, slogan or

name used to mark a product to
distinguish it from other products which
enhance marketability. The terms
(2) CUSTOMER-RELATED
"trademark," "tradename" and
"brandname" are interchangeably used.
CUSTOMER LIST

A trademark can be:

A customer list is a customer database
containing the name, contract information,
• Acquired separately - the cost includes
order history and other vital and social
the purchase price plus costs directly
statistics, such as birth, death and even
attributable to the acquisition. • Internally
sickness. The cost of customer list acquired
developed - the cost includes expenditures
through purchase includes purchase price
required to establish it, including filing
and any directly attributable cost of
fees, registry fees and other expenses
preparing the asset for its intended use.
incurred in securing the trademark such
The costs of internally generated customer
as design cost of the trademark
list are recognized as expernses.

Under R.A. 8293 or the Intellectual

(3) ARTISTIC-RELATED
Property Code of the Philippines, the legal
life of trademark is 10 years and may be
COPYRIGHT
renewed for periods of 10 years each.
Accordingly, the cost of trademark is NOT
A copyright is an exclusive right granted
AMORTIZED but subject to test for
by the government to the author,
impairment at least annually.
composer or artist, enabling the grantee to
publish, sell or otherwise benefit from the
NOTE: Whether the litigation against the
literary, musical or artistic work.
trademark is successful or unsuccessful,
the litigation cost is expensed outright.
The cost assigned to copyright consists of
all expenses incurred in the production of
(B) MASTHEAD
the work including those required to
estabhsh or obtain the right. Where the
Masthead may refer to, a list, usually
copyright is purchased, the cost includes
found on the editorial page of a newspaper
the cash paid, and directly attributable
or other periodical, listing the publisher,
cost necessary for the intended use.
editorial board, advertising rates, etc.

NOTE: Under the Intellectual Property

Masthead, in order to be recognized
Code of the Philippines, the term of
should be separately purchased. Internally
protection for copyright is during the
generated mastheads are expensed
lifetime of the author and for 50 years
outright. The cost of masthead purchased
after death.
includes the purchase price and any
(4) CONTRACT-RELATED over the life of the lease or life of the
improvements, whichever is shorter.
(A) FRANCHISE Where the renewal is highly probable or
certain it may be appropriate to consider
Under a franchise agreement, one party the renewal option in determining the
called the franchisor grants certain rights extended lease term.
to another party called the franchisee.
(5) TECHNOLOGY-RELATED
The cost of the franchise includes the lump
sum payment for the franchise and all (A) PATENT
legal fees and expenses incurred in
connection with the franchise acquisition. A patent is an exclusive right granted by
The lump sum payment is known as the the government to an inventor enabling
initial franchise fee and therefore the him to control the manufacture, sale or
initial cost of the franchise. If the franchise other use of invention for a specified
agreement requires the franchisee to period of time. The legal life of patent is 20
make periodic payment to the franchisor years from the date of filing the
based on the franchisee's revenue, such application. This is in accordance with R.A.
payment is treated as outright expense. No. 8293, or the Intelectual Property Code
This payment is known as the periodic of the Philippines.
franchise fee.
A patent can be:
Amortization of franchise: ● Acquired separately - the cost includes
the purchase price and any directly
Granted for a definite period - amortized attributable expenditure necessary in
over the useful life or definite period, preparing the asset for the intended
whichever is shorter. . Granted use.
indefinitely or perpetually - not be ● Internally developed - the cost
amortized but tested for impairment at includes the licensing and other
least annually. related legal fees in securing the
patent rights. Any research and
(B) LEASEHOLD development costs are not capitalized.

A leasehold is the right acquired by the NOTE: Legal fees and other costs of
lessee by virtue of a contract of lease to successfully prosecuting or defending a
use the specific property owned by the patent shall be expensed immediately.
lessor for a definite period of time in Amortization period of patent:
consideration for a certain sum of money.
The cost of leasehold shall be amortized ● The original cost shall be amortized
over the life of the lease. If the cost is not over the legal life or useful life,
very substantial, it may be charged to whichever is shorter.
outright expense. ● A competitive patent acquired to
protect an original patent shall be
NOTE: Leasehold improvements are amortized over the remaining life of
alterations or modifications on the leased the original patent.
property made by the lessee. This is an ● If a related patent is acquired in order
item of PPE NOT an intangible asset. The to extend the life of the old patent, the
cost of leasehold improvements, ignoring cost of the related patent and any
the residual value, shall be depreciated unamortized cost of the old patent
 shall be amortized over the extended (6) OTHERS
life.
GOODWILL
(B) COMPUTER SOFTWARE
Goodwill arises when earnings exceed
Computer software is a generic term for normal earnings by reason of good name,
organized collections of computer data capable staff and personnel, high credit
and instructions, often broken into two standing, reputation for fair dealings,
major categories: reputation for superior products,
favorable location and a list of regular
● System software - provides basic non- customers.
specific functions of the computer.
● Application software - used by users Only goodwill acquired in a business
to accomplish specific tasks. combination can be capitalized as an
intangible asset. Internally developed
Classification: goodwill is not recorded.

● Integral part of PPE - not an intangible How to measure goodwill?

asset but rather PPE.
● Used for licensing or rental to others - (1) Residual Approach - Under the residual
Intangible asset approach, goodwill is measured by
● Reproduced from product masters for comparing the purchase price for the
resale - Inventories entity with the net tangible and
identifiable assets, meaning total assets
Costs incurred in creating a computer excluding goodwill minus liabilities
software product shall be charged to assumed. (PURCHASE PRICE- FV OF NET
expense when incurred until a technical ASSETS)
feasibility has been established for the
product. If the purchase price or consideration
transferred is less than the net amount of
Actually, this is the research stage where the identifiable assets acquired and
there is so much uncertainty about the liabilities assumed, the difference is GAIN
future economic benefits. Accordingly, all ON BARGAIN PURCHASE presented in
the research costs shall be expensed profit or loss.
outright. As a minimum, technological
feasibility is established when an entity (2) Direct approach - Under direct
has produced either a detailed program approach, goodwill is directly computed as
design of the software or a working model. the excess of average earnings over
normal earnings using the following
After technological feasibility has been methods:
established, capitalizable software costs (a) Purchase of excess earnings
include the cost of coding and testing and (b) Capitalization of excess earnings
the cost to produce the product masters. (c) Present value of excess earnings
(d) Capitalization of average earnings
The costs incurred to actually produce the
software from masters and package the
software for sale shall be charged as
inventory.
PRESENTATION AND DISCLOSURE 14. Intangible assets acquired by way of
government grant and initially recognized
Intangible assets are presented within the at fair value.
NON-CURRENT ASSETS section of the 15. The amount of research and
Statement of Financial Position development expenditure recognized as
expense during the period. disclose the
An entity shall disclose the following for following for each class of intangible
each class of intangible assets, assets, distinguishing between internally
distinguishing between internally generated intangible assets and other
generated intangible assets and other intangible assets.
intangible assets.
1. Whether useful lives are indefinite or
finite, and if finite, the useful lives or the
amortization rate.
2. The amortization method.
3. The gross carrying amount and any
accumulated amortization (aggregated
with accumulated impairment losses) at
the beginning and end of the period.
4. The line item in the income statement
in which any amortization of intangible
asset is included.
5. Additions, separately showing those
internally generated, those acquired
separately and those acquired through
business combination.
6. Intangible assets classified as held for
sale in accordance with PFRS 5.
7. Increases and decreases in intangible
assets resulting from revaluations.
8. Impairment losses and reversal of
impairment losses.
9. Net exchange differences on
translation.
10. The carrying amount of intangible
asset with indefinite life and the reason
supporting the assessment of indefinite
life.
11. The carrying amount and remaining
amortization period of intangible assets
that are material to the entity's financial
statements.
12. The carrying amount of intangible
assets whose title is restricted or pledged
as collateral security.
13. Contractual commitments for the
acquisition of intangible assets.