INTERMEDIATE ACCOUNTING 2

LESSON 11
IDENTIFIABLE INTANGIBLE ASSETS

IDENTIFIABLE INTANGIBLE ASSET - asset that can be sold, transferred, licensed, rented or sold
separately.

A. PATENT
o 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.
-Technology-based intangible asset

o Life – 20 years
-Cannot be renewed but life can be extended beyond legal life by a new patent.

o Cost-
o Purchase price
o Import duties
o Nonrefundable purchase taxes
o Any directly attributable cost of preparing the asset for the intended use.
o Internally developed patent- cost includes licensing and other related legal fees
o Additional development cost may be capitalized as patent cost or separately
accounted for as development cost which will be recognized as intangible asset
and amortized over the useful life of the patent.

o Amortization
o If internally developed patent- cost is amortized over the legal life or useful life
whichever is shorter.
o If acquired from an original patentee, cost shall be amortized over the
remaining legal life or useful life whichever is shorter.
o Competitive patent acquired to protect an original patent, the cost is amortized
over the remaining life of the old patent.
o Related patent acquired to extend the life of old patent, cost of related patent
and any unamortized cost of old patent is amortized over the extended life.
 If there is no extension of life, the new patent shall be amortized over
its own life, and the cost of old patent is amortized over the remainder
of its life.

o Cost of litigation
 Legal fees and other costs of successfully prosecuting or defending a
patent shall be expense.
 Cost of unsuccessful litigation and the remaining cost of the patent
shall be written of as loss.

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 o Illustration

Jan. 1, 2021- Research & dev’t. expense 200,000

Entity develop a patent costing Cash 200,000
P200,000 which is useful for the
entire legal life of 20 years, and Patent 120,000
spent P120,000 for licensing. Cash 120,000

Amortization for 2021 Amortization of patent 6,000

Patent 6,000
(120,000/20 yrs.)
Amortization for 2022 Amortization of patent 6,000
Patent 6,000
Cost of successful defense of the Legal expenses 180,000
patent in 2023. Cash 180,000

Amortization for 2023. Amortization of patent 6,000

Patent 6,000
Acquisition of competing patent on Patent 170,000
January 1, 2024. Cash 170,000

Amortization for 2024. Amortization of patent 16,000

Patent 16,000

Original patent 6,000

Competing patent
(170,000/17 yrs.) 10,000
Total 16,000
Dec. 31, 2024-The product covered Patent written off 256,000
by patent was withdrawn from sale Patent 256,000
under government order because of
potential hazard in the product. Patent writeoff is classified as
other expense
Patent

2021 Orig. cost 120,000 2021 Amortization 6,000

2024 Cost of competing 2022 Amortization 6,000
Patent 170,000 2023 Amortization 6,000
2024 Amortization 16,000
2024 Writeoff 256,000
290,000 290,000

o Impairment of Patent
Whenever there is an indication that patent can be impaired at the end of
reporting period, it should be tested for impairment.

Illustration-
On January 1, 2021, an entity acquired a patent for P2,400,000. The patent has a
useful life of 10 years and remaining legal life of 12 years.

On December 31, 2021, there is an indication that the patent may be impaired.

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 The patent is expected to generate cash flows of P300,000 per year for the
remaining useful life of 9 years.

The appropriate discount rate is 9%. The present value of an ordinary annuity of
1 for 9 periods at 9% is 6.00. The patent has no determinable fair value less cost
of disposal.

The following are the entries:

1. To record the patent acquisition on January 1, 2021:

Patent 2,400,000
Cash 2,400,000

2. To record the patent amortization for 2021.

Amortization of patent (2,400,000/10) 240,000
Patent 240,000

3. To record the impairment loss-

Impairment loss 360,000
Impairment loss 360,000

Carrying amount-12/31/2021 (2,400,000-240,000) 2,160,000

PV of cash flows or value in use (300,000 x 6.00) 1,800,000
Impairment loss 360,000

4. To record the patent amortization-2022

Amortization of patent (1,800,000/9) 200,000
Patent 200,000

B. COPYRIGHT –
o an exclusive right granted by the government to the author, composer or artist enabling
the grantee to publish, sell or otherwise benefit from the literary, musical or artistic
work.- An artistic related intangible asset.

o Cost –
 When produced – all expenses incurred in the production of the work including
those required to establish or obtain the right.
 When purchased- cash paid plus directly attributable cost necessary for the
intended use.

o Amortization
 Amortized over useful life.
 Useful life – that period in which benefits, sales and royalties are expected.
However, in actual practice, it is difficult to estimate the useful life, hence, it is
advisable to write off the cost of the copyright against the revenue of the first
printing.

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  Under the Intellectual Property Code of the Philippines, the term of protection
or legal life for the copyright is during the life of the author and for 50 years
after death.
 The copyright should be reviewed for impairment by assessing at the end of
each reporting period whether there is an indication that it may be impaired.

C. FRANCHISE
 certain right granted by one party called the franchisor to another part called the franchisee.
 A franchise is a business whereby the owner licenses its operations—along with its products,
branding, and knowledge—in exchange for a franchise fee. A contract-based intangible
asset.
 Agreement is:
o Between the government and a private entity or individual.
 The latter is permitted to use public property in performing the services.
1. Use of public water for interisland shipping.
2. Use of public land for telephone and electric lines
3. Use of streets and highways for a bus line.

o Between private entities or individuals

 The franchisee acquires the right to use the trademark, patent and process of
the franchisor.
1. Right to operate a fried chicken drive-in under the tradename “Max”
2. Exclusive right to distribute or sell a particular brand product such as
“Rolex”, “Sony”, or services such as “Jollibee”, “McDonald”

 Cost-
o Lumpsum payment for the acquisition of franchise (Initial franchise fee)
 Periodic payment treated as outright expense (periodic franchise fee)
o Directly attributable costs necessary for its intended use (legal fees and expenses)

 Amortization
o If granted for a definite period – cost is amortized over the useful life or definite period
whichever is shorter.
o If granted for an indefinite period or perpetually – cost of franchise shall not be
amortized but tested for impairment at least annually.

 Illustration – Initial franchise fee

At the beginning of the current ear, an entity purchased a franchise from Jollibee
Company to sell Jollibee products for P5,000,000 for 20 years.

The initial franchise fee is payable in cash, P500,000, when the contract is signed and
the balance in five equal installments every year-end, evidenced by a 12% promissory
note.

The agreement provided that the franchisor would assist in the location of site for the
construction of bui8lding, make a project study of the viability of the project and
provide training of management and employees.

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 contract.

REQUIRED: Prepare the necessary entries in the BOOKS OF FRANCHISEE

To record the initial franchise fee:
Franchise 5,000,000
Cash 500,000
Note payable 4,500,000
To record the payment of the frit installment at year-end.
Note payable 900,000
Interest expense (4,500,000 x 12%) 540,000
Cash 1,440,000
To record the amortization of franchise.
Amortization of franchise 250,000
Franchise 250,000

 Illustration-Periodic franchise fee

The franchisee pays the franchisor a periodic fee of 5% on the gross sales of the franchisee
each year.

If the franchisee realized gross sales of P5,000,000 for the current year, the periodic
franchise fee is 5% of P5,000,000, or P250,000.

The franchisee will simply record the payment of the periodic fee as expense outright.

Entry is:
Franchise fee expense 250,000
Cash 250,000

D. TRADEMARK OR BRANDNAME

o A symbol, sign, slogan or name used to mark a product to distinguish it from

other products. A market-related intangible asset

o Cost –
 Purchased trademark:
o Purchase price
o Costs directly attributable to the acquisition

 Internally developed trademark:

o Expenditures required to establish it (filing fees, registry fees
and other expenses incurred as design cost of trademark

o If the trademark is successfully prosecuted or defended, the

litigation cost is an outright expense.

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  Cost of trademark is not amortized but subject to test for impairment at least
annually and whenever there is an indication that it may be impaired.

o Legal Life – 10 years and maybe renewed for period of 10 years each

o Illustration:
Jan 1-acquired Trademark 3,000,000
trademark for Cash 3,000,000
P3,000,000 with a
remaining legal life of
8 years.
Impairment of loss Impairment loss 500,000
Trademark 500,000

CA 3,000,000
PV of CF or VIU
(250,000/10%) 2,500,000
Impairment loss 500,000

E. CUSTOMER LIST
 a customer database containing the name, contract information, order history and other
vital and social statistics, such as birth, death and even sickness.
 Internally generated customer list shall not be recognized as an intangible asset. (PAS 38,
par. 63)
 An acquired customer list may be recognized as an intangible asset and amortized over the
useful life.

F. COMPUTER SOFTWARE-
Under most circumstances, computer software is classified as an intangible
asset because of its nonphysical nature. However, accounting rules state that there are certain
exceptions that permit the classification of computer software, such as PP&E (property, plant,
and equipment).

Computer software is the most widely owned type of intangible capital asset. There are
three primary types of computer software:

1. Purchased (commercial “off the shelf”)

Purchased software is commercial software that is purchased “off the shelf” and
then placed into service with minimal modification.

To be a capitalized asset, the commercial software must have:

 An estimated useful life of one year or greater

 An aggregate cost that meets or exceeds the capitalization threshold of $100,000.00

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 When purchasing computer software licenses or similar assets, the
capitalization threshold is based on the aggregate or total cost of the purchase. Do not
divide the cost by the number of licenses. The cost can include:

 Purchase software license

 License fees
 Testing fees
 Set-up fees
 Delivery cost

2. Internally-generated

Intangible computer software assets are considered internally-generated if they are:

 Created or produced by the government’s employees or a third-party contractor on

the behalf of the state and local government

–OR–

 Purchased off-the-shelf software that requires substantial modification before

being placed into service.

To be a capitalized asset, the internally-generated computer software must have:

 An estimated useful life of one year or greater

 A cost of the application development stage activities that meets or exceeds the
capitalization threshold of $1 million.

Costs incurred that relate to the development of internally-generated computer

software are only capitalized if ALL of the following are met:

1. Determined the specific objective of the project and the service capacity
expected upon the completion of the project
2. Completion at expected capacity is anticipated and feasible
3. Demonstrated the intention, ability and presence of effort to complete
4. Preliminary project stage activities have been completed
5. Management implicitly or explicitly authorizes and commits to funding the
project (for at least the current year in the case of multi-year projects)

For commercially available software that is modified to the point it is

considered internally-generated, the above requirements are generally considered
to have occurred upon the agency’s commitment to purchase or license the
computer software.

3. Subscription-based information technology arrangements (SBITA)

GASB 96 defines a SBITA as a contract that conveys control of the right to use
another party’s IT software (alone or in combination with tangible capital assets), for a

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 period of time as specified in the contract, in an exchange or exchange-like transaction.
SBITAs include:

 Software as a service (for example, Microsoft 365)

 Platform as a service (databases or webservers)

The Governmental Accounting Standards Board (GASB) is the organization that

determines and updates generally accepted accounting principles (GAAP) for government
entities. Thus, GASB is the acting body that enforces and updates GAAP, which are all
different accounting principles that are constantly changing.

G. BROADCASTING LICENSE, AIRLINE RIGHT AND FISHING RIGHT-