Intangible Assets – Identifiable nonmonetary asset without physical substance

- a resource that is controlled by the entity as a result of past events and from which future economic benefits are
expected. Thus the three critical attributes of an intangible asset are. (ICE)

 Identifiability
 Control
 Existence of future economic benefits

Identifiability of an asset

 Is separable(capable of being separated and sold, transferred licensed, rented)

 Arises from contractual or other legal rights regardless of whether those rights are transferable or separable
from the entity or form other rights and obligation

Intangible assets examples

 Patented technology computer software databases and trade secrets

 Trademarks trade dress newspaper mastheads internet domains
 Video and audiovisual material (Motion pictures, cartoons, TVs program)
 Customer lists
 Mortgage servicing rights
 Licensing royalty and standstill agreements
 Import quotas
 Franchise Agreements
 Customer and supplier relationships
 Marketing rights

Modes of acquisition

 By separate purchase
o Purchase price
o Import duties and nonrefundable taxes
o Directly attributable costs of preparing the asset for its intended use
o If the payment for the asset is deferred beyond normal credit terms, the cost is the cash price equivalent
(i.e. the difference between the total payments and the cash price shall be recognized as interest
expense over the credit period.)
 As part of a business combination(Goodwill recognized)
 BY a government grant
o An intangible asset may be acquired by way of government grant, free of charge or for nominal
consideration.
o Examples:
o Airport land rights
o License to operate radio/TV stations
o Import licenses
o Access to restricted resources
o An intangible asset may be acquired by way of government grant may be initially recorded at either:
o Fair value
o Nominal amount or zero, plus any expenditure directly attributable to preparing the asset for its
intended use
 By exchange of assets
o If the transaction has commercial substance, then measure the intangible asset at: (level of priority)
o FV of asset given up
o FV of asset received
o CA of asset given up
o If the transaction lacks commercial substance, then just measure at CA of asset given up (no G/L)
o Note: An exchange transaction lack commercial substance if the cash flows of the asset received DO
NOT DIFFER from the cash flows of the asset given up.
  By self-creation(internal generation, except for customer list)

Costs to be capitalized include:

o Costs of materials and services consumed to generate the asset

o Costs of employee benefits arising from generating the asset
o Fees to register a legal right
o Amortization of patents/licenses that were USED to generate the intangible asset
o

IAS 37 requires an entity to recognize an intangible asset if (just like PPE)

 probable that future economic benefits that are attributable to the asset will flow to the entity
 The cost of the asset can be measured reliably

- if an intangible asset does not meet both the definition of and the criteria for recognition as an intangible asset. IAS 38
requires the expenditure for this item to be recognized as EXPENSE when incurred

Research vs Developmen

Research – comprises of the ff:

 Activities aimed at obtaining new knowledge

 Search for evaluation and final selection of application of research findings or other knowledge
 Search for alternatives for materials, devices, products, processes, systems, or services
 Formulation, design, evaluation, and final selection of alternatives for new or improved materials, devices,
products processes, systems or services

Development comprises of the ff:

 Design, construction and testing of preproduction or peruse prototype models

 Design of tools jigs moulds and dies involving new techonology
 Design, construction and operation of a pilot plant that is not ascale economocailly feasible for commercial
production
 Design construion and testing of a chosen alternative for new or improved materials, devices, products,
processes, systems or services

Expenditures incurred in the development phase can only be capitalized if the entity can demonstrate the ff:

 TECHNICAL FEASIBILITY OF COMPLETING the intangible asset so that it will be available for use or sale
 INTENTION TO COMPLETE the intangible asset and use or sell it
 ABILITY TO USE OR SELL the intangible asset
 Intangible assets will GENERATE PROBABLE FUTURE ECONOMIC BENEFITS
 Availability of ADEQUATE TECHNICAL FINANCIAL AND OTHER RESOURCES FOR THE COMPLETION use or sale of
the intangible
 Ability to MEASURE RELIABLY THE EXPENDITURE ATTRIBUTABLE to the intangible asset during its development

Initial cost – measured at cost

Subsequent – Entity may choose either

 Cost Model = Carried at cost less accumulated amortization and impairment losses
 Revaluation Model – May be carried at revalued amount (based on fair value less and subsequent amortization
and impairment losses only if fair value can be determined by reference to an active market

Intangible classified as:

 indefinite life: No foreseeable limit to the period over which the asset is expected to genereate net acsh inflows
for the entity
 Finite Life: A limite period of benefit to the entity

Finite Life Assets:

- should be amortized based on a systematic basis over that life

  Amortization method should reflect the pattern of benefits
 Pattern cannot be determined reliably, amortize by the straight-line method
 Amortization charge is recognized in P/L unless another IFRS requires that it be included in the cost of another
asset
 The amortization period should be reviewed at least annual

The asset should also be assessed for impairment in accordance with IAS 36

Indefinite Useful LIVES

- should not be amortized

 Useful life should be reviewed each reporting period to determine whether events and circumstance continue to
support an indefinite useful life assessment for that asset. If they do not the the change in the useful life
assessment from indefinite to finite life should be accounted for as a change in accounting estimate
 The asset should also be assessed for impairment in accordance with IAS 36

Subsequent expenditures

- Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being recognized in
the carrying amount of an asset. Subsequent expenditures on brands mastheads, publishing titles, customer lists and
similar items must always be recognized in profit or loss as incurred. EXPENSED

Patent

- an 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 f time
- Legal life of a patent is 20 years on accordance with RA 8293 or the IP code of the Philippines
- Patent can be acquired by purchase in which the cost comprises the purchase price import duties nonrefundable
purchase taxes and directly attributable costs
- If internally developed costs include licensing and related legal fees in securing the rights
- Patent should be amortized over the legal life or its useful life whichever is shorter
- If competitive patent is acquired to protect an original patent the cost shall be amortized over the remaining life
if the old patent

Trademark

- A symbol sign slogan or name used to mark a product to distinguish it from other products. The cost of a
trademark when purchased includes the purchase price and directly attributable costs.
- If internaly developed the cost of a trademark includes the expenditures requires to establish it such as FILING
FEES REGISTRY FEES AND OTHER COSTS
- Legal life of a trademark is 10 Years and renewable of 10 years each, the entity can classify as INDEFINITE
USEFUL LIFE
- The cost of a trademark is not amortized
- FF. are:
o Trade marks – word names symbols other devices
o Service marks – Like trademarks but services
o Collective Marks – Identifies goods/services of members of a group
o Certification marks – Certify geographical origin or other characterisitcs of good/service

Copy Right

- An exclusive right granted by the government to the author or artist enabling the grantee to publish sell or
otherwise benefit from the literary musical or artistic work
- Term of protection for copyright is DURING THE LIFE OF THE AUTHOR and 50 YEARS AFTER THEIR DEATH
- Copyright should be reviewed, INDEFINITE USEFUL LIFE

Franchise

- The right itself to operate a brand. Such as McDonalds and Jollibee

 - Cost includes the lump-sum payment for the acquisition of the franchise plus directly attributable costs
necessary for the intended use such as legal fees and expenses incurred in connection with the acquisition of
such right.
- Franchise is granted for a definite period, cost is amortized over its useful life or definite period, WHICHEVER IS
SHORTER.
- If indefinitely, cost is not amortized by tested for impairment annually

Others:

- Broadcasting licenses
- License
- Airline rights
- Import rights
- Import Quotas
- Customer list database(acquired, NOT OURS)

Goodwill

- Arises from exceeding normal earnings by reason of goods name, capable staff and personnel. High credit
standing, Good reputation
- Most intangible asset
- Cannot be bought and sold and is only identified with the entity as a whole
- Two kinds of goodwill
o Internal – non-recognizable
o Purchased - recognizable
- Not be recognized as an asset
- PURCHASED GOODWILL ARISES WHEN A BUSINESS IS PURCHASED. IT IS RECOGNIZED AS AN ASSET
- Shall not be amortized, but checked for impairment, INDEFINITE USEFUL LIFE
- Purchase price transferred in purchasing an entiy is greated than the fair value of identifiable net assets the
difference is goodwill
- The purchase price transferred in purchasing an entity less than a fair value of identifiable net assets, the
difference is a GAIN ON BARGAIN PURCHASE recognized in profit or loss

If legal fees to renew have a significant cost: treated as a definite life.

If legal fees to renew have an insignificant cost: treated as indefinite life.

Residual value existence:

a. Generally be zero
b. Exceptions:
a. When there is an active market
b. When an entity promises to buy after its useful life

Impairment of intangible assets

1. Indefinite useful life

a. At least annually
b. Whenever there is an indication that the intangible asset may be impaired.
c.
2. Definite useful life
a. Whenever there is an indication that the intangible asset may be impaired at the end of the reporting
period

Factors to consider the useful life of an intangible asset

1. Expected usage of the assets by the entity

2. Typical product life cycles of the asset
3. Technical technological commercial or other types of obsolence
4. Stability of the industry in which the asset operates
5. Expected actions by competitors or potential competitors
6. The period or control over the asset and legal or similar limits on the use of the asset
7. Dependency on the useful life of other assets of the entity
Internally generated software

 Costs charged to inventory will be expensed as part of the cost of goods sold in a statement of comprehensive
income
 Cost of intenral devleopemt of software in-house use are expensed
 If the software is purchased for the entity’s pwn use and is integral to the hardward, would be treated as cost of
the hardware and capitalized as cost of the asset.
 Capitalized cost of the software intended to be marketed shall be recognized as expense based on expected
pattern of economic benefits derived from such costs.

Impairment of goodwill

 Test for impairment through cash-generating units

 CGU – Generally assets only unless inclusion of liability items is required to get the recoverable amount