CHAPTER 22: INTANGIBLE ASSETS

DEFINITION
Identifiable nonmonetary assets without physical substance.

Criteria:
1. Identifiability
2. Control
3. Future economic benefit

SCOPE
PAS 38 applies to all intangible assets. PAS 38 does not apply to the following:
(a) Goodwill acquired in a business combination
(b) Financial assets
(c) Rights arising from exploration and evaluation assets
(d) Expenditure on the development and extraction of non-regenerative resources
(e) Intangible assets held for sale in the ordinary course of business
(f) Deferred taxes
(g) Leases
(h) Assets arising from employee benefits
(i) Deferred acquisition costs and intangible assets arising from an insurer's contractual rights under insurance contracts
(j) Non-current intangible assets classified as held for sale

RECOGNITION
1. Probable that future economic benefits that attributable to the asse will flow to the entity.
2. Cost of the intangible asset can be measured reliably.

MEASUREMENT
INITIAL MEASUREMENT
- AT COST

(a) SEPARATE ACQUISITION

(1) Purchase price including import duties and non-refundable purchase taxes after deducting trade discounts. rebates and other
similar discounts
(2) Any directly attributable costs necessary to bring the asset for its intended use

(b) DEFERRED SETTLEMENT BASIS

If the payment for an intangible asset is deferred beyond normal credit terms, the cost is the cash price equivalent. The
difference between the cash price and the total payments is recognized as interest expense over the credit period

(c) ACQUISITION THROUGH BUSINESS COMBINATION

If an intangible asset is acquired in a business combination, the cost of the intangible asset is based on the fair value on the date
of acquisition.

(d) ACQUISITION THROUGH GOVERNMENT GRANT

An intangible asset may be acquired by way of government grant, free of charge or for nominal consideration. This may occur
when a government transfers or allocates to an entity intangible asset such as airport right and license to operate radio or TV.
The intangible asset acquired by way of government grant may be initially recorded at either:
a. Fair value
b. Nominal amount or zero, plus any expenditure that is directly attributable to preparing the asset for its intended use.

(e) EXCHANGE
If the exchange has commercial substance, the intangible asset acquired initially measured using the following order of priority
(1) Fair value of the asset given up plus cash paid or minus cash received
(2) Fair value of the asset received
(3) Carrying amount of asset given up plus cash paid or minus cash received

If the exchange Jacks commercial substance, the intangible asset is initially measured at the
(1) Carrying amount of asset given up plus cash paid or minus cash received
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(f) INTERNALLY GENERATED
The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and
prepare the asset to be capable of operating it in the manner intended by management.

Examples of directly attributable costs are

(1) Cost of materials and services used or consumed in generating the intangible asset.
(2) Cost of employee benefits arising from the generation of the intangible asset
(3) Fees to register a legal right
(4) Amortization of patents and licenses that are used to generate the intangible asset.

However, the following expenditures are not components of the cost of an internally generated intangible asset:
(1) Selling, administrative and other general overhead, unless directly attributed to the asset
(2) Clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned performance
(3) Expenditure on training staff to operate the asset

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation
into RESEARCH PHASE and DEVELOPMENT PHASE.

RESEARCH PHASE
Research is original and planned investigation undertaken with the prospect of gaining scientific or technical knowledge and
understanding Generally, research costs are EXPENSED.

Research activities include

(1) Laboratory research aimed at discovering or obtaining new knowledge
(2) Searching for application of research finding and other knowledge
(3) Conceptual formulation and design of possible product or process alternatives
(4) Testing in search or evaluation of product or process alternatives

DEVELOPMENT PHASE
Development is the application of research findings or other knowledge to a plan or design for the production of new or
substantially improved material, device, product, process, system or service prior to the commencement of commercial
production. Capitalization of development costs depends on if the entity can demonstrate ALL of the following criteria:
(1) The technical feasibility of completing the intangible asset so that it will be available for use or sale. This is achieved when a
prototype or model is produced. The entity has completed the testing of the model and it is now convinced that it has a product
to sell or use that is significantly better than any other product available in the market. The entity plans to file a patent
application for the product.
(2) The intention to complete the intangible asset and use or sell it.
(3) The ability to use or sell the intangible asset.
(4) How the intangible asset will generate probable future economic benefits. Among other things, the entity shall demonstrate
the existence of a market for the output of the intangible asset or the intangible asset itself.
(5) Availability of resources or funding to complete development and to use or sell the asset.
(6) The ability to measure reliably the expenditure attributable to the intangible asset during its development.

Development activities include:

(1) Design, construction and testing of preproduction prototypes and models
(2) Design of tools, jigs, molds and dies involving new technology
(3) Design, construction and operation of a pilot plant that is not of scale economically feasible for commercial
(4) Design, construction and testing of a chosen alternative for new or improved product or process

SUBSEQUENT MEASUREMENT
After initial recognition, an entity shall choose as its accounting policy either the COST MODEL or REVALUATION MODEL

COST MODEL
An intangible asset shall be carried at cost, less any accumulated amortization and any accumulated impairment loss.

REVALUATION MODEL
An intangible asset shall be carried at a revalued amount, less any subsequent amortization and any subsequent accumulated
impairment loss.
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NOTE: An intangible asset can only be carried at revalued amount if there is an active market for the asset

CONCEPT OF AMORTIZATION
DEFINITION
Amortization is the systematic allocation of the depreciable amount of an intangible asset over the asset's useful life.

RULE ON AMORTIZATION
ONLY, intangible assets with FINITE OR LIMITED LIFE are amortized over their useful life. Intangible assets with
INDEFINITE LIFE are NOT AMORTIZED but are TESTED FOR IMPAIRMENT at least annually and whenever there is an
indication that the intangible asset may be impaired

AMORTIZATION PERIOD
Amortization shall begin when the asset is available for use and ceases when the asset is derecognized or when classified as
held for sale whichever is earlier.

FACTORS OF AMORTIZATION
(a) AMORTIZABLE AMOUNT: Cost less residual value
(b) USEFUL LIFE - The useful life of an intangible asset must be assessed as either indefinite or finite
FINITE USEFUL LIFE - An intangible asset has a finite life if the entity can determine reliably the length of or number of
production or similar units constituting, the intangible asset's useful life.
INDEFINITE USEFUL LIFE - An intangible 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 - The residual value of an intangible asset shall be presumed to be zero, except
(1) When a third party is committed to buy the intangible asset at the end of its useful life.
(2) When there is an active market for the intangible asset so that its expected residual value can be measured and it is probable
that there will be a market for the asset at the end of its useful life.

AMORTIZATION METHOD
According to PAS 38, the amortization 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.

PRESENTATION OF AMORTIZATION
The amortization charge for each period shall be recognized in profit or loss unless amortization is required to be in in the
carrying amount of another asset.

SUBSEQUENT COSTS ON INTANGIBLE ASSETS

AS A RULE, a subsequent expenditure on an intangible asset shall be recognized as EXPENSE.
The reason is that most subsequent expenditures are likely to maintain only the expected future economic for its embodied in
the intangible asset. However, the subsequent expenditure may be capitalized or added to the cost of the intangible asset if the
following recognition criteria for an intangible asset are met:
(a) It is probable that future economic benefits that are attributable to the subsequent expenditure will flow to the entity.
(b) The subsequent expenditure can be measured reliably.

IMPAIRMENT OF INTANGIBLE ASSETS

Detailed discussion of impairment of intangible assets is within IMPAIRMENT OF ASSETS. As an introduction, impairment
of intangible assets depends on whether the asset has a finite or indefinite life:
 FINITE LIFE - An intangible asset is tested for impairment when impairment indicators are present.
 INDEFINITE LIFE - An intangible asset is tested for impairment ANNUALLY and when impairment indicators are
present.

CATEGORIES
1. MARKETING-RELATED
A. TRADEMARKS
 Acquired separately – cost includes the purchase price plus directly attributable costs.
 Internally developed - cost includes expenditures required to establish it including filing fees, registry fees and
other expenses incurred in securing the trademark such as design cost.
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 Legal life: 10 years and may be renewed for periods of 10 years each. not amortized but subject to impairment
testing annually.
B. MASTHEAD
 Acquired separately – cost includes the purchase price plus directly attributable costs.
 Internally developed – expensed outright.
C. WEBSITE DEVELOPMENT COSTS
Purpose Capitalized as intangible asset?
Internal YES
External and customers can place orders YES
External and customers cannot place orders NO

Stages Treatment of the cost

Planning stage (research stage) Expensed outright
Application and infrastructure stage (development stage) Intangible asset if all criteria were met
Graphical design stage (development stage) Intangible asset if all criteria were met
Content developing stage (advertising) Expensed outright
Operating stage (subsequent cost) Expensed unless criteria were met

2. CUSTOMER-RELATED
CUSTOMER LIST
A customer list is a customer database containing the name, contract information, order history and other vital and social
statistics, such as birth, death and even sickness The cost of customer list acquired through purchase includes purchase price and
any directly attributable cost of preparing the asset for its intended use. The costs of internally generated customer list are
recognized as expenses.

(3) ARTISTIC-RELATED
COPYRIGHT
A copyright is 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. The cost assigned to copyright consists of all expenses
incurred in the production of the work including those required to establish or obtain the right. Where the copyright is
purchased, the cost includes the cash paid, and directly attributable cost necessary for the intended use.
NOTE: Under the Intellectual Property Code of the Philippines, the term of protection for copyright is during the lifetime of the
author and for 50 years after death.

(4) CONTRACT-RELATED
(A)FRANCHISE - Under a franchise agreement, one party called the franchisor grants certain rights to another party called the
franchisee. The cost of the franchise includes the lump sum payment for the franchise and all legal fees and expenses incurred in
connection with the franchise acquisition. The lump sum payment is known as the initial franchise fee and therefore the initial
cost of the franchise. If the franchise agreement requires the franchisee to make periodic payment to the franchisor based on the
franchisee's revenue, such payment is treated as outright expense. This payment is known as the periodic franchise fee.
Amortization of franchise:
 Granted for a definite period - amortized over the useful life or definite period, whichever is shorter
 Granted indefinitely or perpetually-not be amortized but tested for impairment at least annually

(B) LEASEHOLD
A leasehold is the right acquired by the lessee by virtue of a contract of lease to use the specific property owned by the lessor for
a definite period of time in consideration for a certain sum of money. The cost of leasehold shall be amortized over the life of
the lease. If the cost is not very substantial, it may be charged to outright expense.

NOTE: Leasehold improvements are alterations or modifications on the leased property made by the lessee. This is an item of
PPE, NOT an intangible asset. The cost of leasehold improvements, ignoring the residual value, shall be depreciated over the
life of the lease or life of the improvements, whichever is shorter Where the renewal is highly probable or certain it may be
appropriate to consider the renewal option in determining the extended lease term.

(5) TECHNOLOGY-RELATED
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(A) PATENT - A patent is 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 of time The legal life of patent is 20 years from the date of filing the
application. This is in accordance with R.A. No. 8293, or the Intellectual Property Code of the Philippines. A patent can be:
 Acquired separately the cost includes the purchase price and any directly attributable expenditure necessary in preparing the
asset for the intended use.
 Internally developed the cost includes the licensing and other related legal fees in securing the patent rights. Any research
and development costs are not capitalized.
NOTE: Legal fees and other costs of successfully prosecuting or defending a patent shall be expensed immediately.

Amortization period of patent:

 The original cost shall be amortized over the legal life or useful life, whichever is shorter.
 A competitive patent acquired to protect an original patent shall be amortized over the remaining life of the original patent.
 If a related patent is acquired in order to extend the life of the old patent, the cost of the related patent and any unamortized
cost of the old patent shall be amortized over the extended life.

(B) COMPUTER SOFTWARE - Computer software is a generic term for organized collections of computer data and
instructions, often broken into two major categories:
 System software - provides basic non-specific functions of the computer.
 Application software used by users to accomplish specific tasks.

Classification:
 Integral part of PPE - not an intangible asset but rather PPE
 Used for licensing or rental to others - Intangible asset
 Reproduced from product masters for resale - Inventories

(6) OTHERS
GOODWILL - Goodwill arises when earnings exceed normal earnings by reason of good name, capable staff and personnel,
high credit standing, reputation for fair dealings, reputation for superior products, favorable location and a list of regular
customers. Only goodwill acquired in a business combination can be capitalized as an intangible asset Internally developed
goodwill is not recorded

(1) Residual Approach - Under the residual approach, goodwill is measured by comparing the purchase price for the entity with
the net tangible and identifiable assets, meaning total assets excluding goodwill minus liabilities assumed (PURCHASE PRICE-
FV OF NET ASSETS). If the purchase price or consideration transferred is less than the net amount of the identifiable assets
acquired and liabilities assumed, the difference is GAIN ON BARGAIN PURCHASE presented in profit or loss.

(2) Direct approach - Under direct approach, goodwill is directly computed as the excess of average earnings over normal
earnings using the following methods:
(a) Purchase of excess earnings
(b) Capitalization of excess earnings
(c) Present value of excess earnings
(d) Capitalization of average earnings