Valuation of Intangible Assets under
PAS 38
Comprehensive Lecture Notes for Financial Accounting and Reporting / Intermediate
Accounting
Philippine Context (Philippine Accounting Standard 38 – Intangible Assets)
1. Introduction
Intangible assets are increasingly important in modern businesses, particularly in
technology, media, pharmaceutical, and service industries.
These assets provide future economic benefits but do not have physical substance.
In the Philippines, the accounting treatment for intangible assets is governed by Philippine
Accounting Standard (PAS) 38 – Intangible Assets,
which is the Philippine adoption of IAS 38 under International Financial Reporting
Standards (IFRS).
PAS 38 prescribes the recognition, measurement, amortization, impairment, and disclosure
requirements for intangible assets.
2. Definition of Intangible Assets
PAS 38 defines an intangible asset as an identifiable non-monetary asset without physical
substance.
An intangible asset must satisfy three characteristics:
1. Identifiability
2. Control by the entity
3. Existence of future economic benefits
Examples of intangible assets include:
• Patents
• Copyrights
• Trademarks
• Franchises
• Licenses
• Computer software
• Customer lists
3. Identifiability Criterion
An intangible asset is identifiable if:
• It is separable (capable of being separated or sold independently), or
• It arises from contractual or legal rights.
This requirement distinguishes intangible assets from goodwill.
4. Recognition Criteria
An intangible asset shall be recognized if:
1. It is probable that future economic benefits attributable to the asset will flow to the
entity.
2. The cost of the asset can be measured reliably.
If these criteria are not met, the expenditure must be recognized as an expense.
5. Initial Measurement
Intangible assets are initially measured at COST.
The cost includes:
• Purchase price
• Import duties and non-refundable taxes
• Directly attributable costs necessary to prepare the asset for use
• Professional fees
• Testing costs
6. Acquisition of Intangible Assets
Intangible assets may be acquired through several methods:
1. Separate purchase
2. Acquisition as part of a business combination
3. Acquisition through government grant
4. Exchange of assets
5. Internally generated development
7. Internally Generated Intangible Assets
Internally generated intangible assets are divided into two phases:
Research Phase
All research expenditures are expensed when incurred.
Examples:
• Search for new knowledge
• Investigation of alternatives
• Initial laboratory research
Development Phase
Development costs may be capitalized if specific criteria are met.
The entity must demonstrate:
• Technical feasibility
• Intention to complete the asset
• Ability to use or sell the asset
• Availability of resources
• Ability to measure expenditures reliably
8. Expenditures Not Recognized as Intangible Assets
Certain expenditures must always be expensed, including:
• Research costs
• Advertising and promotional costs
• Training costs
• Start-up costs
• Relocation costs
• Internally generated goodwill
9. Subsequent Measurement
After initial recognition, PAS 38 allows two measurement models:
Cost Model
Carrying Amount = Cost – Accumulated Amortization – Accumulated Impairment Loss
Revaluation Model
Asset carried at fair value less subsequent amortization and impairment.
However, the revaluation model may only be used when there is an active market for the
intangible asset,
which is rare in practice.
10. Useful Life of Intangible Assets
Intangible assets may have:
Finite Useful Life
These assets are amortized over their useful life.
Examples:
• Patents
• Licenses
• Copyrights
Indefinite Useful Life
These assets are not amortized but are tested annually for impairment.
Example:
Certain trademarks or brand names.
11. Amortization
Amortization is the systematic allocation of the depreciable amount of an intangible asset
over its useful life.
Depreciable Amount = Cost – Residual Value
Common amortization method:
• Straight-line method
Amortization begins when the asset is available for use.
12. Impairment of Intangible Assets
Intangible assets are subject to impairment testing under PAS 36.
Impairment occurs when:
Carrying Amount > Recoverable Amount
Recoverable Amount is the higher of:
• Fair value less costs of disposal
• Value in use
13. Derecognition
An intangible asset is derecognized when:
• The asset is disposed of, or
• No future economic benefits are expected from its use.
Gain or Loss = Net Disposal Proceeds – Carrying Amount
The gain or loss is recognized in profit or loss.
14. Presentation in Financial Statements
Intangible assets are presented as non-current assets in the Statement of Financial Position.
Example presentation:
Non-Current Assets
Intangible Assets
Less: Accumulated Amortization
Less: Accumulated Impairment
15. Disclosure Requirements
PAS 38 requires entities to disclose:
• Useful lives of intangible assets
• Amortization methods used
• Gross carrying amount
• Accumulated amortization
• Reconciliation of carrying amounts
• Impairment losses recognized
16. Importance of Proper Valuation
Proper valuation of intangible assets ensures:
• Reliable financial reporting
• Accurate measurement of corporate value
• Transparency for investors
• Compliance with Philippine Financial Reporting Standards (PFRS)
17. Summary
Key principles of PAS 38:
• Intangible assets are identifiable non-monetary assets without physical substance.
• Initially measured at cost.
• Subsequent measurement uses cost model or revaluation model.
• Finite life assets are amortized.
• Indefinite life assets are tested annually for impairment.
• Proper disclosure is required in financial statements.