Intangible Asset (PAS 38)
- Identifiable nonmonetary asset without physical substance
- Asset must be controlled by the entity as a result of past event and from which
future economic benefits are expected to flow to the entity
Critical Attributes
1. Identifiability
a. Separable
b. Arises from contractual or other legal rights
2. Control
o Power to obtain benefits from the asset
3. Future economic benefits
o Revenues and cost savings
Recognition
1. It is probable that future economic benefits will flow to the entity
2. The cost of the asset can be measured reliably
General rule:
If an intangible item does not meet the definition of, and the criteria for
recognition of intangible assets, the item’s expenditures will be expensed as
incurred.
Exception:
If the item is acquired in a business combination (included)
e.g. customer list
Initial Measurement
- @ costs
Items not part of costs – expensed as incurred
1. Costs of introducing a new product or service
2. Costs of advertising and promotional activities
3. Costs of conducting business in a new location
4. Costs of staff training
5. Administrative costs
6. Initial operating losses
7. Pre-operating costs
8. Research and development costs
Acquisition of Intangible Assets
1. Separate acquisition
o Costs
Purchase price, net of discounts and rebates
Directly attributable costs
Import duties and irrecoverable (nonrefundable) purchase taxes
2. Acquisition as part of Business Combination
o Costs = FV on the date of acquisition
3. Acquisition by way of deferred payment
o Costs = in order of priority
i. Cash price equivalent
ii. Present value of the liability
o Face amount – Cost = Unearned Interest Expense (Discount on Notes
Payable)
4. Acquisition by way of exchange
o Has commercial substance
i. FV of asset given up (plus cash paid/ minus cash received)
ii. FV of asset received
iii. Carrying amount of asset given up
With gain or loss on exchange
o Lacks commercial substance
Carrying amount of asset given up
5. Acquisition by government grant
o e.g. Licenses
o Cost = FV or Zero + Directly Attributable Cost
6. Acquisition by internal generation
o Cost = Directly Attributable Cost
Material, labor, overhead consumed in generating the intangible
asset
Fees to register a legal right
Amortization of other intangible assets that are used to generate
the intangible assets
Exception: these internally generated items are not identifiable (not recognized)
e.g. brands, mast heads, publishing titles, customer lists, goodwill
Subsequent Measurement
1. Cost model
o Choice is given to the entity, but should be applied to the whole class of
the asset
o Cost – Accumulated Amortization – Accumulated Impairment Losses = CA
2. Revaluation model
o Revalued amount – Subsequent Accumulated Amortization – Subsequent
Impairment Losses = CA
o Can only be used if there is an active market for the asset
If there is no active market, use ‘cost model’
Amortization of Intangible Asset
a. Finite life
- Amortized over their useful life or legal right (whichever is shorter) unless legal
life can be renewed (legal life shouldn’t be followed)
- Method: SLM (if silent)
b. Indefinite life
- Not subject to amortization
Impairment of Intangible Asset (PAS 36)
- Compare carrying amount vs. recoverable amount of the asset
o CA < RA = not impaired
o CA > RA = impaired
CA = Net carrying value of assets (including goodwill) and liabilities
- Recoverable amount – higher between the FV less cost to sell and Value in use
o Value in use – present value of future cash flows of the continuing use of
the asset
Finite: VIU = PV factor x Future cash flows
Indefinite: VIU = Future cash flows / Discount rate
- Tests for impairment
o Finite: when there’s indication
o Indefinite: test at least annually
- Impairment Loss = Carrying Amount – Recoverable Amount
Subsequent Expenditures
General Rule: expensed as incurred, whether successful or unsuccessful
e.g. litigation cost
Exception: if the subsequent expenditure enhances the future economic benefits
of the intangible asset (capitalized)
If litigation is unsuccessful, all of the costs, DAC, and subsequent
expenditures of that patent are expensed outright.
Key Principles on Certain Intangible Assets
Patents
- exclusive right by the government to an inventor
- government will enable the grantee to control the manufacture and sale of the
invention
- RA 8293: Legal Life
o Maximum number of years that you have right to that patent
o 20 years, cannot be renewed
- Technology-based intangible asset
Cost – licensing and registration fees only for applied and registered patents and
purchase price and any directly attributable expenditure
o By purchase: PP, net of discounts + import duties + irrecoverable
purchase taxes + DAC
o Internally generated patent: Licensing cost + Legal cost in securing
patent (initial recognition) + engineering & consulting cost to
develop
Any expense prior to the licensing of the patent is expensed
(r&d)
Any subsequent legal cost (litigation cases) are expensed
Principles on amortization – amortization is based on the useful life or legal life
(20 years), whichever is shorter
Franchise
- Right to conduct business in another territory
- Cost : Initial franchise fee + DAC + Legal fees in connection with the acquisition
of the right
o Initial franchise fee
Downpayment – no need to PV
Issuance of notes payable – must be written down to PV
Interest expense = Carrying amount of NP x Discount rate
- Franchise fee (continuing/ royalties) is not capitalized, charged as expense
Definite period – 20 years or useful life, whichever is shorter
Indefinite period – not amortized but reviewed for impairment annually
Goodwill
- When earnings exceed
Only purchased goodwill (external) is recognized as an asset acquired in a
business combination
Premium paid in acquiring another business or ordinary shares when control is
achieved
Internally generated goodwill shall not be recognized as an asset and charged as
expense
o Methods of estimating goodwill:
Capitalization of ‘average excess earnings’
Capitalization of ‘average earnings’
Purchase or multiples of ‘average excess earnings’
Present value of ‘average excess earnings’
Trademark
- Trade name/ brand name, used to market product and business to distinguish
from others
- RA 8293: Legal Life
o 10 years, but renewable for an additional 10 years for unlimited times.
o Finite – renewed only for a specific number of times
o Indefinite – renewed definitely
Cost – licensing and registration fees only for developed trademarks, cost of
research, survey, design and development cost is expensed
Legal life = 10 years, however it may be renewed for an additional 10-year period
for an unlimited number of items. Therefore, the legal life of a trademark is
indefinite and is not subject to amortization, but instead tested for impairment.
Copyright
- Exclusive right to the author, composer, and artist to publish and sell their literary
and creative works
- Legal Life: 50 years after the death of the author
Cost – expenses incurred in the production of the work including those required
to establish or obtain the right
It should be amortized over the period it is expected to be received for revenue or
legal life whichever is shorter
Computer Software
If the software is an integral part of the hardware, the cost shall be included in
hardware cost
If internally developed (whether for use or sale)
o charged to expense until technological feasibility is achieved (before)
o Capitalized until tech feasibility (after), or before commercial production
Cost to develop the software shall be capitalized once technological feasibility is
reached (development phase) either from the creation of a “working model or a
detailed program design”
Cost to incurred to actually produce software (commercial production)
o Charged to inventory
Probable future benefits, intent and ability to use or sell the software, resources
to complete the software, and ability to measure cost are also requirements for
capitalization.
The amortization method should reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
o If cannot be determined reliably, SLM is used.
Any website development cost (advertising) are expensed
Classification of computer software
1. Inventory – if purchased for resale
2. PPE – if purchased is an integral part of a computer-controlled machine tool
a. Integral part – machine cannot operate w/o the specific computer software
3. Intangible asset – if purchased not an integral part of the computer tool
(identifiable and separate)
Research & Development
Research – activities undertaken to discover new knowledge
o Cost: expensed outright (R&D expense)
Development – application of research findings prior to the commencement of
commercial production
o Criteria for recognition to capitalized:
T-technical feasibility
I-intention to complete
A-ability to use or sell
P-probable future economic benefits
A-availability of resources or fundings
A-ability to measure reliably the expenditures
o Subsequent expenses are expensed to operating expense (after
commercial production/ e.g. technical feasibility)
If not determinable, research.
Residual Value
The residual value with a finite useful life shall be presumed to be zero unless:
1. There is commitment by a third party to purchase the asset at the end of its
useful life
2. There is an active market for the asset and
a. Residual value can be determined by reference to that market; and
b. It is probable that such a market will exist at the end of the asset’s useful
life