Module 7
INTANGIBLE ASSETS
Intangible
➢ Identifiable non-monetary assets
without physical substance.
➢ These are rights, privileges and
competitive advantage that result from
ownership of assets that do not possess
physical substance.
➢ Same accounting treatment with PPE
➢ Initially recorded at cost and it is
written off over useful life in a rational
and systematic manner assuming the
useful life is limited
➢ If the life of the intangible asset is
indefinite, its cost should not be
allocated.
Key attributes of Intangible assets
1. Identifiability ➢ an intangible asset is identifiable
when it is separable, which
means that it is capable of being
separated and sold, transferred,
licensed, rented, or exchanged,
either individually or together
with a related contract.
➢ arises from contractual or other
legal rights, regardless of
whether those rights are
transferable from the entity or
from other rights and obligations.
Key attributes of Intangible assets
2. Control ➢ The entity has the power to
obtain the future economic
benefits flowing the underlying
resource and to restrict the
access of others to such benefits.
Key attributes of Intangible assets
3. Future Economic benefits ➢
➢ It pertains to revenue from sale
of products or services, cost
savings and other benefits
Recognition and Measurement
➢ An intangible asset can be ➢ Additional requirement per PAS
recognized, whether purchased 38
or self-created if
✓ its probable that expected future
economic benefits will flow to the
entity
✓ The cost of the asset can be measured
reliably
Measurement
➢ Initially recorded at cost.
➢ Like tangible asset cost includes
acquisition price and all other
expenditures necessary in
making the asset ready for its
intended use.
➢ It may be acquired from another
entity or can be generated
internally.
Measurement
➢ Intangible asset are acquired for ➢ Intangibles can be acquired:
consideration other than cash -
cost is the fair market value of the
consideration given or the
intangible asset received – which
is more evident.
➢ Cost incurred to create
internally-created intangibles -
Expense
Categories of Intangible Assets
Marketing related intangibles
➢ Used in marketing or promotion Tradename/Trademark – word,
✓ Trademark/tradename phrase, jingle, or symbol that
distinguishes or identifies a particular
✓ Newspaper mastheads company or product.
✓ Internet domain names
➢ It is used to protect symbols, brand
name, logos, and slogans.
➢ In the Philippines, trademark can be
protected through registration with
Intellectual Property Office (IPO) of
the Philippines.
➢ It can be renewed for period of ten
years
Marketing related intangibles
➢ Used in marketing or promotion
✓ Trademark/tradename
Marketing related intangibles
➢ Used in marketing or promotion
✓ Mastheads – list at the top of a page
that includes the names of editors,
writers, and owners, as well as the
title of the newspaper or magazine.
Marketing related intangibles
➢ Used in marketing or promotion [Link]
✓ Internet domain names – labels used
to identify one or more Internet
[Link]
Protocol (IP) addresses.
[Link]
Customer related Intangibles
➢ Occur as a result of interactions
with outside parties
➢ It consist of information gathered
from repeat transactions, with or
without underlying contracts.
➢ Limited life that should be
amortized on a straight line basis
Artistic related intangibles
➢ Involves ownership rights to
literary works, musical works,
pictures, photographs, videos,
and audio-visual materials.
Copyrights – granted by the
government, giving the owner the
exclusive right to reproduce and
sell an artistic or published work.
➢ In the Philippines, copyright
protection lasts during the
lifetime of the author plus 50
years after the authors death.
Contract-related intangibles
➢ represent value of rights that
arise from contractual
arrangements.
Example:
1. Franchise
2. Licensing agreements
3. Construction permits
4. Broadcast rights
5. Service or supply contracts
Contract-related intangibles
Franchise – contractual
arrangement under which the
franchisor grants the franchisee
the rights to sell certain products,
to render specific services, or to
use certain trademarks or
tradenames.
Contract-related intangibles
Franchise license/permit - entered
by government and business
enterprise that permits the
enterprise to use public property in
performing its services.
Contract-related intangibles
➢ Franchise may be for a definite or
indefinite period of time or maybe
perpetual.
Cost of franchise:
a. Finite life – amortized as operating
expenses over life of the franchise
b. Indefinite life – not amortized but
tested for impairment at least
annually
➢ Annual payments under franchise
agreement are expensed as incurred.
Technology related intangibles
➢ refer to innovations or technological advances. Patent – exclusive right issued by the government
through IPO that enables the recipient to
➢ Examples manufacture, sell, or otherwise control his or her
✓ Patent
invention for a period of twenty years from the
date of grant.
✓ Trade secrets
➢ It is an exclusive right granted for a product, a
process, or an improvement of a product or
process which is new, inventive, and useful.
➢ Term of protection of 20 years providing an
inventor significant commercial gain.
➢ Initial cost of a patent is the cash or cash
equivalent paid when the patent is acquired.
➢ Legal cost incurred in defending the patent are
expense immediately
➢ The cost of the patent should be amortized over
its legal life of 20 years or useful life, whichever
is shorter.
Computer Software
➢ Software - collection of instruction that
enable the user to perform task with the
use of computer hardware.
➢ Purchased computer software – Capitalize
➢ Operating asset for hardware – cost of the
asset
➢ Internally developed (for use or sale) –
charged to expense until probable future
benefits, intent and ability to use or sell
the software, resources to complete the
software, and ability to measure cost.
➢ Computer software - is amortized over its
estimated useful life, based on pattern of
benefits using straight
Goodwill
➢ arises when a buyer acquires an existing ➢ It is not amortize because it is
busines. considered to have an indefinite life
➢ Excess of the purchase consideration ➢ Subject to impairment review at least
(money paid to purchase the asset or annually
business) over the total value of the assets
minus the liabilities.
➢ The excess is attributed to the business
entity superior management, skilled
employees, high quality products, fair
pricing policies and harmonious relations
with labor unions.
➢ Can be identified only with the business
as a whole.
➢ It is recorded only when there is an
exchange transaction that involves the
purchase of an entire business or a
business combination.
Research and Development
➢ Cost that are spent on developing
new products and processes
➢ Usually recorded as expense when
incurred
➢ Development costs – capitalize only
after technical and commercial
feasibility of the asset for sale or use
have been established
➢ This means that the entity must
intend, and be able, to complete the
intangible asset and use it or sell it.
Measurement after initial recognition
Cost model Revaluation model
➢ Intangible asset should be ➢ Revalued amount (based on
carried at cost less accumulated FMV) less any subsequent
amortization and impairment amortizations and impairmet
losses. losses
➢ only if FMV can be determined
by reference to an active market.
Classification of Intangible assets based on useful
life
Indefinite useful life Finite useful life
➢ no foreseeable limit to the period ➢ limited period of benefit to the
over which the asset is expected entity
to generate net cash inflows for
the entity
➢ Should not be amortized
➢ Should be reviewed annually
Amortization
➢ Systematic write-off of an
intangible asset
➢ It is recognized as expense
➢ Accumulated Amortization –
contra asset account
Presentation
Disclosure
Exercises 1
Exercises 2
Exercises 3