University of San Carlos
School of Business and Economics
Department of Accountancy
PART 1 – FAR REVIEW Atty. Cymon P. Argawanon, CPA
Intangible Assets July 22, 2020
INTANGIBLE ASSETS (PAS 38)
What is an intangible asset?
PAS 38, paragraph 8, simply defines an intangible asset as an identifiable nonmonetary asset
without physical substance.
Paragraph 8 further states that “the intangible 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.”
Accordingly, there are three essential criteria in the definition of an intangible asset, namely:
a. Identifiability
b. Control
c. Future economic benefits
Identifiability
The definition of an intangible asset requires that an intangible asset must be identifiable in order
to distinguish it clearly from goodwill.
An asset is identifiable when:
a. It is separable.
b. It arises from contractual or other legal rights.
Control
Control is the power of the entity to obtain the future economic benefits flowing from the
intangible asset and restrict the access of others to those benefits.
Future economic benefits
Future economic benefits may include revenue from the sale of products or services, cost saving
or other benefits resulting from the use of the asset by the entity.
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Recognition of an intangible asset
An intangible asset shall be recognized if the following conditions are present:
a. It is probable that future economic benefits attributable to the asset will flow to the
entity.
b. The cost of the intangible asset can be measured reliably.
Initial measurement of intangible asset
PAS 38, paragraph 24, provides that an intangible asset shall be measured initially at cost.
The cost of an intangible asset depends on the following:
a. Separate acquisition
b. Acquisition as part of a business combinsation
c. Acquisition by way of a government grant
d. Acquisition by exchange
e. Acquisition by self-creation or internal generation
Separate acquisition
If an intangible asset is acquired separately, the cost of the intangible asset can be measured
reliably, particularly so if the purchase consideration is in the form of cash or other monetary
assets.
The cost of a separately acquired intangible asset comprises:
a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Directly attributable costs of preparing the asset for the intended use
Acquisition as part of 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.
Acquisition by government grant
An intangible asset may be acquired by way of a government grant, free of charge or for nominal
consideration.
The intangible asset acquired by way of government grant may be initially recorded at either:
a. Fair value
b. Nominal value or zero, plus any expenditure that is directly attributable to preparing the
asset for its intended use.
Acquisition by exchange
The cost of the intangible asset is measured at fair value of the asset given up plus any cash
payment, unless the exchange transaction lacks commercial substance.
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If the exchange transaction lacks commercial substance, the intangible asset is measured at the
carrying amount of the asset given up plus any cash payment.
Internally generated intangible asset
PAS 38, paragraph 63,explicitly provides that “internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance shall not be recognized as
intangible assets.”
Accordingly, such expenditures shall be expensed when incurred.
Identifiable intangible assets
Examples of identifiable intangible assets are:
a. Patent
b. Copyright
c. Franchise
d. Trademark or brandname
e. Customer list
f. Computer software
g. Broadcasting license, airline right and fishing right
Unidentifiable intangible asset
An intangible asset is unidentifiable if it cannot be sold, transferred, licensed, rented or
exchanged separately.
This unidentifiable intangible asset squarely describes a goodwill.
Classification of intangible assets
a. Intangible assets with definite life
b. Intangible asset with indefinite life
Measurement after recognition
An entity shall choose either the cost model or revaluation model as an accounting policy.
Amortization and impairment of intangible assets
PAS 38, paragraph 97, states that intangible assets with limited or finite life are amortized over
their useful life.
Intangible assets with finite useful life are tested for impairment whenever there is an indication
of impairment at the end of reporting period.
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Paragraphs 107 and 108 state that 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 method
The method of amortization shall reflect the pattern in which the future economic benefits form
the asset are expected to be consumed by the entity.
However, if such pattern cannot be determined reliably, the straight line method of
amortization shall be used.
Residual value
The residual value of an intangible asset shall be presumed to be zero, except:
a. When a third party is committed to buy the intangible asset at the end of the useful life.
b. When there is an active market for the intangible asset so that the expected residual value
can be measured and it is probable that there will be a market for the asset at the end of
the useful life.
Change in amortization method and useful life
The amortization method and the useful life of an intangible asset shall be reviewed at each
financial year-end.
Derecognition of an intangible asset
An intangible asset shall be derecognized or eliminated from the statement of financial position:
a. On disposal of the asset
b. When no future economic benefits are expected from use and disposal of the asset
What is 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.
Recognition of goodwill
In recognizing goodwill, distinction should be made between developed goodwill and purchased
goodwill.
Developed goodwill or internal goodwill is that goodwill which is generated internally because of
good name, capable staff and personnel, superior quality of products, favorable location and high
credit standing.
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Such “homegrown” goodwill is not recorded.
Residual approach
Under this approach, goodwill is measured by comparing the purchase price for the entity which
the net tangible and identifiable assets, meaning total assets excluding goodwill minus liabilities
assumed.
Direct approach
Under this approach, goodwill is measured on the basis of the future earnings of the entity. An
attempt is made to value the anticipated excess earnings which are the essential component of
goodwill.
Illustration – Direct approach
The following data are available in relation to the computation of goodwill:
Net assets, excluding goodwill 7,500,000
Normal rate of return in the industry 12%
Past earnings for 5 years preceding the sale:
2015 950,000
2016 975,000
2017 950,000
2018 1,075,000
2019 1,050,000
5,000,000
Average earnings of the 5-year period (5,000,000/5) 1,000,000
Method 1 – Purchase of “average excess earnings”
The goodwill is measured at average excess earnings for 5 years.
Average earnings 1,000,000
Normal earnings (12% x 7,500,000) 900,000
Average excess earnings 100,000
Goodwill (100,000 x 5) 500,000
Note that the normal rate of 12% is applied on net assets, excluding goodwill (total assets before
goodwill minus liabilities).
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Method 2 – Capitalization of “average excess earnings”
The goodwill is measured at the average excess earnings capitalized at 25%.
Average excess earnings 100,000
Divide by capitalization rate 25%
Goodwill 400,000
Method 3 – Capitalization of “average earnings”
The goodwill is measured at average earnings capitalized at 10%.
Average earnings 1,000,000
Divide by capitalization rate 10%
Net assets, including goodwill or purchase price 10,000,000
Less: Net assets, excluding goodwill 7,500,000
Goodwill 2,500,000
Method 4 – Present value method
Under this method, the goodwill is the discounted value or present value of the average excess
earnings that are expected to become available in future periods.
For example, if the average excess earnings of P100,000 are expected to be received annually in
5 years, the goodwill, assuming a discount rate of 12% is computed as follows:
Average excess earnings 100,000
Multiply by the present value of an ordinary
annuity of 1 for 5 years at 12% 3.605
Goodwill 360,500
Impairment of goodwill
PAS 38, paragraph 107, mandates that goodwill shall not be amortized because the useful life is
indefinite.
However, goodwill shall be tested for impairment at least annually and whenever there is an
indication that it may be impaired.
Negative goodwill
If the purchase price or consideration transferred for the entity is less than the net fair value of
the identifiable assets acquired and liabilities assumed, the difference is negative goodwill.
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IDENTIFIABLE INTANGIBLE ASSETS
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. This is in accordance with R.A. No. 8293, or the Intellectual
Property Code of the Philippines, which took effect on January 1, 1998.
A patent cannot be renewed but the life can be extended beyond the legal life by a new patent
for improvements and changes.
Under US GAAP, a patent is classified as technology-based intangible asset.
Cost of litigation
Legal fees and other costs of successfully prosecuting or defending a patent shall be expensed.
Amortization of patent
With regard to the amortization of patent, the following rules shall be observed:
a. If a patent is internally developed. The original cost shall be amortized over the legal life
or useful life, whichever is shorter.
b. If the patent is acquired by an entity from an original patentee, the cost shall be amortized
over the remaining legal life or useful life, whichever is shorter.
c. If a competitive patent is acquired to protect an original patent, the cost of the
competitive patent shall be amortized over the remaining life of the old patent.
d. If a related patent is acquired in order to extend the life of the old patent, the cost of the
related and any unamortized cost of the old patent shall be amortized over the extended
life.
If there is no extension of life, the new patent shall be amortized over its own life, and
the cost of the old patent is to be amortized over the remainder of its life.
Trademark
A trademark is a symbol, sign, slogan or name used to mark a product to distinguish It from other
products.
The terms trademark, tradename and brandname are interchangeably used.
Under the US GAAP, a trademark is a market-related intangible asset.
If the trademark is successfully prosecuted or defended, the litigation cost is an outright expense.
Impairment of trademark
R.A. No. 8293 or the Intellectual Property Code of the Philippines provides legal protection for a
trademark.
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The legal life of trademark is 10 years and may be renewed for periods of 10 years each.
Considering the almost automatic renewal of a trademark, an entity may properly classify a
trademark as an intangible asset with an indefinite useful life.
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.
Under US GAAP, a copyright is considered an artistic related intangible asset.
Under the Intellectual Property Code of the Philippines, the term of protection for copyright is
during the life of the author and for 50 years after death.
Franchise
Under a franchise agreement, one party called the franchisor grants certain rights to another
party called the franchisee.
Under the US GAAP, a franchise is a contract-based intangible asset. The franchise agreement
may be:
a. Between the government and a private entity or individual.
b. Between private entities or individuals.
Between government and private entity
If the franchise is between the government and a private entity or individual, the latter is
permitted to use public property in performing the services.
Examples of such franchise are;
a. The use of public water for interisland shipping
b. The use of public land for telephone and electric lines
c. The use of streets and highways for a bus line
Between private entities
If the franchise is between private entities or individuals, the franchisee acquires the right to use
the trademark, patent and process of the franchisor.
Franchise cost
The cost of franchise 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 the right.
The lump sum payment is known as the initial franchise fee and therefore the initial cost of the
franchise.
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If the franchise agreement requires the franchisee to make a periodic payment to the franchisor,
such payment is considered as outright expense. This payment is known as periodic franchise fee.
Amortization of franchise
If the franchise is granted for a definite period, the cost of franchise shall be amortized over the
useful life or definite period whichever is shorter.
If the franchise is granted indefinitely or perpetually, the cost of the franchise shall not be
amortized but tested for impairment at least annually.
Customer list
Literally, 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.
PAS 38, paragraph 63, provides that internally generated customer list shall not be recognized as
intangible asset.
However, an acquired customer list may be recognized as an intangible asset and amortized over
the useful life.
The recognition of an acquired as an intangible asset may be subject to question or debate.
The purchase of customer list does not provide control by an entity over the expected future
benefits.
Organization cost
The term organization cost represents cost incurred in forming or organizing a corporation.
a. Legal fees in connection with the incorporation, such as drafting of articles of
incorporation and by-laws and corporate registration.
b. Incorporation fees.
c. Share issuance cost, such as printing of share certificates, cost of stock and transfer book,
seal of the corporation, underwriting and promotional fees, and accounting and legal fees
in connection with issuance.
PAS 38, paragraph 69, provides that start up costs which include legal and secretarial costs in
establishing a legal entity shall be recognized as expense when incurred.
Web site development cost
Under SIC 32, a web site that has been developed for the purpose of promoting and advertising
an entity’s products and services does not meet the requirement to be recognized as an
intangible asset.
Therefore, web site development cost shall be expensed as incurred.
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RESEARCH AND DEVELOPMENT COST
Introduction
PAS 38, paragraph 52, provides that to assess whether an internally generated intangible asset
meets the criteria for recognition, an entity classifies the generation of the asset into a research
phase and a development phase.
PAS 38, paragraph 53, provides that if an entity cannot distinguish the research phase from the
development phase, the entity treats the expenditure as if it were incurred in the research phase
only.
Definition of research
Research is original and planned investigation undertaken with the prospect of gaining scientific
or technical knowledge and understanding.
Examples of research activities
a. Laboratory research aimed at obtaining or discovering new knowledge.
b. Searching for application of research finding and other knowledge.
c. Conceptual formulation and design of possible product or process alternative.
d. Testing in search for product or process alternative.
Accounting for research cost
PAS 38, paragraph 54, provides that expenditure on research or on the research phase of an
internal project shall be recognized as expense when incurred.
Definition of development cost
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, system or service,
prior to the commencement of commercial production.
Simply stated, a development activity involves the application of research findings to develop a
new product.
Examples of development activities
a. Design, constructions, and testing of preproduction prototype and model.
b. Design of tools, jigs, molds and dies involving new technology.
c. Design, construction and operation of a pilot plant that is not of a scale economically
feasible to the entity for commercial production.
d. Design, construction and testing of a chosen alternative for new or improved product or
process.
Accounting for development cost
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In contrast with research cost, development cost is incurred at a later stage in a project and the
probability of success may be more apparent.
Development cost may pr may not be recognized as an intangible asset depending on very strict
criteria.
Criteria for recognition
Development cost may qualify as intangible asset if and only if the entity can demonstrate all of
the following:
a. 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.
b. The intention to complete the intangible asset and use or sell it.
c. The ability to use or sell the intangible asset.
d. How the intangible asset will generate probable future economic benefits.
e. Availability of resources or funding to complete development and to use or sell the asset.
f. The ability to measure reliably the expenditure attributable to the intangible asset during
the development.
Internally developed computer software
Costs incurred in creating a computer software product shall be charged to expense when
incurred until a technical feasibility has been established for the product.
Actually, this is the research stage where there is so much uncertainty about the future economic
benefits. Accordingly, all the research costs shall be expensed outright.
As a minimum, technological feasibility is established when an entity has produced either a
detailed program design of the software or a working model.
After technological feasibility has been established, capitalizable software costs include the cost
of coding and testing and the cost to produce the product masters.
The costs incurred to actually produce the software from masters and package the software for
sale shall be charged as inventory.
SAMPLE THEORIES AND PROBLEMS
1. An intangible asset is (choose the incorrect one)
a. An identifiable nonmonetary asset without physical substance
b. A resource controlled by an entity as a result of past event
c. A resource from which future economic benefit are expected to flow to the entity
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d. Held for use in the production or supply of goods or services, for rental to others
or for administrative purposes.
2. Which is incorrect concerning the criterion control by the entity of the intangible asset?
a. An entity controls an asset if the entity has the power to obtain the future
economic benefits flowing from the underlying resource and also can restrict the
access of others to those benefits
b. The capacity of the entity to control the economic benefits from an intangible
asset would normally stem from legal rights that are enforceable in a court of law
c. Market and technical knowledge may give rise to future economic benefits which
can be controlled by the entity if the knowledge is protected by legal rights such
as copyright
d. The skill of employees arising out of the benefits of training costs can be
recognized as intangible asset.
3. Which is incorrect concerning separate acquisition of an intangible asset?
a. If an intangible asset is acquired separately, the cost of the intangible asset can
usually be measured reliably
b. The cost of an intangible asset comprises its purchase price and any directly
attributable expenditure on preparing the asset for its intended use
c. If payment for an intangible asset is deferred beyond normal credit terms, its cost
is equal to the cash price equivalent
d. The cost of an intangible asset includes initial operating losses
4. The cost of an internally generated asset includes all of the following, except
a. Cost of materials and services used in generating the intangible asset
b. Compensation costs of personnel directly engaged in generating the asset
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset
5. The following expenditures shall be expensed when incurred except
a. Start up costs
b. Advertising and promotion costs
c. Business relocation or reorganization costs
d. Payment in advance of delivery of goods or the rendering of services
6. It is the systematic allocation of the cost or revalued amount of an intangible asset, less
any residual value, as an expense over the asset’s useful life
a. Amortization
b. Allocation
c. Realization
d. Expiration
7. The amortization method used shall reflect the patter in which the asset’s economic
benefits are consumed by the entity. If such pattern cannot be determined reliably, what
is the amortization method used?
a. Straight line
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b. Production method
c. Diminishing balance method
d. Ratio of current year’s sales to the total expected sales
8. The factors that are considered in determining the useful life of an intangible asset include
all of the following except
a. Technical obsolescence
b. Expected action of competitors
c. Expected usage of the asset by the entity
d. Residual value
9. Directly attributable costs of preparing the intangible asset for its intended use include all
of the following, except
a. Cost of employee benefits arising directly from bringing the asset to its working
condition
b. Professional fees arising directly from bringing the asset to its working condition
c. Cost of testing whether the asset is functioning properly
d. Initial operating losses
10. Which item below does not qualify as an intangible asset?
a. Computer software
b. Registered patent
c. Copyright that is protected
d. Notebook computer
11. Which of the following items would qualify as an intangible asset?
a. Advertising and promotion on the launch of a huge product
b. College tuition fees paid to employees who decide to enroll in an executive M.B.S
program at Harvard University while working with the entity
c. Operating losses during the initial stages of the product
d. Legal costs paid to intellectual property lawyers to register a patent
12. Which disclosure is not required with respect to intangible assets?
a. Useful lives of the intangible assets
b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitments for the acquisition of intangible assets
d. Fair value of similar intangible assets used by its competitors
13. Amortization of an intangible asset with a finite useful life shall commence when
a. It is first recognized as an asset
b. It is probable that it will generate future economic benefits
c. It is available for use
d. The costs can be identified with reasonable certainty
14. A brand name that was acquired separately shall initially be recognized at
a. Recoverable amount
b. Either cost or fair value oat the choice of the acquirer
c. Fair value
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d. Cost
15. A trademark is an example of which general category of intangible asset?
a. Market-related
b. Customer-related
c. Artistic-related
d. Contract-based
16. A copyright is an example of which general category of intangible asset?
a. Market-related
b. Customer-related
c. Artistic-related
d. Contract-based
17. Broadcast rights and franchises are an example of which general category of intangible
asset?
a. Market-related
b. Customer-related
c. Artistic-related
d. Contract-based
18. A purchased patent with a remaining legal life of 15 years should be
a. Expensed in the year of acquisition
b. Amortized over 15 years regardless of the useful life
c. Amortized over its useful life if less than 15 years
d. Amortized over 20 years
19. The cost of purchasing rights for a product that might otherwise have seriously
competed with one of the purchaser’s patented products shall be
a. Charge off in the current period
b. Amortized over the legal life of the purchased patent
c. Added to factory overhead and allocated to production of the purchaser’s product
d. Amortized over the remaining estimated life of the patent for the product whose
market would have been impaired by competition from the newly patented
product
20. A research and development activity for which the cost would be expensed as incurred is
a. Design, construction and testing of preproduction prototype and models
b. Quality control during commercial production
c. Periodic design changes to existing products
d. Adaptation of an existing capability to a particular requirement or customer need.
21. Podium Company has incurred P200,000 of research expenditure on a project to develop
a new type of fuel and has expensed these costs. ON January 2, 2014, Portal Company
purchases the research project, including certain patents that have been registered by
Podium Company for P300,000 and recognizes the costs as and intangible asset.
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Subsequently, Portal Company incurred P400,000 of expenditure on completing the
research phase and decides to develop the product commercially. It incurs a further cost
of P00,000 in bringing the product to a stage where the conditions for recognizing
development costs of an internally generated intangible asset are met. Further costs of
P2,000,000 are incurred in bringing the product into a condition where it is ready for use
in the manner the management intend. Initial marketing costs and losses are incurred of
P400,000 before the product was successfully launched. What total amount should Portal
Company recognize as an asset related to the above costs?
a. 300,000
b. 2,300,000
c. 2,700,000
d. 3,300,000
22. On October 1, 2014, Jupiter, Inc. exchanged 2,000 shares of its P500 par value ordinary
shares held in treasury for a patent owned by Mars Company. The treasury shares were
acquired in 2013 at a cost of P800,000. At the time of exchange, Jupiter’s ordinary share
was quoted at P550 per share and the patent had a net carrying value on Mars’ books of
P90,000. At what amount should Jupiter record the patent?
a. 800,000
b. 900,000
c. 1,000,000
d. 1,100,000
23. C Company has developed a database of names and addresses of professional people who
reach their 25th birthdays between the years 2008 and 2014 and intends to exploit this by
selling the information to suppliers of life enhancement products and solutions for junior
executives. The company has incurred a total P500,000 to develop the data base.
The company has also incurred a total P800,000 of promoting the databases to vendors
of such solutions, such as adventure holiday companies. The company has also incurred
P500,000 losses as there are substantial administrative costs and no income as yet. C
Company intends to capitalize all the costs incurred in relation to the database promotion
and administrative costs. What amount of intangible asset should C Company recognize?
a. 500,000
b. 1,000,000
c. 1,300,000
d. 1,800,000
24. Moon Company purchased Patent A for P600,000 and Patent B for P900,000. Moon also
paid indirect costs of P75,000 for Patent A and P105,000 for Patent Bb. Both patents were
challenged in legal actions. Moon paid P300,000 in legal fees in successful defense of
Patent A and P450,000 in legal fees in an unsuccessful defense of Patent B. What amount
should Moon capitalize for patents?
a. 675,000
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b. 975,000
c. 1,680,000
d. 2,430,000
25. On January 2 ,2014, Cymon Company paid P500,000 to acquire a patent with a remaining
economic useful life of 15 years. Cymon Company expects to use the patent for 5 years
and intends to sell it after 5 years. Newton Company has committed to buy the patent for
40% of the cost to Cymon Company. In its December 31 ,2014, what amount of patent
amortization should Cymon Company report in its profit or loss?
a. 40,000
b. 60,000
c. 100,000
d. 200,000
26. Meteor Company purchased a patent on January 1, 2011 for P428,400. The patent was
being amortized over its remaining legal life of 15 years expiring on January 1, 2023. Early
2015, Meteor determined that the economic benefits of the patent would not last longer
than 10 years from the date of acquisition. What amount should be reported in the
statement of financial position as patent, net of accumulated amortization at December
31 ,2014?
a. 257,040
b. 293,760
c. 302,400
d. 314,160
27. Neptune Company spent P288,000 in developing a new product with a patent being
granted on January 2, 2012. Due to the competitive nature of the product, the patent was
estimated to have a useful life of ten years. Cost of licensing and registering was P36,000.
On July 1, 2014, a competitor obtained rights to a patent, which made Neptune’s patent
obsolete. How much is the loss from patent obsolescence?
a. 6,000
b. 16,200
c. 27,000
d. 36,000
28. Comet Company is considering acquisition of the net assets of Shooting Star Corporation
to expand its operations. The book value and current value of the net assets of Shooting
Star are P6,60,000 and P8,000,000, respectively. The normal rate of return is believed to
be 9%, but Comet believes it can earn 12% annually on its investment in Shooting Star
due to the excellent reputation of Shooting Star. What is the amount of goodwill using
the “years multiple of excess earnings” method assuming a 10-year period of excess
earnings?
a. 1,980,000
b. 2,000,000
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c. 2,200,000
d. 2,400,000
29. On April 30, 2011, Shark Corporation purchased for P30 per share all 200,000 of Fins
Corporation’s outstanding ordinary share. On this date, Fins’ balance sheet showed net
assets of P5,000,000. Additionally, the fair value of Fins’ identifiable assets on the same
date was P600,000 in excess of their carrying amount. What amount should Shark report
as goodwill in its April 30, 2011 consolidated balance sheet?
a. None
b. P400,000
c. P600,000
d. P1,000,000
30. The management of Shell Corporation is planning to sell the business Records show that
cumulative net earnings for the past 5 years amounted to P600,000, including non-
recurring gain of P50,000. The appraised value of Shell’s net assets was P800,000.
Assuming that goodwill is determined by capitalizing average annual net earnings at 10%,
how much would be the implied goodwill?
a. 200,000
b. 250,000
c. 300,000
d. 350,000
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