CHAPTER 32

IDENTIFIABLE INTANGIBLE ASSETS

TECHNICAL KNOWLEDGE

To understand the meaning of patent.

Tounderstand andimpairment
theamortization ofpatent.
To know the meaning of trademark.

To understand the amortization and impairment of

trademark.

To understand the nature of copyright.

To know the amortization and impairment of copright.

zo understand the nature of franchise.

1'0 know the amortization and impairment of franchise.

928
 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 specifLed perLod of th'Le.

The legal life of patent is 20 years. This is an accordhnce

with RA. 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 technologybased

intangible asset.

Cost of patent

If the patent is acquired by purchase, the cost comprises:

Purchase price
duties

999'?
Import
Nonrefundable purchase taxes
. Any directly attributable cost of preparing the asset for
the intended use

If the patent is internally developed, the cost normally includes

the licensing and other related legal fees in securing the patent
rights.

As a rule, all related research and developmentcosts shall he

expensed as incurred.

However, from the time technological feasibility, any additional

development cost to develop the patent to full manufacturing
stage may be capitalized as patent cost or separately accounted
for as development cost. 4

Thecapitalized costisrecognized
development asLntangiblé
easel
.- and amortized over the useful life of the patent.

«The forthecapitalization
reason is thatat thispointin tims,
and
thepatentis nowtechnLcally commercially
feasible.
 Cost of litigation

Legal fees and other costs of successfully prosecuting o.

defending a patent shall be expensed.

The reason is that such litigation cost is intended to maintain

only rather than increase or enhance the future benefits from
the asset.

Needless to say, if the litigation is unsuccessfld, the legal coetg

and the remaining cost of the patent shall be written 03 as lose.

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 liseful 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.

patentis acquiredto protectan originai

If a competitive
patent, the cost of the competitive patent shall be amortized
over the remaining life of the old 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
unamertized 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.

930
Illuetmtlon
An entity developed a patent at cost of P200,000 and spent
Pl20,000 fur the licensing of the patent includmg legal fees
and cost of modolnand drawmgn that accompany the registration
on January 1, 2020. I

The patent will be useful for the entire legal life of 20 years.
On January 1..2022, the entity paid P180,000 to attorneys for
the services in connection with a eucceeeful defense of the
patent.
On January 1, 2028. the entity purchased a competing patent
for P170,()00 m order to protect the original patent.

patenthas18yearstorunfromthedatehf
Thecompeting
acquisition.
On December 81, 2028, the product coveredby the patent was
withdrawn from sale under a government order because of
potential hazard in the product.
Journal entries

1. To record the development of the patent:

Research and development expense 200,000
Cash 200,000

2. To record the cost of licensing of the patent:

Patent 120,000
Caeh 120,000

3. To record the amortization of the patent for 2020:

Amortization ofpatent (120,000 / 20 yearn) 6,000

Patent 6,000
4. To recordthe amortizationof the patent for 2021:
Amortization
ofpatent 6,000
Patent 6,000
5- thecost
ofsuccessful
defense
ofthepatenkin
:gzrzecord
1 exponen- 180,000
Cub

981
 v bf 2022:
a. Torecord ofthepatent
theamortizndon
Amortization
ofpatent 6,000
Patent
8 00°
7. Torecord
theaoquinition pmntonJ-nuuy
ofacompetinc
1, 2028:

Patent 170,000
Cash 170,000
"
of the patentfor 2023:
8. To word the amortization
Amortization
ofpatent 16.000
Patent 16,000

Odginalpatent 6,000
patent (170,000! 17)
Competing 10,000
Total 16,000

patentis amortizedoverthe remaininglegal

The competing
life of 17 years of the original patent.

9. To write off the patent accounton December 31, 2023:

Patent written 03 256,000

Patent 256,000

The patent written 06 is classifiedas other expense.

The patent in a T-aooountfopn may be shownas follows:

Patent

2020 Originalooet 120,000 2020 Amortization 6,000

2023 Costof competing 2021 Amortization 6,000
patent 170,000 2022 Amortization 6,000
2023 Amortization 16,000
2023 WriteoE 256,000
290,000 290,000
W
_--

932
Impairment of patent
Since a patent is an intangible asset with hnite useftil life,
the cost is amortized.

However, the patent should be tested for impairment

whenever there is an indication of impairment at the end of
reporting period.

Illustration

On J anuary l, 2020, an entity acquired a patent for P2,400,000.

The patent has a useful life of 10 years and remaining legal life
of 12 years.

On December 31, 2020, there is an indication that the patent

may be impaired.
The patent is expected to generate cash flows of P300,000 per
year for the remaining useful life of 9 years.
The appropriate discount rate is 9%. The present value of an
ordinary annuity of 1 for 9 periods at 9% is 6.00. The patent has
no determinable fair value less cost of disposal. .
1. To record the patent acquisition on J anuary 1, 2020;
Patent 2,400,000
Cash 2,400,000

2. To record the patent amortization for 2020:

Amortization of patent (2,400,000! 10) 240,000
Patent 240,000

3. To record the impairment loss on December 31, 2020:

Impairment loss 360,000
Patent 360,000

Carrying amount - December 31, 2020

(2,400,000240,000) . 2,160,000
Present value of cash flows or value in use
(300.000 x 6.00) 800 000
Impairmentloss 360,000
W

To record the patent amortization for 2021:

Amortization of patent
Patent (l '800'000 I 9) 200000 200000
933
 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 US GAAP, a trademark is a marketrelated intangible

asset.

' When a trademark is purchased,the costincludes the purchase

price plus costs directly attributable to the acquisition.

When a trademark is internally developed, the cost includes

expenditures required to establish it, including Hing fees, registry
fees and other expensesincurred in securing the trademark such
as design cost of the trademark.

If the trademark is successfully prosecuted or defended, the

litigation cost is an outright expense.

The reason is that such cost is simply intended to maintain,

rather than enhance or increase, the future economic benefits
from the asset.

Impairment of trademark

R. A. No. 8293 or the Intellectual Property Code of the

Philippines provides legal protection for a trademark.
'
The legallifeof trademarkis 10yearsandmay 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.

The cost of a trademark is not amortized but subject to test for

impairment at least annually and whenever there is an
Indication that it may be impaired.

934
Illustration

'
At the beginning of current year . an anti ty acqmred a trademark
Thetrademark
hasa remaining
legalhieof8
:2::3,000,000.
However, it is anticipated that the trademark Would be
in
routtnely renewed 1n the future. Thus, the trademark
oonmdered to have an indefinite life.

Accordingly, no amortization is required for the trademark.

However, the trademark must be tested for impairment
annually.

cashflowsof P250,000
to generate
Thetrademarkis expected
per year. The appropriate discountrate is 10%.
valueof a streamof ipdEfinjte
thepresent
Mathematically,
bydividing
cashflowsis simplycomputed theannual cash
flow by the discount rate.

Journal entries

1. To record the acquisition:

Trademark 3,000,000
Cash 3,000,000
loss:
2. To recordtheimpairment
loss
Impairment 500,000
Trademark 600,000

Carryingamount orvalueinuse 3,000,000

flows
Presentvalueofcash
I 10%)
(250,000 2,500,000
Impairment1088 500,000
..

935
Copyright

A capyright 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.

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.

When a copyright is purchased, the cost includes the cash

paid plus directly attributable costnecessaryfor the intended
use.

Amortization of copyright

Theoretically, the cost of the copyright shall be amortized over

the useful life.

The useful life is that period in which benefits, sales and royalties
are expected.

In practice, it is often difficult to estimate the number of years

in which benefits will be received.

Thus, it is usually advisable to write off the cost of the copyright

'
against the revenueof thefirst printing.

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.

The copyright should be reviewed for impairment by assessing

at the end of each reporting period whether there is an
indication that it may be impaired.

986
Franchise

Under a franchise agreement, one party called the franchise:-

grante certain rights to another party called the franchisee.

Under US GAAP, a franchise is a contract-based intangible

asset. The franchise agreement may be:

3. 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.

Examples are the right to operate a fried chicken drive-in

under the tradename Max or Aristocrat or the exclusive
right to distribute or sell a particular brand product like
Rolex time pieces, or Sony color television sets, or the
right to operate a Mc Donald or Jollibee restaurant.

The franchise in either case may be granted for a definite

period or an indefinite period.

937
Franchise coat
The east of the 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
ex enses incurred in connection with the acquisition of thg
rig t.

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, such payment is
considered as outright expense . This payment is known a.
the periodic franchise fee.

Amortization of franchise

If the hanchise is granted for a definite period, the cost of

franchise shall be amortized over the useful life or definite
period whichever is shorter.

Of course, a definite franchise is tested for impairment at

the end of reporting period when there is an indication that
it may be impaired.

If the franchise is granted indefinitely or perpetualk the

cost of the franchise shall not be amortized but tested for
impairment at least annually.

Illustration Periodic franchise fee

For example, the franchisee pays the franchisor a periodic fee

of 5% on the gross sales of the franchisee each year.

If the franchisee realized gross sales of P5,000,000 for the

current year, the periodic franchise fee is 5% of P5,000,000, or
P250,000.

The franchiseewill simplyrecordthe paymentof the periodic

fee as follows:

Franchise fee expense 250,000

Cash 250,000

938
 V

Illustration - Initial franchise fee

At the begmmng of current year, an entity purchased a

ManchufromJolhbee tosellJollibee
Company produqts I
for P6.000.000 for 20 years.

The lmtml franchise fee is payable in cash, P500000, when

the contract I. signed and the balance in five equal
installments every year-end, evidenced by a 12% promissory
note.

The agreement provided that the franchisor would assist in

the location of ante for the construction of building, make a
project study for the viability of the project and provide
trumng of management and employees.

Jolhbee Company has already performed substantially all

the services required under the contract.

Books of franchisee

1. To record the initial franchise fee:

hanchme 5,000,000
Cash 500,000
Note payable 4,500,000

2. 'Do record the payment v: the hrst installment at year-end:

Note pmble 900.000
Interest expense (4,600,000 x 12%) 540,000
Cash 1,440,000

3. To record the amorhzation of h-anchiee:

Amomumon of franchise 250,000

Inch! (5.000.000!20) 250.000

039
Lease right
The accountingfor lease is now governed by IFRS 16.
Under the new lease standard, a lessee is required to initj
recognizeangfuofuseasset forthe lease term andalease
liability for the obligation to make lease payments.
The right of use asset 1spresented as a separate line item in the
statement of financial position.

Leasehold improvement
Leasehold improvement is alteration or modification on the
leased property made by the lessee.
Leasehold improwment is not included in the cost of right of
use asset but accounted for separately.

Examples are building, walk, pavement, landscaping; driveway

and other structure made on a leased land, and lighting
installations, repairs, partitions, cabinets, shelves, and
ventilating system made on a leased building prior to occupancy.

Legally, leasehold improvement reverts to the lessor upon

termination of the lease contract.

Leasehold improvement is classified under property, plant and

equipment of the lessee.

Leasehold improvement shall be depreciated over the lease

term or useful life of the improvement, whichever is shorter.-

The residual value of the leasehold improvement shall be

ignored in computing .depreciation because legally the
improvement becomes the property of the lessor upon
termination of the lease.

A renewal option that is too uncertain should be ignored in

determining the lease term.

But where renewal of the lease contract is highly probable or

certain, the extensionis consideredin determining the extended
lease term.

940
Broadcasting license with indefinite useful life

The entity has acquired a broadcasting license that expires

in five years. The broadcasting license is renewable every
10 years if the entity provides at least an average level of
service to the customers and complies with relevant
legislative requirements.

The license may be renewed indefinitely at little cost. The

entity intends to renew the license indehnitely and evidence
supports its ability to do so.

The broadcasting license should be treated as having an

indefinite useful life because it is expected to contribute to
the net cash inflows indefinitely.

Therefore, the broadcasting license should not be amortized

but tested for impairment annually and whenever there is
an indication that it may be impaired.
O

Broadcasting license with finite useful life

The entity has acquired a broadcasting license that expires

in 3 years.

The licensing authority has decided ~that it will no longer

renew broadcasting license but rather will auction the
license.

The entity expects that the broadcasting license will continue

to contribute to the net cash inflows until the license expires
after 3 years.

In this case, the useful life of the broadcasting license in no

longer indefinite because the license cannot be renewed
anymore.

Thus, the broadcasting license should be amortized over the

remaining useful life of 3 years and immediately tested for
impairment.

941
\

Airline right
An entity has acquired a route authority or an airline right
that may be renewed every 5 years. The acquiring entity
intends to comply with the applicable rules and regulations
surrounding renewal.

Route authority renewals are routinely granted at a minimal

cost and historically. route authority has been renewed when
the airline has complied with the applicable rules and
regulations.

In this case,the airline right should be regarded as having

an indefiniteasefulhfe becausethe entity expectsto provide
service indeflmtely.

Thereforeathe airline right should not be amortized but

tested for impairment annually and whenever there is an
indication that it may be impaired.

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 an intangible asset.

However, an acquired customer list may be recognizedas

an intangible asset and amortized over the useful life.

The customer list should also be reviewed for impairment

by assessing at the end of each reporting period whether
there is an indication that it may be impaired.

The recognitionof an acquired customerlist 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.
Undoubtedly,customerscannotbe forcedto buy fromthe
entity. The customers can go elsewhere for their needs.

942
 organization cost

The term organization cost represents cost incurred m brazing

or organizing a corporation.

' 9,. 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 certiflcatee,

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 6.9, provides that start up costs which

include legal and secretarial costs in establishing a legal entity
shall be recognized as expense when incurred.

Accordingly, organization cost shall be expensed immediately.

However, share issuance costs shall be debited to the share

premium account arising therefrom.

If the share premium is not sufficient to absorb such costs, the

excess shall debited to "share issuance costs" account to be
presented as "contra equity" or as a deduction from other share
premium first and retained earnings second.

Web site development cost

Under SIC 32, a web site that has been developed fdr 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 developmentcost shall be expensedas

Incurred.

943