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Chapter 12: Intangible Assets Overview

The document discusses accounting principles for intangible assets including: 1) Defining intangible assets as being separable and arising from legal rights or binding agreements. 2) Intangible assets must be identifiable, provide future economic benefits, and have a cost that can be measured reliably to qualify for recognition. 3) Intangible assets are initially measured at cost and subsequently at cost less accumulated amortization and impairment losses. 4) Intangible assets have either indefinite or finite useful lives and are tested annually for impairment.

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484 views4 pages

Chapter 12: Intangible Assets Overview

The document discusses accounting principles for intangible assets including: 1) Defining intangible assets as being separable and arising from legal rights or binding agreements. 2) Intangible assets must be identifiable, provide future economic benefits, and have a cost that can be measured reliably to qualify for recognition. 3) Intangible assets are initially measured at cost and subsequently at cost less accumulated amortization and impairment losses. 4) Intangible assets have either indefinite or finite useful lives and are tested annually for impairment.

Uploaded by

Kaname Kuran
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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  • Intangible Assets Overview
  • Measurement and Acquisition
  • Recognition and Measurement After Initial Recognition
  • Derecognition and Accounting Entries

Chapter 12: INTANGIBLE ASSETS | REVIEWER

Active Market

 A market that routinely experiences high transaction volumes with all of the following
conditions exist:
i. Homogeneous product
ii. Participants 24/7
iii. Publicly announce

Intangible Heritage Assets

Intangible assets which displayed the following characteristics:

1) Their value in cultural, environmental and historical terms is unlikely to be fully reflected
in a financial value based purely on a market price.
2) Legal and/or statutory obligations may impose prohibitions or severe restrictions on
disposal by sale.
3) Their value may increase over time.
4) It may be difficult to estimate their useful lives, which in some cases could be several
hundred years.

Research

 Original and planned investigation undertaken with the prospect of gaining new
scientific and technical knowledge and understanding.

Nature of Intangible Asset

1. Identifiability
a) It is separable
b) It arises from binding arrangements
2. Control over a resource
3. Existence of future economic benefits or service potential

Recognition of Intangible Asset

 It is probable that the expected future economic benefits or service potential that are
attributable to the asset will flow to the entity; and
 The cost or fair value of the asset can be measured reliably.
Measurement of an Intangible Asset

 It shall be measured initially at cost. If an intangible asset is acquired through a non-


exchange transaction, its initial cost at the date of acquisition shall be measured at its
fair value as at that date.

Acquisition of Intangible Assets

a) By separate purchase or acquisition


b) As part of a business or entity combination
c) Through a non-exchange transaction
d) By exchanges of assets
e) By self-creation (internal generation)

Examples of expenditures that are not part of the cost of an intangible asset are:

 Costs of introducing a new product or service.


 Costs of conducting operations in a new location or with a new class of users of a
service.
 Administration and other general overhead costs.

An intangible asset arising from development phase of an internal project shall be recognized
if, and only if, an entity can demonstrate all of the following:

i. The technical feasibility of completing the intangible asset so that it will be available for
use or sale.
ii. Its intention to complete the intangible asset and use or sell it.
iii. Its ability to use or sell the intangible asset.
iv. How the intangible asset will generate probable future economic benefits or service
potential.
v. The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and
vi. Its ability to measure reliably the expenditure attributable to the intangible asset during
its development.

The cost of an internally generated intangible asset is the sum of expenditure incurred from
the date when the intangible asset first meets the recognition criteria. Reinstatement of
expenditure previously recognized as an expense is prohibited.

The following are not components of the cost of an internally generated intangible asset:
i. Selling, administrative and other general overhead expenditure unless this expenditure
can be directly attributed to preparing the asset for use;
ii. Identified inefficiencies and initial operating deficits incurred before the asset achieves
planned performance.
iii. Expenditure on training staff to operate the asset.

Recognition of an Expense

 Expenditure on an intangible item shall be recognized as an expense when it is incurred


unless it forms part of the cost of an intangible asset that meets the recognition criteria.
Expenditure on an intangible item that was initially recognized as an expense shall not
be recognized as part of the cost of an intangible asset at a later date.

Measurement after Initial Recognition

 After initial recognition, intangible assets should be carried at its cost less any
accumulated amortization and any accumulated impairment losses.

Useful Life
Intangible assets are classified as having:
a) Indefinite life – no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for, or provides service potential to, the entity.
b) Finite life – a limited period of benefit to the entity.

Residual Value
The residual value of an intangible asset with a finite useful life shall be assumed to be zero
unless:
a) There is a commitment by a third party to acquire the asset at the end of its useful life;
or
b) There is an active market for the asset, and: (1) residual value can be determined by
reference to that market; and (2) it is probable that such a market will exist at the end of
the asset’s useful life.

Impairment
 Intangible assets with finite useful life are tested for impairment whenever there is an
indication of impairment at the end of reporting period.
 Intangible assets with indefinite useful life are tested for impairment at least annually
and whenever there is an indication of impairment.
 Recoverable amount < Carrying amount = Impairment Loss
Derecognition

An intangible asset shall be derecognized or eliminated from the statement of financial


position:

a) On disposals (including disposal through a non-exchange transaction); or


b) When no future economic benefits or service potential are expected from its use or
disposal.

Gain or Loss arising from Derecognition

 It shall be determined as the difference between the net disposal proceeds, if any, and
the carrying amount of the asset. It shall be recognized in surplus or deficit when the
asset is derecognized. Gains shall be classified as revenue.

Accounting Entries

a) Purchase of Intangible Assets


Account Title Account Code Debit Credit
Computer Software 10801020 XXX
Due to BIR 20201010 XXX
Cash-Modified Disbursement
System (MDS), Regular 10104040 XXX
To recognize the purchase of the software package

b) Amortization at the end of the first year


Amortization-Intangible Assets 50502010 XXX
Accumulated Amortization –
Computer Software 10801021 XXX
To recognize the amortization of the software at the end of the first year

c) Impairment Loss
Impairment Loss-Intangible Assets
Computer Software-02 50503110 XXX
Accumulated Impairment Losses –
Computer Software 10801012 XXX
To recognize impairment loss of the computer software

Note: The recoverable amount of an asset is the fair value less cost of disposal or value
in use, whichever is higher.

Common questions

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An internally generated intangible asset can be recognized if all the following criteria are met: technical feasibility of completion, intention and ability to complete for use or sale, plan for generating economic benefits or service potential, availability of resources, and reliable measurement of related costs . Reinstatement of previously expensed costs is prohibited to maintain consistent application of accounting principles and prevent manipulation of financial statements by reclassifying expenses as assets after initial recognition .

Research is foundational to developing intangible assets, as it involves original, planned investigations aimed at gaining new scientific and technical knowledge that can lead to the recognition of an asset when criteria are met . It serves as the genesis for innovative processes or products that might fulfill recognition criteria by demonstrating technical feasibility, potential economic benefits, and reliable cost measurement . Thus, research underpins the etiology of value creation within intangible assets, linking scientific advances to practical economic applications.

Differentiating between tangible and intangible assets is crucial because intangible assets lack physical substance, making identifiability critical — an intangible asset must be separable or arise from binding arrangements. Additionally, intangible assets must grant control over expected future economic benefits or service potential . Misclassification can lead to incorrect accounting treatment, affecting financial statements, and decisions regarding asset management and investment.

Impairment implications for intangible assets with indefinite useful life include potential decreases in asset value impacting the balance sheet and profit and loss statements. These assets require more frequent reviews to ensure that any decline in recoverable amount is captured promptly due to their indefinite nature, which lacks a predictable consumption pattern and might be more susceptible to changes in market conditions affecting valuation . Ensuring accurate valuations is critical for protecting stakeholder interests and maintaining fiduciary responsibilities.

The residual value of an intangible asset with a finite useful life is assumed to be zero unless there is a commitment by a third party to acquire the asset or an active market exists. This assumption affects the calculation of amortization and the asset's net book value over time . A non-zero residual value means that the asset will not be fully amortized to zero by the end of its useful life, affecting financial forecasting and resource allocation.

Recognizing amortization and impairment losses for intangible assets affects financial statements by decreasing the asset's book value and increasing expenses, which reduces net income on the income statement . This can impact financial ratios, investor perceptions, and credit ratings. Reduced net income may lower tax liabilities, as amortization and impairment charges might be deductible for tax purposes, depending on jurisdiction. Proper management of these factors is essential for accurate financial planning and reporting.

The initial acquisition cost of an intangible asset can differ based on the acquisition method. For a separate purchase, it includes the transaction price . In a business combination, it is measured at fair value. Non-exchange transactions also depend on fair value at acquisition. Self-created intangible assets might have their costs split across development stages, meeting specific criteria for capitalization . These variations impact financial reporting and strategy on asset management.

Legal and statutory obligations can impose prohibitions or severe restrictions on the disposal of intangible heritage assets, affecting their valuation as these limitations might prevent the realization of their full market value. This can result in their cultural, environmental, and historical values not being reflected in financial valuations . Such constraints may necessitate alternative valuation methods that account for non-financial contributions to society or the entity holding the asset.

Valuing intangible heritage assets is challenging because their cultural, environmental, and historical values often aren't fully captured in financial terms. Regular intangible assets usually provide direct economic benefits, making them easier to value based on market transactions or cash flow projections. Heritage assets may have prohibitive legal restrictions against sale, complicating traditional valuation methods . The lack of active markets or comparable sales further necessitates alternative valuation techniques focusing on broader societal or non-market values. This complexity requires comprehensive consideration of both qualitative and quantitative factors.

An intangible asset has an indefinite useful life if there is no foreseeable limit to the period over which it generates benefits, while a finite useful life is determined when the benefits are limited by legal, regulatory, or economic factors . Intangible assets with finite lives are tested for impairment when indications arise, whereas those with indefinite lives are tested at least annually or when indications of impairment occur . This classification impacts the frequency and conditions under which impairment tests are conducted.

Chapter 12: INTANGIBLE ASSETS | REVIEWER Active Market A market that routinely experiences high transaction volumes with all
Measurement of an Intangible Asset It shall be measured initially at cost. If an intangible asset is acquired through a non-
i. Selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to prepa
Derecognition An intangible asset shall be derecognized or eliminated from the statement of financial position: a)

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