Nature and Definition

 Identifiable nonmonetary asset without

physical substance;
 It must meet all of the following definition
criteria:
 Identifiability
 Control
 Future Economic Benefits
Examples of Intangible Assets
 Patent
 Copyright
 Trademark
 License
 Franchise
 Computer Software
 Motion Picture Films
 Customer Lists
 Marketing Rights
TYPES OF INTANGIBLE ASSETS
 Marketing-related intangible assets
 Customer-related intangible assets

 Artistic-related intangible assets

 Contract-related intangible assets

 Technology-related intangible assets

 Goodwill
Marketing-related intangible assets

 Trademarks or trade names

 word, phrase, or symbol that distinguishes or
identifies a particular company or product
 E.g. Kleenex, Pepsi-Cola, Buick, Excedrin, Wheaties,
and Sunkist
 Newspaper mastheads
 The "masthead" of a newspaper is also called the
"banner" or the area at the very top of the front
page that contains the newspaper's name
 New York Times, Washington Post, Los Angeles
Times, etc.
Marketing-related intangible assets

 Internet domain names

A domain name is an identification string that
defines a realm of administrative autonomy,
authority, or control on the Internet.
 Noncompetition agreements
 Thepurpose of non-competition agreements is to
prevent an ex-employee from exploiting resources,
knowledge and/or leads that were gained from a
previous employer.
Customer-related intangible assets
 Customer lists
 Assume that Green Market Inc. acquires the customer
list of a large newspaper for P6,000,000 on
January 1, 2010. This customer database includes
name, contact information, order history, and
demographic information. Green Market expects to
benefit from the information evenly over a three-year
period
 Order or production backlogs
 Contractual and Non contractual customer

relationships
Artistic-related intangible assets

 Involve ownership rights to plays, literary

works, musical works, pictures,
photographs, and video and audiovisual
material. Copyrights protect these
ownership rights.
 Copyright gives the owner or heirs the
exclusive right to reproduce and sell an
artistic or published work. Copyrights are
not renewable.
Contract-related intangible assets
 Represent the value of rights that arise from
contractual arrangements.
 Franchise
 Contractual arrangement under which the franchisor grants
the franchisee the right to sell certain products or services, to
use certain trademarks or trade names, or to perform
certain functions, usually within a designated geographical
area.
 Franchisor having developed a unique concept or product,
protects its concept or product through a patent, copyright,
or trademark or trade name
Contract-related intangible assets
 The franchisee acquires the right to exploit the
franchisor’s idea or product by signing a franchise
agreement.
 Licensing agreements
A municipality (or other governmental body) allows a
privately owned company to use public property in
performing its services.
 Examples are the use of public waterways for a ferry
service, use of public land for telephone or electric
lines, use of phone lines for cable TV, use of city streets
for a bus line, or use of the airwaves for radio or TV
broadcasting.
Contract-related intangible assets
 Represent the value of rights that arise from contractual
arrangements.
 Franchise and licensing agreements
 Contractual arrangement under which the franchisor grants the
franchisee the right to sell certain products or services, to use
certain trademarks or trade names, or to perform certain
functions, usually within a designated geographical area.
 Franchisor, having developed a unique concept or product,
protects its concept or
 product through a patent, copyright, or trademark or trade name
 Construction permits
 Broadcast rights, and
 Service or supply contracts.
Technology-related intangible assets

 Relate to innovations or technological advances.

 Examples are patented technology and trade
secrets
 Patent
 gives the holder exclusive right to use, manufacture, and
sell a product or process for a period of 20 years
without interference or infringement by others.
 Two principal kinds of patents
◼ Product patents which cover actual physical products, and
◼ Process patents, which govern the process of making
products.
 Merck, Polaroid, and Xerox
 PRACTICE MAKES PERFECT!
The Daydream Corporation is confused on the treatment of the following items in its financial
statements. Indicate following items shall be shown as intangible assets on the entity's statement of
financial position.
a. Cost of developing a publishing title. Expense
b. Cost of purchasing a brand name. Intangible
c. Training costs incurred in start-up of an operation in a new
location Expense
d. Purchase cost of franchise Intangible
e. Cost to obtain license to operate for 5 years Intangible
f. 3-month lease prepayment Prepaid expense
g. Cost of equipment for use in research projects PPE
h. Operating losses during the first two years of operation Retained earnings
i. Cost of developing a patent for a new product (before
establishment of commercial and economic viability)
Expense
j. Cost of further development of patent described in (i) after
establishment of commercial and economic viability Intangible
 PRACTICE MAKES PERFECT!
k. Legal costs in acquiring patent in (i) Intangible
l. Costs of successful prosecution to protect existing patent Expense
m. Cost of unsuccessful defense of a copyright Expense
n. Cost of promotion of new product Expense
o. Cost of internal development of goodwill Expense
p. Cost of constructed structures on a leased building PPE
q. Accumulated costs of organizing the corporation Expense
Recognition and Measurement
 Recognized when it is probable and
measurable; and
 Measured at cost.
Initial Measurement

 Separate acquisition;
 Acquisition in a business combination;

 Acquisition by way of government grant;

 Acquisition by exchanges of assets;

 Internally generated intangible asset.

Separate acquisition
 Purchase price
 Import duties and nonrefundable
purchase taxes
 Directly attributable costs of

preparing the asset for its intended

use.
Separate acquisition
 Directly attributable costs include the
following:
 Costs of employee benefits arising directly
from bringing the asset to its working
condition;
 Professional fees arising directly from
bringing the asset to its working condition;
 Costs of testing whether the asset is
functioning properly.
Separate acquisition

 Purchase Price
 Import duties and non-refundable purchase
taxes, after deducting trade discounts and
rebates.
 If acquired in cash = cash paid
 If acquired beyond normal credit terms =
cash price equivalent
 If acquired by issuance of own equity
securities = fair value of the asset acquired.
Example
Gershwin Corporation obtained a franchise
from Sonic Hedgehog Inc. for a cash payment of
P120,000 on April 1, 2010. The franchise grants
Gershwin the right to sell certain products and
services for a period of 8 years. Prepare
Gershwin’s April 1 journal entry and December
31 adjusting entry.
Franchise 120,000
Cash 120,000
Separate acquisition

 Directly attributable costs

Costs of employee benefits
Professional fees arising directly from
bringing the asset to its working
condition; and
Cost of testing
Separate acquisition
 Costs which are NOT capitalizable
 Costs of introducing a new product or service,
including costs of advertising and promotional
activities.
 Costs of conducting business in a new location or with
a new class of customer, including staff training costs.
 Administration and general overhead costs.

 Costs incurred while an asset capable of operating in

a manner intended by management has yet to be
brought into use.
 Initial operating losses.
Business Combination

 Cost is based on its fair market value on

the date of the acquisition
 If there is active market – quoted market
price
 No active market – amount which would
be paid by the entity for the asset in an
arm’s length transaction between
knowledgeable and willing parties.
Government Grant

 Airport land rights

 Licenses to operate radio of television
stations
 Import licenses or quotas or rights to

access restricted resources.

 Recorded at either:

 Fair
value
 Nominal amount or zero
Exchange

 Measured at fair value

 If it lacks commercial substance – cost
is carrying amount of the asset given
up
Internally generated

 Examples of directly attributable costs

 Cost of materials and services used or
consumed in generating the intangible asset.
 Costs of employee benefits arising from the
generation of the intangible asset
 Fees to register a legal right
 Amortization of patents and licenses that are
used to generate the intangible asset.
Internally generated

 Does not compose an internally

generated intangible asset
 Selling, administrative and other general
overhead
 Identified inefficiencies and initial operating
losses incurred before an asset achieves
planned performance
 Expenditure on training staff to operate the
asset.
Internally generated

 PAS 38, par. 63

Internally generated brands, mastheads,
publishing titles, customer lists and items
similar in substance shall not be recognized
as intangible assets.
Recognition as an EXPENSE
 Start up costs (organization costs)
 Legal and secretarial costs
 Pre-opening costs or expenditures to open a new
facility or business
 Pre-operating costs or expenditures for
commencing new operations or launching new
products or processes.
 Training costs
 Advertising and promotional costs

 Business relocation or reorganization costs

Example
McNabb Company spent P190,000
developing a new process, P45,000 in legal fees
to obtain a patent, and P91,000 to market the
process that was patented, all in the year 2010.
How should these costs be accounted for in
2010?
Example
McNabb Company spent P190,000 developing a
new process, P45,000 in legal fees to obtain a patent,
and P91,000 to market the process that was patented,
all in the year 2010. How should these costs be
accounted for in 2010?
The P190,000 should be expensed as research and
development expense in 2010. The P91,000 is expensed as
selling and promotion expense in 2010. The P45,000 of costs
to legally obtain the patent should be capitalized and
amortized over the useful or legal life of the patent, whichever
is shorter.
Subsequent expenditure

 Recognized as expense
 Likely to maintain only the expected future
economic benefits embodied in the intangible
assets.
Identifiable Intangible Assets
 Patent
 Copyright

 Franchise

 Trademark or brand name

 Leasehold or lease right

 Computer software

 Broadcasting license, airline right and fishing

right
Unidentifiable Intangible Assets

 An intangible asset is unidentifiable if it

cannot be
 Sold
 Transferred
 Licensed
 Rentedor
 Exchanged separately
Patent

 Exclusive right granted by the government

to an inventor enabling the grantee to
control the manufacture, sale or other use
of the invention for a specific period of
time.
 Legal life of patent is 20 years
Cost of Patent
 If by purchase, it includes:
 Purchase price
 Directly attributable expenditure necessary in
preparing the asset for its intended use
 If internally developed
 Licensingfees and
 Other related legal fees

 Expensed as incurred:
Cost of Patent

 Expensed as incurred:
 Research and development costs
 Legal fees and other costs of successfully
prosecuting or defending a patent (maintain
the patent only), otherwise if unsuccessful,
written of as loss.
PRACTICE MAKES PERFECT!
Nieland Industries had one patent recorded on its books
as of January 1, 2010. This patent had a book value of
P288,000 and a remaining useful life of 8 years. During 2010,
Nieland incurred research and development costs of P96,000
and brought a patent infringement suit against a competitor.
On December 1, 2010, Nieland received the good news
that its patent was valid and that its competitor could not use the
process Nieland had patented. The company incurred P85,000 to
defend this patent.
At what amount should patent(s) be reported on the
December 31, 2010, balance sheet, assuming monthly amortization
of patents?
 Illustration

Carrying Life in Amortization Months

Amount Months Per Month Amortization

Patent (1/1/12) P288,000 96 P3,000 12

Carrying amount P288,000

Less: Amortization of patent (12 X P3,000) (36,000)
Carrying amount 12/31/12 P252,000
 PRACTICE MAKES PERFECT!
Crystal Company summarized the following transactions
pertaining to patent.
2016 Spent P250,000 for the research and development of the patent.
2017
Jan. 1 Paid P60,000 to apply for and obtain right to the patent. The useful life of
the patent is 10 years.
2018
Jan. 1 Purchased for P600,000 a new patent that is expected to prolong the life
of the original patent by 6 years.
2019
Dec. 31 A competitor obtained rights to a patent which rendered the entity’s
patent obsolete.
Required:
Prepare journal entries relating to the patent.
 PRACTICE MAKES PERFECT!
2016 Spend P250,000 for the research and development
of the patent.

2016 Research and development 250,000

expense
Cash 250,000
To record research and development of the patent.
PRACTICE MAKES PERFECT!
Jan. 1, Paid P60,000 to apply for and obtain right to the
2017 patent. The useful life of the patent is 10 years.

2017 Patent 60,000

Cash 60,000
To record payment for patent.
PRACTICE MAKES PERFECT!
Jan. 1, Paid P60,000 to apply for and obtain right to the
2017 patent. The useful life of the patent is 10 years.

Amortization expense
(60,000 / 10 years) 6,000
Patent 6,000
To record amortization of patent
 PRACTICE MAKES PERFECT!
Jan. 1, Purchased for P600,000 a new patent that is expected
2018 to prolong the life of the original patent by 6 years.
2018 Patent 600,000
Cash 600,000
To record payment for patent.

Original cost 60,000

New patent 600,000
Total cost 660,000
Less: Amortization for 2017 6,000
Carrying amount – Jan. 1, 2018 654,000
PRACTICE MAKES PERFECT!
Entry to record amortization of patent for 2018.
2018 Amortization of patent
(654,000 / 15 years) 43,600
Patent 43,600
To record amortization of patent.
PRACTICE MAKES PERFECT!
Entry to record amortization of patent for 2019.
2019 Amortization of patent 43,600
Patent 43,600
To record amortization of patent.
PRACTICE MAKES PERFECT!
Entry to record write off of patent for 2019.
2019
Patent written off 566,800
Patent 566,800
To record patent that is obsolete.

Carrying amount – 1/1/2018 654,000

Less: Amortization
2018 43,600
2019 43,600 87,200
Carrying amount – 12/31/19 566,800
Franchise
 Under a franchise agreement, one party called
the franchisor grants certain rights to the
another party called the franchisee.
 Includes the lump sum payment for the
acquisition of the franchise plus
 Directly attributable costs necessary for its
intended use (legal fees, and expenses incurred
in connection with the acquisition of the right)
PRACTICE MAKES PERFECT!

At the beginning of current year, Outlandish

Company entered into a franchise agreement with
Jollibee Company to sell Jollibee products for an
indefinite period. The agreement provides for an
initial fee of P20,000,000, P5,000,000 down upon
signing of the contract and the balance in four equal
annual payments every year-end. The entity signed
10% interest-bearing note for the balance. The
collection of the note is reasonably assured.
 PRACTICE MAKES PERFECT!

The agreement further provides that the franchisor

will assist in the site location, make a survey of potential
market and provide training of management and
employees. Jollibee Company has already performed
all initial services required under the agreement.
Required:
Prepare journal entries for the current year on the books
of the franchisee.
 PRACTICE MAKES PERFECT!

To record franchise agreement to sell Jollibee products for an

indefinite period.

Books of franchisee
1. Franchise 20,000,000
Cash 5,000,000
Note payable 15,000,000
To record franchise agreement to sell Jollibee
products for an indefinite period.
 PRACTICE MAKES PERFECT!

To record collection of the note.

Books of franchisee
2. Note payable
(15,000,000 / 4) 3,750,000
Interest expense
(15,000,000 x 10%) 1,500,000
Cash 5,250,000
To record collection of the note.
PRACTICE MAKES PERFECT!

Books of franchisee
3. There is no amortization because the franchise is
for an indefinite period.
Copyright
 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.
 Amortized over useful life (benefits, sales and royalties
are expected)
 Write off the cost of the copyright against the
revenue of the first printing
 Under Intellectual Property Code of the Philippines,
the term of protection for copyright is during the life
of the author and for 50 years after his death.
Acquired Copyright

 Cost includes:
 Cash paid
 Directly attributable cost necessary for its
intended use
 Amortized over the useful life
Illustration
Sinise Industries acquired two copyrights during
2010. One copyright related to a textbook that was
developed internally at a cost of P9,900. This textbook
is estimated to have a useful life of 3 years from
September 1, 2010, the date it was published.
The second copyright (a history research textbook)
was purchased from University Press on December 1,
2010, for P24,000. This textbook has an indefinite
useful life.
How should these two copyrights be reported on
Sinise’s balance sheet as of December 31, 2010?
Illustration
Copyright No. 1 for P9,900 should be expensed and
therefore not reported on the balance sheet.

Copyright No. 2 for P24,000 should be capitalized.

Because the useful life is indefinite. It would be reflected
on the December 31, 2012 balance sheet at its cost of
P24,000.
Illustration:
An entity acquired a copyright that has a
remaining legal life of 50 year. However, an
analysis of consumer habit and market trend
provides evidence that the copyrighted material
shall generate cash inflows for only 30 years.
The acquired copyright should be amortized
over the 30-year useful life.
Trademark

 Symbol, sign, slogan or name used to

mark a product to distinguish it from other
products.
 Trademark, tradename and brandname
are interchangeably used.
Trademark
 Cost includes:
 Purchase price
 Directly attributable costs to the acquisition

 If internally developed, cost includes:

 Filingfees
 Registry fees

 Other costs incurred in securing the trademark (such

as design cost of the trademark)
 Legal life is 10 years and may be renewed for
periods of 10 years each.
Illustration:
Larry Byrd, Inc., spent P68,000 in attorney fees
while developing the trade name of its new product, the
Mean Bean Machine.
Prepare the journal entries to record the P68,000
expenditure and the first year’s amortization, using an
8-year life.
Trade Name 68,000
Cash 68,000
Amortization Expense 8,500
Trade Name 8,500
(P68,000 X 1/8 = P8,500)
Goodwill
 Arises when earnings exceed normal earnings.
 Developed goodwill or internal goodwill

because of:
◼ Good name
◼ Capable staff and personnel
◼ Superior quality of products
◼ Favorable location
◼ High credit standing

 Not recorded because there is no objective

transaction on which the goodwill can be based.
Illustration:
In 2010 Ghostbusters Corp. spent
P420,000 for “goodwill” visits by sales personnel
to key customers. The purpose of these visits
was to build a solid, friendly relationship for the
future and to gain insight into the problems and
needs of the companies served.
How should this expenditure be reported?
Illustration:
Companies cannot capitalize self-developed,
self-maintained, or self-created goodwill. These
expenditures would most likely be reported as
selling expenses.
Goodwill

 Purchased goodwill
 Goodwill that has been paid for.
 Arises when a business is purchased.
 Recognized as an ASSET because it has been
paid for.
Illustration:
On September 1, 2010, Winans
Corporation acquired Aumont Enterprises for a
cash payment of P700,000. At the time of
purchase, Aumont’s balance sheet showed assets
of P620,000, liabilities of P200,000, and
owners’ equity of P420,000. The fair value of
Aumont’s assets is estimated to be P800,000.
Compute the amount of goodwill acquired
by Winans.
Illustration:
Purchase price P700,000
Fair value of net assets
Fair value of assets P800,000
Fair value of liabilities 200,000 600,000
Value assigned to goodwill P100,000
PRACTICE MAKES PERFECT!

Judicature Company purchased another entity for

P7,500,000 cash. A schedule of the fair value of the
acquired entity’s assets and liabilities as of the purchase
date follows:
Cash 50,000
Accounts receivable 800,000
Inventory 1,350,000
Property, plant and equipment 4,300,000 6,500,000

Accounts payable 900,000

Note payable – bank (long-term) 1,000,000 1,900,000
Net assets at fair value 4,600,000
PRACTICE MAKES PERFECT!

 Required:
1. Determine the amount of goodwill using
the residual approach.
2. Prepare journal entry to record the
purchase of the entity.
PRACTICE MAKES PERFECT!

1. Determine the amount of goodwill using the residual

approach.
Acquisition cost 7,500,000
Net assets acquired 4,600,000
Goodwill 2,900,000
 PRACTICE MAKES PERFECT!

2. Prepare journal entry to record the purchase of the entity.

Cash 50,000
Accounts receivable 800,000
Inventory 1,350,000
Property, plant and equipment 4,300,000
Goodwill 2,900,000
Accounts payable 900,000
Note payable 1,000,000
Cash 7,500,000
To record purchase of an entity and recognition of
goodwill.
Research and Development Cost

 Examples of Research activities:

 Laboratory research aimed at obtaining or
discovering new knowledge.
 Searching for application of research finding
and other knowledge
 Conceptual formulation and design of
possible product or process alternative
 Testing in search for product or process
alternative
Research and Development Cost
 Examples of Development activities:
 Design, construction, and testing of preproduction
prototype and model
 Design of tools, jigs, molds, and dies involving new
technology
 Design, construction and operation of a pilot plant
that is not of a scale economically feasible to the
entity for commercial production
 Design, construction and testing of a chosen
alternative for new or improve product or process.
Illustration
Treasure Land Corporation incurred the following costs in
2010.
Cost of laboratory research aimed at
discovery of new knowledge P120,000
Cost of testing in search for product
alternatives 100,000
Cost of engineering activity required to
advance the design of a product
to the manufacturing stage 210,000
P430,000
Prepare the necessary 2010 journal entry or entries for
Treasure Land.
Illustration
To record research and development expense.
Research and development 430,000
Expense
Cash 430,000

To record research and development

expense.
PRACTICE MAKES PERFECT!

 Futile Company is an established computer software entity.

 In 2016, the entity incurred the following costs in the process
of designing, developing and producing a new software
program using the APPLE technology to access the Internet:
Designing and planning 1,000,000
Code development 1,500,000
Testing 500,000
Production of product master 2,500,000

 The costs of designing and planning, code development and

testing were all incurred before the technological feasibility
of the product was established.
PRACTICE MAKES PERFECT!
 In 2017, the entity incurred the P1,000,000 to
produce the software program for sale n 2017.
 The entity began marketing the software program
in 2017 and earned revenue of P2,400,000.
 The entity has estimated that total revenue over the
4-year life of the product would be P12,000,000.
 At the end of 2017, the entity was offered
P4,000,000 for the right to distribute the software.
PRACTICE MAKES PERFECT!

Required:
1. What amount of the research and development

and production cost should be expensed in

2016?
2. What amount of the research and development
and production cost should be expensed in
2017?
PRACTICE MAKES PERFECT!

Required:
1. What amount of the research and development

and production cost should be expensed in 2016?

Designing and planning 1,000,000
Code development 1,500,000
Testing 500,000
Total R and D expense in 2016 3,000,000

The cost of producing the product master of

P2,500,000 is capitalized as software cost to be
subsequently amortized.
PRACTICE MAKES PERFECT!

Required:
2. What amount of the research and development

and production cost should be expensed in

2017?
625,000