Intangible Assets
MS. ELL ERY D E L EON
QUESTION QUESTION
Define an intangible asset. What are the three essential criteria in the definition of
an intangible asset?
ANSWER
PAS 38, paragraph 8, simply defines an intangible asset as ANSWER
an identifiable nonmonetary asset without physical The three essential criteria in the definition of an
substance. Paragraph 8 further states that the intangible intangible assets are
asset must be controlled by the entity as a result of past 1. Identifiability
event and from which future economic benefits are expected 2. Control
to flow to the entity. 3. Future economic benefits
QUESTION
What are the two conditions for the recognition of an
intangible asset?
ANSWER
1. It is probable that the future economic benefits that are
attributable to the asset will flow to the entity.
2. The cost of the intangible asset can be measured reliably.
QUESTION QUESTION
Explain the meaning of identifiability. Explain the meaning of future economic benefits.
ANSWER ANSWER
An asset is identifiable when: a. It is separable. This means that Future economic benefits may include revenue
the asset is capable of being separated from the entity and sold, from the sale of products or services, cost savings
transferred, licensed, rented a exchanged, either individually or or other benefits resulting from the use of the
together with a related Contract, asset or liability b. It arises from asset by the entity.
contractual or other legal rights.
For example, the use of intellectual property in a
QUESTION
production process or the legal right to use a new
Explain the element of control of an intangible asset?
technology may future production costs rather
than increase future revenue.
ANSWER
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. The entity must be able to enjoy the
future economic benefits from the asset and prevent others from
enjoying the same benefits. The capacity of an entity to control the
future economic benefit from an intangible asset normally would
stem from legal rights that are enforceable in a court of law, for
example, trademarks, copyright and patent.
QUESTION QUESTION
What is the cost of an intangible asset that is What is the cost of an internally generated intangible asset?
"acquired separately"?
ANSWER
ANSWER The cost of an internally generated intangible asset comprises all
The cost of an intangible asset comprises the directly attributable costs necessary to create, produce and
purchase price, import duties and prepare the asset to be capable of operating it in the manner
nonrefundable purchase taxes, and any intended by management. Examples of directly attributable costs
directly attributable cost of preparing the are:
asset for the intended use. 1. Cost of materials and services used or consumed in generating
the intangible asset
Directly attributable costs include costs of 2. Cost of employee benefits arising from the generation of the
employee benefits arising directly from intangible asset
bringing the asset to the working condition, 3. Fees to register a legal right .Amortization of patents and
professional fees arising directly from bringing licenses that are used to generate the intangible asset
the asset to the working condition, and costs
of testing whether the asset is functioning PAS 38, paragraph 63, explicitly provides that internally generated
properly. 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.
QUESTION QUESTION
Explain the measurement of an intangible asset after Explain the amortization of an intangible asset.
initial recognition.
ANSWER ANSWER
Initially, an entity shall measure an intangible asset Amortization is the systematic allocation of the amortizable
at cost amount of an intangible asset over the useful life.
However, after initial recognition, an entity shall
PAS 38 provides the following guidelines on amortization:
choose either the cost model or revaluation model as
a. Paragraph 97 states that intangible assets with limited or
its accounting policy. finite life are amortized over the useful life. However, such
intangible assets are tested for impairment at the end of
Cost model
reporting period when there is an indication of
An intangible asset shall be carried at cost, les any
impairment.
accumulated amortization and any accumulated
b. Paragraphs 107 and 108 state that intangible assets with
impairment loss. indefinite life are not amortized but are tested for
Revaluation model impairment at least annually and whenever there is
An intangible asset shall be carried at a revalued indication that the intangible asset may be impaired.
amount, less any subsequent amortization and any
subsequent accumulated impairment loss.
An intangible asset can only be carried at revalued
amount if there is an active market for the asset
QUESTION QUESTION
Explain the useful life of an What is the method of amortizing the cost of an intangible asset?
intangible asset
ANSWER
ANSWER The method of amortization shall reflect the pattern in which the economic
The 4eful life of an intangible benefits from the asset are consumed.
asset must be assessed as either
indefinite or finite. However, if such pattern cannot be determined reliably, the straight line method
of amortization [Link] used.
If finite, the useful life may be
expressed in terms of years or the Amortization shall begin when the intangible asset is available for the intended
number of units to be produced. use.
The useful life of an intangible QUESTION
asset is indefinite when there is Explain the residual value of an intangible asset.
foreseeable limit to the period over
which the asset is expected to ANSWER
generate net cash flows 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 18 probable that there will be a market
for the a
Specific Intangible Assets
MS. ELL ERY D E L EON
QUEST1ON QUESTION
What do you understand by patent? Explain the amortization and impairment of patent.
ANSWER ANSWER
A patent is an exclusive right granted by the government Since a patent is an intangible asset with finite useful
to an inventor enabling him to control the manufacture, life, the cost is amortized.
sale or other use of invention for a specified period of a. The original cost shall be amortized over the legal
time. life or useful life, whichever is shorter.
b. A competitive patent acquired to protect an original
The legal life of patent is 20 years from the date of filing patent shall be amortized over the remaining ife of
the application. This is in accordance with R.A. No. 8293, the original patent.
or the Intellectual Property Code of the Philippines, which c. If a related patent is acquired in order to extend the
took effect on January 1, 1998. life of the old patent, the cost of the related patent
and any unamortized cost of the old patent shall be
A patent cannot be renewed but the life can be extended amortized the extended life.
beyond the legal life by a new patent for improvements
and changes. Under US GAAP a patent is classified as However, the patent should be tested for impairment
technology-based intangible asset. whenever there is an indication of impairment at the
end of reporting period.
QUESTION QUESTION
What is a trademark? Explain the amortization and impairment of trademark.
ANSWER ANSWER
A trademark is a symbol, sign, A trademark with finite useful life is amortized at the end of each reporting
slogan or name used to mark a period.
product to distinguish it from other
products. The terms "trademark," However, the trademark with finite useful life is also tested for impairment
"tradename" and "brandname" are whenever there is an indication of impairment at the end of reporting
interchangeably used. Under US period.
GAAP, a trademark is a market-
related intangible asset. Under R.A. 8293 or the Intellectual Property Code of the Philippines, 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 life.
A trademark with indefinite useful life is not amortized.
However, the trademark with indefinite useful life is tested Tor impairment at
least annually and whenever there is an indication of impairment.
QUESTION One act of bad customer relations might damage goodwill
What is goodwill? and one act of good relations might improve goodwill.
Developed goodwill is goodwill which is generated
ANSWER internally because of good name, capable staff and
Goodwill arises when earnings exceed normal earnings by personnel, superior quality of products, favorable location
reason of good name, capable staff and personnel, high and high credit standing.
credit standing reputation for fair dealings, reputation for
superior products, favorable location and a list of regular Such "homegrown" goodwill is not recorded.
customers.
Cost of developing, maintaining or restoring goodwill shall
In other words, goodwill is created by a go0d relationship be expensed as incurred.
between an entity and the customers:
a. By building up a reputation by word of mouth for high PAS 38, paragraph 48, explicitly provides that internally
quality products or high standard of service. generated goodwill shall not be recognized as an asset. P
b. By responding promptly and helpfully to queries and
complaints of customers. Purchased goodwill is goodwill that is paid for. Purchased
c. Through the personality of the staff and their attitude goodwill arises when a business is acquired.
to the customers.
Purchased goodwill is recognized as an intangible asset.
Goodwill changes from day to day. Goodwill is continually
changing.
QUESTION QUESTION
Explain the lain the residual approach of measuring Explain the impairment of goodwill.
goodwill.
ANSWER
ANSWER PAS 38, paragraph 107, mandates that goodwill shall
Under the residual approach, goodwill is measured by not be amortized because the useful life is indefinite.
the comparing the purchase price for the entity with the
net tangible identifiable assets, meaning total assets However, goodwill shall be tested for impairment at least
excluding goodwill minus liabilities assumed. annually and whenever there is an indication that it may
The excess of the purchase price over the net tangible be impaired.
and identifiable assets is considered as goodwill.
Goodwill does not generate cash flows independently
The net tangible and identifiable assets must be
from other assets or group of assets, and therefore, the
measured fair value.
recoverable amount of goodwill as an individual asset
If the purchase price is less than the net fair value of the cannot be determined.
identifiable assets acquired and liabilities assumed, the
difference is negative goodwill. As a consequence, if there is an indication that goodwill
PFRS 3, paragraph 34, provides that such negative may be impaired, recoverable amount is determined for
goodwill is recognized in profit or loss as gain on bargain the cash generating unit to which goodwill belongs.
purchase.
QUESTION QUESTION
What is a copyright? Explain the amortization and impairment of copyright.
ANSWER ANSWER
A copyright is an exclusive right granted by the Theoretically, the cost of the copyright shall be amortized
government to the author, composer or artist, enabling over the useful life.
the grantee to publish sell or otherwise benefit from the
literary, musical or artistic work. In practice, it is often difficult to estimate the number of
years in which benefits will be received.
Under Us GAAP, a copyright is considered an artistic-
related intangible asset. Thus, it is usually advisable to write off the cost of the
copyright against the revenue of the first printing
The cost assigned to copyright consists of all expenses
incurred in the production of the work including those Under the Intellectual Property Code of the Philippines, the
required to establish or obtain the right. term of protection for copyright is during the lifetime of the
author and for 50 years after death.
Where the copyright is purchased, the cost includes the
cash paid, and directly attributable cost necessary for The copyright should be tested for impairment whenever
the intended use. there is an indication of impairment at the end of reporting
period
QUESTION QUESTION
What is a franchise? Explain the amortization and impairment of
franchise.
ANSWER
Under a franchise agreement, one party called the franchisor grants ANSWER
certain rights to another party called the franchisee. If the franchise is granted for a definite period,
Under US GAAP, a franchise is a contract-based intangible asset. The the cost of the frachise shall be amortized
franchise agreement may be: over the useful life or definite period,
a. Between the government and a private entity or individual whichever is shorter.
b. Between private entities or individuals
The franchise with finite life should be tested
If the franchise is between the government and a private entity or
for impairment whenever there is an
individual, the latter is permitted to use public property in performing
indication of impairment at the end of
its services. Examples are the use of public water for interisland
reporting period.
shipping, the use of public land for telephone or electric lines, or the
use of streets and highways tor a bus line.
If the franchise is granted indefinitely or
If the franchise is between private entities or individuals, the franchisee perpetually, the cost of the franchise shall not
acquires the right to use the trademark, patent and process of the be amortized but tested for impairment at
franchisor. Examples are the right to operate a fried chicken drive-in least annually and whenever there is an
under the tradename "Max" or "Aristocrat" and the right to operate a indication of impairment.
"McDonald" or "Jollibee" restaurant.
Research and Development M S . E L L E RY D E L E O N
QUESTION
Explain research activity.
ANSWER
Research is original and planned investigation Research activities include:
undertaken with the prospect of gaining scientific or a. Laboratory research aimed at discovering or obtaining
technical knowledge and understanding. new knowledge
b. Searching for application of research finding and other
Otherwise stated, a research activity is undertaken knowledge
to discover new knowledge that will be useful in c. Conceptual formulation and design of possible product
developing new product or that will result in or process alternatives
significant improvement of existing product. d. Testing in search or evaluation of product or process
alternatives
PAS 28, paragraph 54, provides that expenditure on
research shall be recognized as expense when
incurred.
QUESTION
Explain development activity.
ANSWER
Development is the application of research findings Development activities include:
or other knowledge to a plan or design for the a. Design, construction and testing of preproduction
production of new or substantially improved material, prototypes and models
device, product, process, system or service, prior to b. Design of tools, jigs, molds and dies involving new.
the commencement of commercial production. Technology
c. Design, construction and operation of a pilot plant that is
Simply stated, a development activity involves the not of scale economically feasible for commercial
application of research findings to develop a new production
product. d. Design, construction and testing of a chosen alternative
for new or improved product or process
Paragraph 53 provides that if an entity cannot
distinguish the research phase from the
development phase, the entity shall treat the
expenditure as if it were incurred in the research
phase only.
QUESTION
Explain accounting for development cost.
ANSWER
Development cost may be expensed or capitalized depending The AICPA Financial Accounting Standards Board
on whether certain criteria or conditions are met. stipulated that expenditures for research and
development which have alternative future use, either
Development cost may qualify as intangible asset if and only in additional research projects or for productive
if the entity can demonstrate all of the following: purposes, can be capitalized.
a. The technical feasibility of completing the intangible
asset so that it will be available for use or sale. This is This means that costs incurred for materials,
achieved when a prototype or model is produced equipment and intangible asset related to research and
b. The intention to complete the intangible asset and use or development activities which have alternative future
sell it. use can be capitalized.
c. The ability to use or sell the intangible asset. Subsequently, the following should be charged to
d. How the intangible asset will generate probable future research and development expense:
economic benefits a. Cost of materials used
e. Availability of resources or funding to complete b. Depreciation of equipment used in research and
development and to use or sell the asset. development
f. The ability to measure reliably the expenditure c. Amortization of intangible asset used in research
attributable to the intangible asset during its and development
development.
QUESTION
Give examples of activities not considered as
research and development
ANSWER
Research and development activities Examples of such activities not considered research and development
typically occur prior to the beginning of include:
commercial production and distribution of a. Engineering follow through in an early phase of commercial
product or process. production
b. Quality control during commercial production including routine
Accordingly, activities that relate to testing
commercial production do not result to c. Trouble shooting in connection with breakdowns during production
research and development activities.
d. Routine on-going efforts to refine, enrich or improve
qualities of existing product
e. Adaptation of an existing capability to a particular requirement or
customer need
f. Periodic design changes to existing products
g. Routine design of tools, jigs, molds and dies
h. Activity, including design and construction engineering, related to
construction, relocation, rearrangement or start up of facilities and
equipment.
QUESTION
Explain the capitalization of cost for an internally The costs incurred to actually produce the software from
developed computer software. masters and package the software for sale shall be
charged as inventory.
ANSWER
Costs incurred in creating a computer software product As a rule, computer software is classified as an intangible
shall be charged to expense when incurred until a asset.
technical feasibility has been established for the product.
Under US GAAP, a computer software is classified as
Actually, this is the research stage where there is so technology-based intangible asset.
much uncertainty about the future economic benefits.
Accordingly, all the research costs shall be expensed Computer software purchased for resale shall be treated
outright. as inventory.
As a minimum, [Link] established A computer software purchased as an integral part of a
when an entity has produced either a detailed program computer controlled machine tool that cannot operate
design of the software or a working model. without the specific software shall be treated as property,
plant ana equipment.
After technological feasibility has been established,
capitalizable software costs include the cost of coding However, if the computer software is not an integral part
and testing and the cost to produce the product masters. or the related hardware, it is classified as an intangible
asset.
Business Combination
MS. ELL ERY D E L EON
QUESTION QUESTION
What is a business combination? What are the ways in which an acquirer might obtain
control of an acquiree?
ANSWER
A business combination is a transaction or other event ANSWER
in which an acquirer obtains control of one or more a. By transferring cash, cash equivalents or other
businesses. assets including net assets that constitute a
business
Transactions sometimes referred to as true mergers or b. By incurring liabilities
mergers of equals are also business combinations. c. By issuing equity interests
d. By providing more than one type of consideration
A business is defined as "an integrated set of activities e. By contract alone, even without consideration
and assets that is capable of being conducted and
managed for the purpose of providing a return in the
form of dividends, lower costs or other economic
benefits directly to investors or other Owners, members
or participants"
QUESTION QUESTION
What are examples of business combination? What is a business combination involving entities or
businesses under common control?
ANSWER
A business combination may be structured in a number ANSWER
of different ways for legal, taxation or other reasons, It is a business combination in which all of the combining
which include but not limited to the following: entities or businesses ultimately are controlled by the
a. One or more businesses become subsidiaries of an same party or parties both before and after the
acquirer. combination and that control is not transitory.
b. One entity transfers its net assets to another entity.
c. All combining entities transfer their net assets to a A group of individuals shall be regarded as controlling an
newly formed entity, sometimes referred to as "roll- entity when as a result of contractual arrangements they
up" or "put together" transaction. collectively have the power to govern the financial and
d. A group of former owners of one of the combining operating policies of the entity so as to obtain benefits
entities obtains control of the combined entity. from its activities.
QUESTION QUESTION
Define control, noncontrolling interest, acquirer, acquiree What is the method of accounting for a business
and Owners in connection with business combination. combination?
ANSWER
1. Control is the power to govern the financial and ANSWER
operating policies of an entity so as to obtain benefits An entity shall account for each business combination by
from 18 activities. An investor controls an investee applying the acquisition method.
when it is exposed or has rights to variable returns
from the investment and has the ability to affect those The application of the acquisition method requires the
returns through the power over the investee. following:
2. Non-controlling interest or minority interest is the a. Identifying the acquirer
equity in a subsidiary not attributable, directly or b. Determiningthe acquisition date
indirectly, to a parent. c. Recognizing and measuring the identifiable assets
3. Acquirer is the entity that obtains control of the acquired, the liabilities assumed and any
acquiree. noncontrolling interest in the acquiree
4. Acquiree is the business or group of businesses that d. Recognizing and measuring goodwill or gain from
the acquirer controls in a business combination. bargain purchase
5. Owners include holders of equity interest of investor-
owned entities and owners, members or participants
in mutual entities.
QUESTION 5. If a new entity is formed to issue equity interests to effect
What are the factors in identifying the acquirer in a a business combination, one of the combining entities
business combination? that existed before the combination shall be identified as
the acquirer.
ANSWER
1. In a business combination effected primarily by The following may be of help in identifying the acquirer:
transferring cash or other assets, or by incurring a. The combining entity whose owners as a group receive
liabilities, the acquirer is usually the entity that the largest proportion of the voting rights in the combined
transfers the cash or other assets, or incurs the entity is likely the acquirer.
liabilities. b. Where there is a large minority interest in the combined
2. In a business combination effected primarily by entity and no other owner has a significant voting
exchanging equity interests, the acquirer is usually interest, the holder of the large minority interest is likely
the entity that issues its equity interests. the acquirer.
3. The acquirer is usually the combining entity whose c. Where one entity has the ability to select the
relative size measured in terms of assets, revenue management team or the majority of the members of the
or profit is significantly greater than that of the governing body or the combined entity, such entity is
other combining entities. likely the acquirer.
4. In a business combination involving more than two
entities, determining the acquirer shall include a
consideration of which of the combining entities
initiated he combination as well as the relative size
of the entities.
QUESTION QUESTION
What is the acquisition date in n business combination? What is the recognition principle in a business
combination?
ANSWER
The acquisition date is the date on which an acquirer ANSWER
obtains control over the acquiree. As of acquisition date, the acquirer shall recognize,
separately from goodwill, the identifiable assets acquired,
The acquisition date is normally the date on which the the liabilities assumed and any noncontrolling interest in
acquirer legally transfers the consideration, acquires the the acquiree.
assets and assumes the liabilities of the acquiree.
To qualify for recognition, the identifiable assets and
The acquisition date is also known as the closing date. liabilities must meet the definition of assets and liabilities
However, it is possible for control to pass to the acquirer in the Conceptual Framework for Financial Reporting.
before or after the closing date.
However, as an exception, an acquirer shall recognize at
Where several dates are key to a business combination, it acquisition date a contingent liability as8umed in a
is the date on which control passes that determines the business combination if it is a present obligation that
acquisition date. For example, the acquisition date arises from a past event and the amount can be
precedes the closing date if a written agreement provides measured reliably.
that the acquirer obtains control of the acquiree on a
date before the closing date.
QUESTION
QUESTION
What is the consideration transferred in a business combination?
What is the measurement
principle in a business
ANSWER
combination?
The consideration transferred in a business combination shall be measured at fair
value, which shall be calculated as the sum of the acquisition-date fair values of the
ANSWER
following:
1. The acquirer shall measure
a. The assets transferred by the acquirer
the identifiable assets
b. b. The liabilities incurred by the acquirer to the former owners of the acquiree
acquired and the liabilities
c. The equity interests issued by the acquirer
assumed at fair value.
2. For each business
QUESTION
combination, the acquirer
Explain the treatment of a contingent consideration in a business combination.
shall measure any
noncontrolling interest in
ANSWER
the acquiree either at:
The acquirer shall recognize the acquisition-date fair value of any contingent
a. Fair value
consideration as part of the consideration transferred in exchange for the acquiree.
b. The noncontrolling
The acquirer shall classify the obligation to pay the contingent consideration as either
interest's
liability or equity.
proportionate share of
If the contingent consideration is classified as equity, this amount shall not be
the acquiree's
remeasured. If the contingent consideration is classified as financial liability, it shall
identifiable net assets.
be remeasured at fair value with any ge or loss being recognized in profit or loss.
QUESTION QUESTION
Explain a business combination achieved in What is the measurement of goodwill in a business combination?
stages.
ANSWER ANSWER
A business combination may be "achieved in Goodwill is measured as the excess of the total of the
stages. For example, an acquirer holds a 35% consideration transferred, the amount of noncontrolling interest in
interest in an acquiree and subsequently the acquiree and the acquisition-date fair value of the acquirer's
acquires an additional 40% interest in the same previously held interest in the acquiree, over the net amount of
acquiree to obtain control. This is sometimes the identifiable assets acquired and liabilities assumed.
referred to as step acquisition. The acquirer
shall remeasure the previously held equity Formula:
interest in the acquiree at the acquisition date Consideration transferred XXXX
fair value Any resulting gain or loss from the Amount of noncontrolling interest in the acquiree XXX
remeasurement to fair value is recognized in Fair value of previously held interest in the acquiree XXXX
profit or loss. Fair value of the Net Asset of the Acquiree (XXXX)
Goodwill XXXX
If the resulting amount in the computation is "negative", the
acquirer shall recognize a gain on bargain purchase included in
profit or loss.
QUESTION QUESTION
What are acquisition-related costs in a business What is the treatment of acquisition-related costs?
combination?
ANSWER
ANSWER The acquirer shall account for acquisition-related costs as
Acquisition-related costs are costs incurred by the expenses in the period in which the costs are incurred, except
acquirer to effect a business combination. the costs of issuing debt and equity securities.
Acquisition-related costs include: The cost of issuing debt securities shall be included in the
a. Finder fees measurement of the financial liability.
b. Advisory, legal, accounting, valuation and other
professional or consulting fees The cost of issuing equity securities shall be deducted from
c. General administrative costs, including costs of any share premium from the issue and any excess is charged
maintaining an internal acquisition department to "share issuance cost".
d. Costs of registering and issuing debt and equity
securities The share issuance cost account is reported as contra equity,
meaning, as a deduction from share premium from other
share issue or from retained earnings.