Intangible Asset – identifiable nonmonetary asset without physical substance
Criteria to be considered IA
1. Identifiability – it is separable and arises from contractual or other legal rights
Identifiable – asset could be sold, transferred, licensed, rented or sold separately
2. Control – power to obtain its economic benefits and restrict others from the same
benefits
3. Future Economic benefits – revenue, cost savings and other benefits
Conditions to recognized IA
1. It is probable
2. Asset can be measured reliably
INITIAL MEASUREMENT
Intangible asset is measured initially AT COST;
a. Separate Acquisition: cost are composed of; (PID)
1. Purchase price
2. Import duties and non-refundable taxes
3. Directly attributable cost of preparing the asset for intended use
Acquisition as part of business combination
COST = Fair value on the date of acquisition
Acquisition by Government Grant
COST may either of the two;
1. Fair Value
2. Nominal amount or Zero plus any expenditure directly attributable in preparing the
asset to its intended use
Acquisition by Exchange; either of the two;
If exchange have commercial substance
COST = Fair value of the asset given up plus any cash payment
If exchange lacks commercial substance
COST = Carrying amount of the asset given up plus any cash payment
When can you say the exchange transaction Lacks commercial substance?
ANS: the cash flows of the asset received do not differ significantly from the cash flows of the
asset transferred
Internally generated intangible Asset
COST = all directly attributable cost necessary to create, produce and prepare the asset to its
intended use
Examples: cost of materials and services, employee benefits arising from generation of IA, fees
to register legal right, amortization of patents and licenses used to generate IA
NOTES: Items not to be considered as Intangible assets
Internally generated brands
Mastheads
Publishing titles and other items similar in substance
Reason: Items cannot be identified separately from the cost of developing the business whole
Subsequent expenditure on an intangible Asset – recognized as expense unless it met the
following criteria then it is capitalize
1. It is probable that future economic benefits that are attributable specifically to the
subsequent expenditure will flow to the entity
2. The subsequent Expenditure can be measured reliably
SUBSEQUENT MEASUREMENT
1. Cost Model – carried at cost less accumulated amortization and impairment loss
2. Revaluation Model – carried at revalued amount (FV at the date of revaluation) less any
subsequent accumulated amortization and impairment loss
NOTES: IA can only be carried at revalued amount if there is an active market for the asset
Classification of Intangible assets
1. IA with Definite life
- Patent, copyrights, franchise w/ fixed term, computer software, customer list and
license
- Amortized over their useful life or legal life whichever is SHORTER
- Tested for impairment whenever there is an indication of impairment at the end of
reporting period
2. IA with Indefinite life
- Goodwill, trademark and perpetual franchise
- NOT amortized
- Tested for impairment at least annually and whenever there is an indication of
impairment
Impairment loss – asset recoverable amount is less than its carrying amount
Recoverable amount – the higher between Fair Value less cost of disposal and Value in use
Amortization - systematic allocation of the amortizable amount over its useful life
JE: dr. amortization expense, cr. Intangible asset
Amortization period – Amortization shall begin when the asset is available for use or is ready for
its intended use and will end when the asset is derecognized or classified as held for sale.
Useful life ; Finite- expressed in terms of years or number of units produced . Indefinite – no
limit – reviewed at each financial year end
Amortization Method – must reflect the pattern in which future economic benefits from the
asset are expected to be consumed by the entity , If cannot be determined use straight Line
Method - reviewed at each financial year end
Residual value- Presumed to be Zero except;
a. A third party is committed to buy the IA at the end of its useful life
b. There is an active market for IA that the residual value can be expected to be measured
and it is probable that there will be a market for the asset at the end of its useful life
- Residual value are reviewed at each financial year end
- Change in residual value is accounted as change in accounting estimate, same as
useful life and amortization method reviewed at each financial year end
- RV may increased to amount equal to or greater than carrying amount
DERECOGNITION OF INTANGIBLE ASSET
Derecognized or eliminate from SFP;
a. On disposal of asset
b. When no future economic benefits are expected from use and disposal of asset
GAIN or loss arising from derecognition is the difference between net disposal proceeds less
carrying amount of the asset
IDENTIFIABLE TANGIBLE ASSETS
1. PATENT- exclusive right given by government to the inventor enabling the inventor to control
the manufacture, sale, or other use of his invention.
Legal life – 20 years and cannot be renewed but life can be extended beyond the legal life by a
new patent for improvements and changes
COST of patent
a. Purchase patent
1. Purchase price
2. Import duties and non-refundable purchase taxes
3. Directly attributable cost in preparing the asset to its intended use
b. Internally generated patent
Cost includes licensing and other legal fees
All related Research and Development are Expensed
NOTES: However, from the time technological feasibility is achieved, any additional
development cost may be capitalized or separately accounted as development cost
Technological feasibility is the stage where the entity have reasonable assurance of the success
and production of the asset
Amortization of Patent
a. Patent is internally generated
Amortized over the legal or useful life, whichever is LOWER
b. Patent is acquired from original patentee
Amortized over the remaining legal life or useful life , whichever is LOWER
c. Competitive patent is acquired to protect the original patent
Competitive patent shall be amortized over the remaining life of the old patent
d. Related patent is acquired to extend the life of old patent
The cost of related patent 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 is amortized over its own life, and
the cost of the old patent is to be amortized over the remainder of its life
2. TRADEMARK – symbol, sign, or mark to distinguished a product from other products.
Measurement: AT COST
a. Purchased trademark
Purchased price plus cost directly attributable to the acquisition
b. Internally generated trademark
Expenditures required to established it e.g;
Filing fees, registry fees, other expenses to secure trademark like design cost
If Trademark is successfully defended, litigation cost is an outright expense
Subsequent measurement
Not Amortized
Because trademark legal life is 10 years and renewable for period of 10 years and considering
the almost automatic renewal, trademark may classify as IA with indefinite useful life
Impairment
Tested for impairment at least annually and whenever there is an indication that it may be
impaired
3. COPYRIGHT – exclusive right granted by the government to the author, composer, or artist
Enabling the grantee to publish, sell or benefit from it.
Measurement: AT COST
All cost incurred in the production of the work plus those required to establish or obtain the
right
If Purchased, then cost= to cash paid plus directly attributable cost necessary for the intended
use
Subsequent measurement
Amortized over its useful life
Useful life- period in which benefits, sales, and royalties are expected
Because it’s often difficult to estimate the number of years in which benefits will be received it
is advisable to write off the cost of copyright against the revenue of the first printing
Reviewed for impairment at the end of each reporting period whether there is an indication
that it may be impaired
4. FRANCHISE – one party called franchisor grants certain rights to another party called the
franchisee. May be granted for definite or indefinite period
It is a contract based intangible asset to either;
a. Between Government and private entity or individual such as the entity is permitted to use
public property in performing the services
b. Between two private entities such as the franchisee acquires the right to use the
trademark, patent and process of the franchisor
Measurement: AT COST
Lumpsum payment for the acquisition of the franchise plus directly attributable cost
necessary for the intended use
Lumpsum payment is known as the initial franchise fee
Periodic franchise fee – periodic payment to the franchisor is treated as outright expense
Amortization
Definite period – cost is amortized over the useful life or definite period, whichever is
shorter
5. BROADCASTING LICENSE
a. With Indefinite life
considered to have indefinite life so not amortized but tested for impairment annually
and whenever there is an indication
b. With finite useful life
Amortize over its useful life and tested for impairment
6. CUSTOMER LIST – customer database containing the name, contract information, order
history and other info.
a. Internally generated
Not recognized as an Intangible asset
b. Acquired customer list
Recognized as IA and is amortized over the useful life . also be reviewed for
impairment
ORGANIZATION COST- cost incurred in forming or organizing corp.
These costs are recognized as expense when incurred
a. Legal fees
b. Incorporation fees
c. Share issuance cost and others – contra equity as it is a deduction to share premium,
if insufficient deducted to retained earnings
WEB SITE DEVELOPMENT COST – developed for promoting and advertising an entitys
products and services expensed as incurred
RESEARCH AND DEVELOPMENT COST
To assess whether the internally generated Intangible asset meets the recognition
criteria, entity must classify the generation of the asset into two;
1. Research Phase - all cost in this phase is an outright expense, for the reason that it is
not certain that future economic benefits would probably flow to the entity
2. Development Phase – may or may not be recognized as an Intangible asset
depending on these very strict criteria: ALL MUST BE MET
Achieve technical feasibility or when a prototype or model has been
produced
intention to complete the IA and use or sell it
ability to use or sell the asset
asset will generate probable future economic benefits
availability of resources or funding to complete development
ability to measure reliably the expenditure attributable to the IA during
development
If it cannot be distinguished to either of the two, it is assumed that the expenditures
were incurred in research phase
Research- original and planned investigation undertaken with the prospect of gaining
scientific or technical knowledge and understanding.
Research activity- undertaken to discover new knowledge to develop or to improve a
product
Development – application of research findings or other knowledge to a plan or design
for the production of new or substantially improved products.
Development activity – application of research findings to develop new product
1. Activities aimed to obtain knowledge
2. Search of, evaluations of, final selection of applications of research findings or knowledge
3. Search for alternatives of materials, devices, products, processes, systems or services
4. Formulation, design, evaluation, final selection of