INTANGIBLE ASSETS

An intangible asset is an identifiable non-monetary asset without physical substance

Criteria for intangible assets:
a. Indentifiability- to distinguish it from goodwill; it is identifiable when:
Seperable- asset is capable of being separated from the entity; and sold, transferred, licensed, rented or
exchanged
Arises from contractual or legal rights- regardless of whether these rights are transferable or seperable
b. Control- entity must be able to enjoy the future economic benefits from the asset and prevent others from
enjoying the same benefits
c. Future economic benefits- may arise from the sale of production or services, cost savings, or other benefits
resulting from the use of the asset by the entity
Examples of intangible assets:
o Patents- legal right granted by the government for an invention to prevent others from making, using, selling or
distributing an invention w/o permission from patentee; min of 20yrs
o Copyrights- intellectual property protection granted to an author of literary, musical or artistic work for the
publication, distribution and adaptation of that work; cost consists of all expenses incurred in the production of
the work including those required to establish the right; 50yrs after which enters the public domain
o Brand marks
Trademarks- words, names, symbols or signs used to mark a product to distinguish it from others
Service marks- distinguishes the source of service
Collective marks- distinguish the goods or services of members of a group
Certification marks- to certify the geographical origin or other characteristics of a good/service
o Franchise- franchisor grants certain rights like trademarks, patent and process of the franchisor to franchisee
Ways of Acquiring Intangible Assets:
1. Separate acquisition- cost comprises:
Directly Attributable Costs of preparing the asset for its intended use and Purchase Price including
Import Duties and Non refundable purchase taxes less trade discounts and rebates
Directly attributable costs include: (1) costs of employee benefits & professional fees directly related to
bringing the asset to its working condition (2) costs of testing
Not part of costs are: ads, intro of new product, staff training, new business location or class of
customer, administration and other general overhead
2. Acquisition in a business combination- recognize at fair value (1st:quoted price in an active market 2nd: prices in
most recent transactions for similar assets or discount future net cash flows from the asset)
Acquirees in process research and developments project meets the definition of intangible asset when:
it meets the definition of an asset and an intangible asset
3. Acquisition by way of government grant- initially recorded at either Fair Value (with a credit to Unearned
Income from Government Grant which is amortized as income) or, Nominal amount (presumably zero) plus
directly attributable costs
May be acquired free of charge or for nominal consideration. Takes place when a government unit
transfers or allocates to an entity intangible assets such as airport landing rights, licenses to operate
radio/television statios, import licenses or quotas or rights to access other restricted sources
4. Acquisition by exchange of assets- intangible assets acquired in exchange for nonmonetary or/and monetary
asset. measured at fair value, unless if it- Lacks commercial substance (reference may be made to non-monetary exchanges of PPE; lacks
commercial substance when the cash flows of the asset received do not differ significantly from the cash
flows of the asset rransferred)
Fair value of the asset received or given up is NOT reliably measured
--then the cost of the intangible asset is the carrying value of the asset given up plus cash paid or
minus cash received. No gain or loss is recognized on the exchange of non monetary assets
5. Internally generated intangible asset- to assess whether to capitalize intangible asset, entity has to determine
whether the cost is incurred in the Research phase or in the Development Phase
(a) Research Phase knowledge for development. Recognized as expense! Includes unidentifiable I.A.

(b) Development Phase application of research. Recognized as part of cost! Should demonstrate:
technical feasibility, intention to complete and use/sell it, ability to use/sell it, generate probable
future economic benefits, availability of resources for completion, measured reliably
Examples capitalizable costs: employee benefits, materials & services all from the generation of the
intangible asset, legal rights fees, amortization of patents & licenses that are used to generate IA
Not all development phase costs are capitalizedit should be at the right development date
Expenditures on an intangible asset shall be recognized as expense unless
(1) cost meets the recognition criteria
(2) it is acquired in a business combination & cant be a separate intangible asset (shall form part of goodwill)
expenditures will never be recognized as part of the asset even if technical feasibility is established
expensed even w/ economic benefits: start up and training costs, ads, business reorganization & relocation
shall not be recognized as intangible assets: internally generated goodwill resulting from expenditures that
enhance the comp image, employee morale and performance (uncontrolled and unreliably measured);
internally generated brands, customer lists, publishing titles, mastheads
Subsequent expenditures are expensed. Unless they result to: extension of useful life, increase of net cash inflow,
improvement of the quality of the output
Example entries: 1) Dr. Patent in process (w/ technical fesibility), Research and development expense; Cr. Cash
2) Dr. Patents Cr. Patent in process, Cash
3) Dr. Amortization of patents Cr. Accu. Amortization-patents
4) Dr. Legal Fees Cr. Cash
Measurement after initial recognition: parallel to PPE, an entity shall choose between Cost or Revaluation Model
Amortization of intangible assets with finite useful lives, while those w/ indefinite life or not yet available for use are
tested for their impairment annually. Amortizable amount= cost residual value.
Residual value of an IA is assumed to be ZERO unless: (1) there is a commitment by a third party to buy the IA at
the end of its life and (2) there is an active market for the intangible asset, and the RV can be reliably measured.
Methods: Straight line method, diminishing balance, unit of production method
An intangible asset is amortized over the period of expected economic benefits- that is, shorter between
(1) period of its legal or contractual rights
(2) period over which the entity expects to use the asset

COMPUTER SOFTWARE- all costs incurred in the development of software programs are Research and Development
costs, likewise as all expenditures incurred before the capitalization are expensed. Technological feasibility has been
established when the entity has produced either a detailed program or a working model of the software. Costs to be
capitalize after TF: costs of coding and testing, and cost to produce the product masters
Expensed: cost of in house use, because itd be difficult to demonstrate future economic benefits to the entity
Qualifies as IA if it is held for licensing or rental to others
If software is for entitys own use and integral to the hardware, it would part of PPE
Cost of purchase software is treated as Inventory if it is for sale on a routine basis
-- The capitalized cost of software is expensed based on the economic benefits derived from such costs.
The amount transferred to expense is the greater between:
(1) amount of amortization using straight line method over the useful life
(2) amount based on ratio of (current revenue/total expected revenue from software)
Website Development Costs Expensed. A web site that has been developed for the purpose of promoting and
advertising an entitys products and services are NOT intangible assets.
Goodwill- Arises when earnings exceed normal earnings by reasons of a good relationship between an entity and its
customers. not specifically identifiable. Unique. Cannot be bought or sold alone. Can only be identified with the
entity as a whole. Changes from day to day.
Internally generated goodwill shall not be recognized as an asset because it is not an identifiable resource that is
seperable nor does it arise from contractual or other legal rights.
Purchased goodwill is the goodwill that has been paid for which arises when a business is purchased. This takes
place when an entire business is acquired by another entity for an amount greater than the FMV of the net
identifiable assets acquired.
Impairment of Goodwill and Cash Generating unit
L

 M
N