Accounting for Corporation
and properties expressly
The corporation code of the Philippines,
Sec 2
Corporation is an artificial being
created by operation of law, having the
right of succession and the powers,
attributes and properties expressly
authorized by law or incident to its
existence.
Attributes of a Corporation
 A corporation is an artificial
being with a personality separate
and apart from its individual
shareholders or members
 It is created by operation of
law. It cannot come into
existence by mere agreement of
the parties as in the case of
business partnerships.
Corporation requires special
authority or grant from the state,
either by a special incorporation
law that directly creates the
corporation or by means of a
general corporation law.
 It enjoys the right of
succession. A corporation has
the capacity of continued
existence subject to the period
stated in the Articles of
Incorporation. The death,
withdrawal, insolvency or
incapacity of the individual
shareholders or members will not
dissolve the corporation. The
transfer of ownership of shares of
stock does not dissolve the
corporation
 It has the powers, attributes
authorized by law, or incident
to its existence
Advantages of a Corporation (BL2AST)
 Board of Directors Centralized
Decisions
 Limited Liability
 Legal Capacity
 Acquire more funds
 Succession
 Transfer of ownership even
without the consent of the other
owner.
Disadvantages of a Corporation
(MUC3H)
 Management and control have
been separated from
ownership
 Uniting of incompatible and
conflicting elements in one
company
 Costly of formation
 Complicated in formation
 Control of majority, minority
wishes are subservient
 Heavier taxation
Classes of Corporation
Section 3 of the corporation code
classified private corporatio into:
1. Stock Corporation- corporations
which have capital divided into shares
and are authorized to distribute to the
holders of such shares dividends or
allotments of the surplus profits on the
basis of the shares held
2. Non-stock corporation- Corporation
where no part of its income is
distributable as dividends to its
members, trustees or officers. Any profit
that a non-stock corporation may obtain
as an incident to its operation shall,
whenever necessary or proper, be used
for the furtherance of the purpose or
purposes for which the corporation was
organized
Classes of Share
Par value Share
 Shares which has a specific
amount fixed in the articles of
incorporation & appearing on the
certificate of stock
 The “par value” is the minimum
issue price of the shares
 Section 6 of the code state that
preference shares may be issued
only as par value shares.
No par value share
 Shares that has no value
appearing on the face of the
certificate of stock.
 A no-par value share may have a
stated value which may be fixed
in the articles of incorporation or
by the board of directors or the
shareholders
 Minimum stated value of a no-par
value share is five pesos (P 5.00)
per share
 In addition, shares issued without
par value are deemed fully paid.
 Banks, trust companies,
insurance companies, public
utilities and Bldg & Loan
associations are not permitted to
issue no-par value shares
Ordinary Share (Common Stock)
 Represent the residual corporate
interest that bears the ultimate
risk of loss and receives the
benefit of success
 Ordinary shareholders are
guaranteed neither dividends nor
assets upon dissolution but they
generally control the
management of the corporation
and tend to profit most if the
corporation is successful
 These are shares entitled the
holder to an equal pro-rata
division of profits without any
preference
 The corporation code prohibits
the issuance of only preference
shares without ordinary shares
 Ordinary shareholders, generally,
enjoy the same rights with no
preference over the other
shareholders.
 The following are the four basic
rights of ordinary shareholders:
o Right to attend and vote in
shareholders meeting
o Right to purchase additional
shares (pre-emptive right or stock
right)
o Right to share in the corporate
profits( right to dividends)
 o Right to share in the net assets of
the corporation upon liquidation
Preference Share (Preference Stock)
 Are shares that give the holders
thereof certain preference over
other shareholders. Such
preference may include priority
claims over:
o Dividends
o Net assets in the event of
liquidation
 In exchange for such
preferences, shareholders
sacrifice certain inherent rights of
ordinary shareholders such:
o Voting rights
o Opportunity to managed
o One purpose of issuing
preference share is to broaden
investor appeal thereby
increasing the corporation’s
opportunity to generate equity
financing
Promotion shares
Those issued to promoters as
compensation in promoting the
incorporation of a corporation, or for
services rendered in launching or
promoting the welfare of the corporation
Treasury shares
A stock that has been issued by the
corporation as fully paid and later
reacquired but not retired
Convertible shares
A stock which is convertible or
changeable from one class to another
class
Minimum Subscription and Paid in
Capital
At the time of incorporation, at least 25%
of the authorized capital stock (share
capital) as stated in the articles of
incorporation must be subscribed and at
25% of the total subscription must be
paid upon subscription. In NO CASE
SHALL THE PAID-IN CAPITAL BE
LESS THAN P5,000. These requirement
are mandatory. SEC shall not accept the
articles of incorporation of any stock
corporation unless accompanied by a
sworn statement of the treasurer that the
paid in capital and minimum subscription
has been complied with. (see images for
illustration)
Corporate Books and Records
1. Minute book- it contains the
minutes of the meetings of the
directors
2. Stock and transfer book- it is a
record of the names of
shareholders, instalments paid
and unpaid by shareholders and
dates of payment, any transfer of
stock and dates thereof, by whom
and to whom made
3. Books of accounts- these
represents the record of all
business transactions. The books
of accounts normally include the
journal and the ledger
4. Subscription book- it is a book
of printed blank subscription
 5. Shareholders ledger- it is a
ledger which details the number
of shares issued to each
shareholders
6. Subscribers ledger- it is a
subsidiary ledger for the
subscription receivable account.
It reports the individual
subscriptions of the subscribers
7. Stock certificate book- it is a
book of printer blank certificates
of stock.
The owner’s equity section of a
corporation’s statement of financial
position is called shareholder’s equity.
It has two major components
 Share capital (contributed or
paid-in capital) – reflects the
amount of resources received by
a corporation as a result of
investment by shareholders,
donations or other capital
transactions
 Retained earnings
(accumulated profit or loss) - is
the amount of capital
accumulated and retained
through the profitable operations
of the business
Legal Capital
 Capital contributed by
shareholders comes from the
sale of shares of stock. The share
of stock issued are generally
referred to as share capital. Legal
capital is that portion of the
contributed capital or the
minimum capital amount of paid-
in capital which must be remain in
the corporation for the protection
of corporate creditors.
 The amount of legal capital is
determined as follows:
o In case of par value, legal capital
is the aggregate par value of all
issued and subscribed shares
o In case of no-par value shares,
legal capital is the total
consideration received by the
corporation for the issuance of its
shares to the shareholders
including the excess of issue
price over the stated value
Share Premium
 It is the portion of the paid-in
capital representing amounts paid
by shareholders in excess of par.
It may also results from
transactions involving treasury
stocks, retirement shares,
donated capital, share dividends
and any other “gain” on the
corporation’s own stock
transactions.
Authorized Share Capital
 The number of authorized shares
indicates the maximum number of
shares the corporation can issue
as specified in the article of
incorporation.
 The maximum number of shares
when multiplied by the par value
of the shares will yield the
authorized capital stock
  Note any amendments in the
authorized capital stock that will
increase or decrease capital
stock should require prior
approval from SEC
Issued Share Capital
 These are shares which have
been sold and paid for in full
 Issued shares may include
treasury shares
 It is credited when the total par
value of shares issued are fully
collected.
 It is debited only when the issued
shares are retired, redeemed or
cancelled by the corporation.
Subscribed Share Capital
 It is the portion of the authorized
share capital that has been
subscribed but not yet fully paid.
 It is credited for the total par
value of the shares subscribed
 It is debited for the total par value
of the fully collected subscription.
Outstanding Share Capital
 These are issued shares, which
are in the hands of the
shareholders.
 The number of outstanding
shares will equal the difference
between the issued shares and
the treasury shares
Treasury Stock
 These are issued shares
acquired by the corporation but
not retired and are therefore,
awaiting to be reissued at a later
date
 Entity own shares that were
previously issued but are
subsequently reacquired but not
retired.
 Under the corporation code, an
entity may reacquire its
previously issued shares only if it
has sufficient unrestricted
retained earnings. (see images
for illustration)
Accounting for Issuance of Share
Capital
 The entry to record the issuance
of share capital depends on
whether the stock is with or
without par value.
 When shares with par value are
sold, the proceeds should be
credited to the share capital
account to the extent of the par
value of the shares, with any
excess being reflected as share
premium
Cash xx
Share Capital xx
Share Premium xx
 When shares of no-par value are
sold, the proceeds should be
credited to the share capital
Cash xx
Share Capital xx
 If the no-par stock has a stated
value, the excess proceeds over
the stated value may alternatively
be credited to share premium or
APIC
 Cash xx
Additional Paid in Capital xx
 Section 65 of the corporation
code prohibits the original issue
of share capital for a
consideration less than the par or
stated value
 The par value is no indication of
its market value; hence it is
merely indicates the amount per
share to be entered in the share
capital account
Illustration
With Par
Narsan holdings is authorized to issue
1,000,000 shares divided into 10,000
shares, with a par value of 100 per
share. The company issued on cash
basis 2,000 shares at par
Cash 200,000
Ordinary shares 200,000
The amount of 200,000 invested in the
corporation is called paid-in capital or
contributed capital. The credit to
ordinary shares increases the share
capital of the corporation
Suppose the 2,000 shares were sold at
150 per share
Cash 300,000
Ordinary shares 200,000
Share premium 100,000
This sale of shares increases the
corporation’s contributed capital by
P300,000. When the shares with par
value are sold, the proceeds should be
credited to the ordinary shares account
to the extent of the par value
Without Par
Morning star travel is a domestic
corporation engaged in the business of
organizing tour packages for asean and
european visitors to the philippines. The
company has two classes of shares:
preference and no-par ordinary shares
Assume that 5,000 ordinary shares were
issued for 85,000
Cash 85,000
Ordinary shares 85,000
Assume that morning star travel no-par
ordinary shares have a stated value of
20 and the company issued 5,000
shares at 25 per share
Cash 125,000
Ordinary shares 125,000
Or alternatively
Cash 125,000
Ordinary shares 100,000
Share premium 25,000
Subscription of Shares
 There are times when a
corporation sells its shares
directly to investors on a
subscription basis.
 The subscription contract is a
legally binding contract which
provides for the number of shares
subscribed, the subscription
price, terms of payment and other
contractual condition
  A subscriber becomes the
shareholder upon subscription
but the stock certificate
evidencing ownership evidencing
ownership are not issued unless
full collection of the subscription
Illustration
POGI corporation is a quality car care
center. Assume that 5,000 shares of
P10 par value ordinary shares of the
company were sold on subscription at
P12 per share on Sept 1, 2019 to
GANDA. Subscription installments of
P24,000 and P36,000 will be due on
Sept 16 and 30 respectively.
Sept 1 Subscription Receivable 60,000
Subs. Ordinary share 50,000
Share premium 10,000
Sept 16 Cash 24,000
Subscription receivable 24,000
Sept 30 Cash 36,000
Subscription receivable 36,000
Subs. Ordinary share 50,000
Ordinary share 50,000
 Subscription receivable is a
shareholder’s equity account.
 It is presented in the statement of
financial position as a deduction
from the related subscribed
ordinary shares
 However, when it is collected
within one year, this may be
shown as a current asset
 There are instances when a
subscriber fails to settle the
subscription in full on the date
specified in the subscription
contract or in the “call” made by
the board of directors, in such
case, the subscribed share
capital are declared deliquent
 The usual remedy is to dispose of
these shares in a public auction
for the account of the deliquent
subscriber
There are two methods of accounting for
share capital authorization and issuance
namely :
 Journal entry method
 Memorandum method
Illustration
MACHO corporation was authorized to
issue P400,000 ordinary shares divided
into 4,000 shares with a par value of
P100 per share. On August 13, 2019 the
company received subscription for 1,000
shares at par from various individuals.
As at September 20, 2019, 600 of the
subscribed shares have been fully paid
and the stock certificates issued
correspondingly. Next day the company
issued 400 shares at par for cash (see
images for the answer)
Treasury Shares
 These are shares of stocks which
have been issued and fully paid
for, but subsequently reacquired
by the issuing corporation either
by purchase, redemption,
donation or other lawful means
 Such share may again be
disposed of for a reasonable
price
  Treasury stock is not asset
because the corporation may not
own shares of itself
 It is reported as a deduction from
the total shareholders equity
Illustration
Plantation EcoResort is a world class
destination in Indang Cavite. The
operations have been succesful. To
consolidate control over the enterprise
and thus avoid a corporate takeover by
outsiders, the board of directors decided
to minimize outstanding shares by
purchasing 1,500 shares with a par
value of P1,000 for P 2,000
Treasury stock 3,000,000
Cash 3,000,000
Reissuance of Treasury stock
At cost. Assume that the treasury stock
were subsequently reissued at cost.
Cash 3,000,000
Treasury stock 3,000,000
Above cost. Assume that all treasury
shares were reissued at P2,500 per
share
Cash 3,750,000
Treasury stock 3,000,000
Share Premium- treasury 750,000
Treasury stock is always debited for the
cost of the shares purchased or credited
for the cost of the shares reissued.
There is no reference to par value. The
excess over cost of P750,000 is not
regarded as gain but as a component of
share premium
Below cost. Assume that the 1,500
treasury shares were reissued at P1,500
per share
Cash 2,250,00
Retained earnings 750,000
Treasury stock 3,000,000
The excess of the cost over reissue
price of P750,000 should be debited to
share premium to the extent of its
balance. In the absence of any balance,
the loss is debited to retained earnings
Retirement of Treasury Stock
 The shares purchased may be
subsequently retired.
 The ordinary shares account is
reduced by its par value.
 The number of shares issued is
reduced by the stock retired
 The treasury stock account is
credited at cost
 Retirement may result in a gain or
loss
Continuance of Illustration
Assume that plantation EcoResort
purchased the treasury shares for P750
per share.
Ordinary shares 1,500,000
Share Premium 375,000
Treasury stock 1,125,000
Observe that there is a gain on
retirement if the cost of treasury shares
is less than the par value
Assume that a total of 10,000 shares
have been issued at P1,500 per share
prior to the purchase of treasury shares.
Plantation EcoResort purchased 1,500
treasury shares for P2,000 per share,
these were not reissued and were
ultimately retired
Ordinary shares 1,500,000
Share Premium 750,000
Retained earnings 750,000
Treasury stock 3,000,000
The loss on retirement of P1,500,00
should be debited to the following
accounts in order given
 Share premium of original
issuance
 Share premium of treasury stock
 Retained earning
Dividends in General
Retained Earnings
 It represents the component of
the shareholder's equity arising
from the retention of assets
generated from the profit-directed
activities of the corporation
 At the end of an accounting
period, the income summary
account of a corporation is closed
to the retained earnings account
 the retained earnings is credited
with corporation profit and
debited with the loss
 In general, the basic source of
retained earnings is profit while
dividends declaration reduce
retained earnings
 other less common situations that
cause increases or decreases in
retained earnings are as follows:
o debits resulting from reissuance
of treasury stocks below cost and
loss on retirement of treasury
stocks
o debits or credits for prior period
errors
 debit balance in the retained
earnings account resulting from
accumulated loss is called
DEFICIT
 retained earnings may be
restricted or appropriated and
unrestricted or unappropriated
o unrestricted retained earnings are
free and can be declared as
dividends
o restricted retained earnings may
be legal, contractual or voluntary
 Retained earnings is not a cash
fund waiting to be distributed as
dividends.
 Instead it is an owner's equity
account representing claim on all
assets in general and not on any
asset in particular
 The corporation may have a large
balance of retained earnings but
may not have cash to pay a cash
dividend
 Shareholders are not guaranteed
dividends and dividends do not
become a liability of the
corporation UNTIL THE BOARD
OF DIRECTORS has formally
declared a dividend distribution
 Dividends may take the form of
cash, property or additional
shares
 As a general rule, dividends
should be based on the total
 subscription and not on issuance.
Subscribers are entitled to
receive dividends even though
they are not fully settled their
account.
Three Important Dates
DATE OF DECLARATION
 The board of directors will adopt
a resolution declaring that a
dividend is to be paid.
 The resolution will specify the
amount, type and date of
payment of this dividend. it will
also set a date of record.
 Cash dividends are declared
solely by the board of directors
while share dividends will
necessitate the concurrence of at
least two-thirds of the outstanding
shareholders.
 an entry is made
Retained earnings xx
Dividends payable xx
Date of record
 A list of shareholders entitled to
the declared dividends is
prepared at the date of record.
 If an investor buys a share of
stock after this date, he will not
receive the dividend. the share is
said to be traded ex-dividend
 No entry is necessary
Date of payment
 The corporation settles its liability
on this date.
 An entry is made:
Dividend Payable xx
Cash/property/sharecapital xx
Cash Dividends
 Majority of dividends distributed
by the corporations
 In declaring cash dividends, a
company must have both an
appropriate amount of retained
earnings and the necessary
amount of cash
 Dividends on par value shares
are stated as a percentage of the
par value
 Dividends on no-par value shares
are stated at a certain amount per
share
 When the BOD declares a cash
dividend
Retained earnings xx
Cash dividend payable xx
Pogi corporation declared a cash
dividend of P12 per share of ordinary
shares on July 1. The dividends are
payable on August 1 to shareholders of
record on July 21. The company has
100,000 ordinary shares issued of which
7,000 shares are held in treasury. The
entries to record the dividend
declaration and payment are as follows:
Retained earnings 1,116,000
Cash Dividend Payable 1,116,000
 Cash dividends payable are
reported as current liabilities in
the statement of financial position
 All issued and fully paid shares,
and all subscribed par value
 shares are entitled to dividends
when declared
 The subscribed MUST BE PAR
VALUE SHARES. No par value
shares are considered legally
issued only when fully paid
 Unissued shares, subscribed no-
par shares and treasury shares
are not entitled to dividends
Property Dividends
 A distribution to shareholders that
is payable in non-cash assets is
generally referred to as property
dividends or dividends in kind
 Per IFRIC 11, an entity shall
measure a liability to distribute
non-cash assets as a dividend to
its owners at the FV of the Assets
to be distributed
JABEE Industries based on Pulilan,
Bulacan has 5,000 shares investment in
another entity accounted for as
nonmarketable equity investments. The
carrying amount of this investment is
P500,000. On Dec 1, 2019 this growing
food company declared as property
dividends this investment to all it
outstanding par value shares to be
distributed on Dec 15, 2014. The fair
market value of the investment at the
declaration date was P950,000. There
was no change in fair value on
settlement date
The entries to record the dividend
declaration and distribution are as
follows:
Retained Earnings 950,000
Property Div. Payable 950,000
Property Div. Payable 950,000
Investment in equity security 500,000
Gain on Distribution of Div. 450,000
Share Dividends
 A corporation may distribute to
shareholders additional shares of
the company’s own share as
share dividends.
 Share dividends or bonus issue
are fundamentally different from
cash or property dividend
 This type of dividend do not
transfer assets to the
shareholders
 It affects only the accounts within
the shareholders equity account
 Because retained earnings are
decreased while share capital
increases, total shareholders
equity is unchanged.
 From the shareholders point of
view, a share dividend does not
change their percentage of
interests in the corporation,
although total outstanding shares
have increased.
Siobe a japanese fastfood chain is
blessed with years of profitable
operations for its commitment to serve
affordable and healthy japanese food
favorites. The shareholders equity of the
company before declaration of a 10%
share dividend is as follows:
Ordinary shares, P50 par, 20,000
shares issued and outstanding1,000,000
Share Premium 200,000
TOTAL SHARE CAPITAL 1,200,000
RETAINED EARNINGS 650,000
TOTAL SHE 1,850,000
The declaration of a 10% share dividend
will require the issuance of an additional
2,000 shares. Assume that the company
is traded at PSE and the stock market
price is P110.
The entries will be:
Retained Earnings 220,000
Shares distributable 100,000
Share Premium 120,000
Shares Distributable 100,000
Ordinary shares 100,000
When the share is distributed, only the
components of the shareholders’ equity
changes; retained earnings decreased
by P220,000 and share capital
increased by 220,000
The receipt of a share dividend does not
alter the relative position of a
shareholder. If a 10% share dividend is
distributed, all shareholders increase
their proportionate holdings by 10% and
the total share outstanding is increased
by the same proportion. No profit is
realized by the shareholders.
Large Dividend
 If the share dividend is 20% or
more of the previously
outstanding shares such that the
effect is to reduce materially the
market value per share, then only
the par or stated value is credited
to ordinary shares with a
corresponding debit to retained
earnings.
Assume instead Siobe declared a 20%
share dividend on its 20,000 issued and
outstanding P50 par value shares. The
Company will issue additional 4,000
shares due to the share dividend. The
entries will be:
Retained Earnings 200,000
Shares Distributable 200,000
Shares Distributable 200,000
Ordinary shares 200,000
The account titles used to record a large
share dividend are the same as those
for small share dividends.
Note though that the balance in the
account- Share Premium remained the
same; this is because large share
dividends are recorded at par value.
Liquidating Dividend
 These are not distribution of
earnings but rather returns of
capital to the investing
shareholders. This type of
dividend can be legally paid only
under either of the following
circumstances:
o When the corporation is under
liquidation
o When the corporation is engaged
in the exploration of natural
resources
Intangible Assets
 Governed by PAS 38.
 An identifiable nonmonetary
asset without physical substance.
 Controlled by the entity as a
result of past event and from
which future economic benefits
are expected to flow to the entity.
Identifiability
It is identifiable when:
 It is separable - it is capable of
being separated from the entity
and be sold, transferred,
licensed, rented or exchanged.
 It arises from contractual or other
legal rights
Control
The entity must be able to enjoy future
economic benefits from the asset and
prevent other from enjoying the same
benefits.
Future Economic Benefits
Includes revenues, cost savings
For example, the use of intellectual
property in a production process or the
legal right to use a new technology, may
reduce future production costs rather
than increase future revenue.
Recognition of Intangible Assets
 It is probable that future
economic benefits attributable to
the asset will flow to the entity.
 The cost of the intangible asset
can be measured reliably.
 Judgment is based on external
evidence.
Initial Measurement
PAS 38, paragraph 4 provides that an
intangible asset shall be measured
initially at cost.
Separate Acquisition
 Comprises of:
o Purchase price
o Import duties and
nonrefundable purchase taxes
o Directly attributable costs of
preparing the asset for the
intended use.
 Directly attributable costs include:
o Cost of employee benefits
arising directly from bringing
the asset to its working
condition.
o Professional fees arising
directly from bringing the
asset to its working condition.
o Cost of testing whether the
asset is functioning properly.
 If payment is deferred, the cash
price equivalent is the cost.
o Cash price equivalent – total
payments = interest expense
over the credit period.
 Examples of cost that are not
included but expensed immediately:
o Cost of introducing a new
product or service, including
costs of advertising and
promotional activities.
 o Costs of conducting business
in a new location or with a
new class of customer,
including costs of staff
training.
o Administration and other
general overhead costs.
o Costs incurred while an asset
capable of operating in a
manner intended by
management has yet to be
brought into use.
o Initial operating losses.
Acquisition as Part of Business
Combination
 Based on fair value on the date of
acquisition.
 If there is an active market, the
quoted price of an identical asset
provides reliable evidence of fair
value
o If there is none, then that of a
similar asset may provide
evidence.
 If there is no active market, the
quoted price for an identical or
similar asset may be available.
 Based on unobservable input
usually developed by the entity
using the best available
information.
Acquisition by Government Grant
 When a government transfers or
allocates to an entity intangible
assets such as:
o Airport land rights
o Licenses to operate radio or
television stations
o Import licenses or quotes or
rights to access restricted
resources
 Such assets may be initially
recorded at either:
o Fair value
o Nominal amount or zero plus any
expenditure that is directly
attributable to preparing the asset
for its intended use.
Acquisition by Exchange
Intangible assets may be acquired in
exchange for a nonmonetary asset or a
combination of monetary asset and
nonmonetary asset; with commercial
substance, often measured at fair
value.
If the exchange transaction lacks
commercial substance or when the cash
flows of the asset received do not differ
significantly from the cash flows of the
asset transferred, then it is measured at
carrying amount of the asset given
up.
Internally Generated Intangible Asset
 The cost of an internally
generated intangible asset
comprises all directly attributable
costs necessary to create,
produce and prepare the asset to
be capable of operating it in the
manner intended by
management.
 The following expenditures are
not components of the cost of an
internally generated intangible
assets:
 o Selling, administrative and other
general overhead, unless this
expenditure can be directly
attributed to preparing the asset
for use.
o Clearly identified inefficiencies
and initial operating losses
incurred before an asset achieves
planned performance.
o Expenditure on training staff to
operate the asset.
 PAS 38, paragraph 63 provides
that internally generated brands,
mastheads, publishing titles,
customer lists and items similar in
substance shall not be
recognized as intangible assets.
They shall be components of
internally generated goodwill and
shall be expensed when incurred.
Recognition of an Expense
Expenditures that are expensed when
incurred:
 Start up costs
o Organizational costs such as
legal and secretarial costs;
preopening costs for new facility
and preoperating costs for
commencing new operation or
launching new product.
 Training Costs
 Advertising and promotional costs
 Business relocation or
reorganization costs
Subsequent Expenditures
Any subsequent expenditure on an
intangible asset shall be recognized
as expense.
It is because most of the subsequent
expenditure are likely to maintain
only the expected future economic
benefits embodied.
However, there are subsequent
expenditures that may be capitalized
if the following criteria are met:
 It is probable that future
economic benefits attributable
specifically to the subsequent
expenditure will flow to the
entity.
 The subsequent expenditure
can be measured reliably.
Only rarely will a subsequent
expenditure on an intangible asset
results to an addition to the cost of
the intangible asset.
Unidentifiable Intangible Assets
It cannot be sold, transferred, licensed,
rented or exchanged separately. It is
inherent in a continuing business and
can only be identified with the entity as a
whole.
Such is the case of goodwill.
Subsequent Measurement:
1. Cost Model - At cost less any
accumulated amortization and any
accumulated impairment loss.
2. Revaluation Model - At revalued
amount less any subsequent
amortization and any subsequent
accumulated impairment loss.
Revalued amount is the fair value at the
date of revaluation and is determined by
reference to an active market.
Amortization of Intangible Assets
 It is the systematic allocation of
the amortizable amount of an
intangible asset over the useful
life.
 Amortization shall begin when the
asset is available for use,
meaning, when the asset is in the
location and condition for the
intended use.
 It will cease when the intangible
asset is derecognized or when
the asset is classified as “held for
sale
1. Paragraph 37 – those intangible
assets with limited or finite life are
amortized over their useful life.
2. Paragraph 107 and 108 – those with
indefinite life are not amortized but are
tested for impairment at least annually
and whenever there is an indication that
the intangible asset may be impaired.
Amortization Method
It shall reflect the pattern in which the
future economic benefits from the asset
are expected to be consumed by the
entity.
If such patterns cannot be determined
reliably, straight line method of
amortization shall be used.
Impairment of Intangible Assets
Intangible assets with finite useful life
are tested for impairment whenever
there is an indication of impairment at
the end of the reporting period.
Intangible assets with indefinite life are
tested annually and whenever there is
an indication of impairment.
Impairment loss is recognized if the
recoverable amount is less than the
carrying amount.
Recoverable amount is the higher
between fair value less cost of disposal
and value in use
Derecognition of Intangible Assets
 On disposal of the asset
 When no future economic
benefits are expected from its use
and disposal.
 Gains and losses shall be
determined as net disposal
proceeds – carrying amount of
the asset.
Disclosures
 Useful lives are indefinite or finite,
and if finite, the useful lives or the
amortization rate
 The amortization method
 The gross carrying amount and
any accumulated amortization at
the beginning of the period
  The line item in the income
statement which any amortization
of intangible asset is included
 Additions, separately showing
those internally generated, those
acquired separately and those
acquired through business
combination.
 Intangible assets classified as
held for sale in accordance with Method 1 – Purchase of “average
PFRS 5 excess earnings”

Goodwill Average earnings 1,000,000

Goodwill arises when earnings exceed Normal earnings

normal earnings by reason of good
(7,500,000 x .12) (900,000)
name, capable staff and personnel, high
credit standing, reputation for fair Average excess earnings 100,000
dealings, reputation for superior
products favorable location and a list of Goodwill
regular customers.
(100,000 x 5) 500,000
Developed Goodwill - goodwill that is Method 2 – Capitalization of “average
generated internally therefore is not excess earnings”
recorded.
Purchased Goodwill - goodwill that has The goodwill is measured at the average
been paid for. It arises when a business excess earnings capitalized at 25%
is purchased. Thus, it is recognized as
an asset. Average excess earnings 100,000

Measurement of Goodwill Divide by capitalization rate ÷ .25

1. Residual Approach Goodwill 400,000
Goodwill is measured by comparing the Method 3 – Capitalization of “average
purchase price for the entity with the net earnings”
tangible and identifiable assets. Net
assets should be measured at fair value. The goodwill is measured at average
earnings capitalized at 10%
Goodwill is the excess of the purchase
price over the fair value of net tangible Average earnings 1,000,000
and identifiable assets. (see book for the
Capitalization rate ÷ .1
illustration)
Net assets,
including goodwill 10,000,000
Less: net assets (7,500,000)
excluding goodwill
Goodwill 2,500,000
Method 4 – Present Value Method
If the average excess earnings of
P100,000 are expected to received
annually in 5 years, the goodwill
assuming a discount rate of 12%
Average excess earnings 100,000
Multiply by the PV of OA annuity
of 1 for 5 years at 12% 3.605
Goodwill 360,500
Negative Goodwill
If the purchase price or consideration
transferred for the entity is less than the
net fair value of the identifiable assets
acquired and liabilities assumed, the
difference is negative goodwill.
PFRS 3, paragraph 34 provides that
such negative goodwill is recognized in
profit or loss as “gain on bargain
purchase”
Patent
A patent is an exclusive right granted for
an invention, which is a product or a
process that provides, in general, a new
way of doing something, or offers a new
technical solution to a problem.
If acquired through purchase:
 Purchase price
 Import duties
 Nonrefundable purchase taxes
 Any directly attributable cost of
preparing the asset for the
intended use.
If internally developed, the cost normally
includes the licensing and other related
legal fees in securing the patent rights
*All related research and development
costs shall be expensed as incurred.
*From the time that a patent application
has been made, any engineering and
consulting costs to develop the parent
and cost of design charges required by
the patent authority shall be capitalized
as patent cost.
This is because the patent is now
technically and commercially feasible.
Cost of Litigation
Legal fees and other costs of
successfully prosecuting or defending a
patent shall be expensed.
If unsuccessful, the legal costs and the
remaining cost of the patent shall be
written off as a loss.
Amortization
The original cost shall be amortized over
the legal life or useful life, whichever is
shorter.
If there’s a competitive patent acquired
to protect an original patent, the cost of
the competitive patent shall be
amortized over the remaining useful life
of the old patent.
If a related patent is acquired to extend
the life of the old patent, the cost of the
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 shall be amortized over its own
life, and the cost of the old patent is to
be amortized over the remainder of its
life.
If the patent is acquired by an entity
from an original patentee, the cost shall
be amortized over the remaining legal
life or useful life, whichever is shorter.
Trademark
It is a symbol, sign, slogan or name
used to mark a product to distinguish it
from other products.
Cost
If acquired through purchase:
 Purchase price plus costs directly
attributable to acquisition.
If internally developed, the cost includes
expenditures required to establish it,
including filing fees, registry fees and
other expenses incurred in securing the
trademark such as design cost of the
trademark.
Amortization
RA No. 8293 or the Intellectual Property
Code of the Philippines provides legal
protection for a trademark.
Legal life of the trademark is 10 years
and may be renewed for periods of 10
year each.
This is the reason why trademarks can
be considered intangible assets with an
indefinite useful life.
Copyright
It is an 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.
Cost
The cost assigned to copyright consists
of all expenses incurred in the
production of the work including those
required to establish or obtain the right.
If a patent is purchased, the cost
includes the cash paid plus directly
attributable cost.
For internally generated copyright, the
cost of an acquired copyright should be
amortized over the useful life.
Amortization
Under the Intellectual Property Code of
the Philippines, the term of protection for
copyright is during the life of the author
and for 50 years after death.
Franchise
Under US GAAP, it is a contract-based
intangible asset and may be between
the government and private entities or
between private entities and individuals.
Between Government and Private
Entities
The latter is permitted to use public
property in performing the services:
Examples:
 The use of public water for
interisland shipping
 Use of public land for telephone
and electric lines
 Use of streets and highways for a
bus line.
Between Private Entities
The franchisee acquires the right to use
the trademark, patent and process of the
franchisor.
Cost
It includes the lump sum payment for the
acquisition of the franchisee plus directly
attributable costs necessary for the
intended use (initial franchise fee)
If the franchise agreement requires the
franchisee to make periodic payment to
the franchisor, such payment is
considered as outright expense (periodic
franchise fee)
Amortization
With a definite period – the cost of the
franchise shall be amortized over the
useful life or definite period whichever is
shorter.
With indefinitely or perpetually – shall
not be amortized but tested for
impairment at least annually.
Leasehold
A leasehold is the right acquired by the
lessee by virtue of a contract of lease to
use the specific property owner by the
lessor for a definite period of time in
consideration for a certain sum of
money in the form of rent.
Amortization
The cost of leasehold shall be amortized
over the life of the lease.
If the cost of the leasehold is not very
substantial, it is charged outright to
expense.
Leasehold Improvements
They are alterations or modifications on
the leased property made by the lessee.
Examples are walks, pavements,
landscaping, driveways and other
structures made on a leased land or
leased building.
Legally, the these revert to the lessor
upon termination of the lease contract.
Thus, if the lessee constructs a new
building on a leased land, the lessee
has the right to use such facilities during
the life of the lease but such
improvements become the property of
the lessor when the lease contract
expires.
Depreciation
The cost of the leasehold improvements
shall be depreciated over the lease term
or useful life of the improvements,
whichever is shorter.

Residual value is ignored because
legally the improvements become the
property of the lessor upon termination
of the lease.
Renewal Option
If the option to renew is offered but is
too uncertain, the leasehold
improvements are depreciated over the
original lease term or the useful life of
the improvements, whichever is shorter.
If the option is highly probable or certain,
the leasehold improvements are
allocated over the extended lease term
or the useful life of the leasehold
improvements, whichever is shorter.
Research and Development
PAS 38, paragraph 52 provides that to
assess whether an internally generated
intangible asset meets the criteria for
recognition, an entity classifies the
generation of the asset into a research
phase and a development phase.
Paragraph 53, If the entity cannot
distinguish the phases, the expenditure
is treated as if it were incurred in the
research phase only.
Research
It is the original and planned
investigation undertaken with the
prospect of gaining scientific or technical
knowledge and understanding.
Undertaken to discover new knowledge
that will be useful in developing the new
product or may result to a significant
improvement of the existing product.
Examples:
 Laboratory research aimed in
obtaining new knowledge
 Searching for application of
research finding
 Conceptual formulation and
design of possible product or
process alternative
 Testing in search for product or
process alternative
Development Cost
Development is the application of
research findings or other knowledge to
a plan or design for the production of
new or substantially improved material,
devise, product, process, system or
service prior to the commencement of
commercial production.
Examples:
 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
improved product or process.
Activities not R&D
Activities that related to commercial
production do not result to R&D Costs
Examples:
 Engineering follow through in
an early phase of commercial
production.
 Quality control during
commercial production
including routine testing
 Trouble shooting breakdown
during production.
 Routine on-going effort to
refine, enrich or improve
quality of an existing product.
 Adaptation of an existing
capability to a particular
requirement or customer
need.
 Periodic design changes to
existing products.
 Routine design of tools, jigs,
molds and dies.
 Activitiy, including design and
construction engineering
related to construction,
relocation, rearrangement or
start-up of facilities and
equipment
Accounting for R&D Costs
Research Cost
PAS 38, paragraph 54 states that
expenditure on research or on the
research phase shall be recognized as
expense when incurred.
This is due to the uncertainty of the
success of the project. Generation of
future economic benefits cannot be
assured.
Development Cost
The cost may qualify as intangible asset
if and only if it demonstrates all of the
following criteria:
 Technical feasibility of completing
the intangible asset (completion
of a prototype)
 Intention to complete and use or
sell it.
 Ability to use or sell the asset
 Existence of a market for
probable future economic
benefits
 Availability of resources or
funding to complete the
development cost
 Ability to measure reliably the
expenditure attributable to the
intangible asset during its
development.
Acquired in-process R&D
An in-process r& d project acquired
separately or in a business combination
is recognized as an asst at cost, even if
a component is research.
Subsequent expenditures may be
expensed or capitalized depending on
the criteria it qualifies.
AICPA FASB
Stipulated that expenditures for r & d
which have alternative future use, either
in additional research project or for
productive purposes, can be capitalized.

Costs incurred for materials, equipment

and intangible asset related to research
and development which have alternative
future use can be capitalized.

Subsequently, the following should be

charged to r and d expense

 Cost of materials used

 Depreciation of equipment used
in r&d
 Amortization of intangible assset
used in r&d

Internally Developed Computer

Software

Cost incurred in creating computer

software product shall be charged as
expense when incurred until a technical
feasibility has been established for the
product.

Technical feasibility has been

established when an entity has
produced either a detailed program
design of the software or a working
model.

After technological feasibility has been

established, capitalizable software costs
include:

 the cost of coding and testing

 and the cost to produce the
product masters.