UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 17 – PAS 38: INTANGIBLE ASSETS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
A. Definition
An intangible asset is simply defined as an
identifiable nonmonetary asset without physical
substance. The intangible asset must be controlled
by the entity as a result of past event and from which
future economic benefits are expected to flow to the
entity. Accordingly, there are 3 essential criteria in
the definition of an intangible asset, namely:
1. Identifiable
The definition of an intangible asset required that
an intangible asset to be identifiable to
distinguish it from goodwill. An assets meets the
identifiability criterion in the definition of an
intangible asset when it
a) It is separable
Meaning the asset is capable of being
separated or divided from the entity and
sold, transferred, licensed, rented or
exchanged, either individually or together
with a related contract, asset or liability; or
b) Arises from contractual or other legal rights
This is regardless of whether those rights
are transferable or separable from the entity
or from other rights and obligations
2. Control
Another element in the definition of an intangible
asset is that it must be under the control of the
entity as a result of a past event.
Controls 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. In other words, the entity must
be able to enjoy the future economic benefits
from the asset and prevent others from enjoying
the same benefits
The capability of an entity to control the future
economic benefits from an intangible asset would
normally stem from legal rights that are
enforceable in a court of law. The capacity to
control future economic benefits is much
pronounced in the case of trademark, copyright
and patent.
In the absence of legal right, it is more difficult
to demonstrate control.
3. Future economic benefits
The future economic benefits may include
revenue from the sale of products or service,
cost saving, or other benefits resulting from the
use of the asset by entity. For example, the use
of intellectual property in a production process
may reduce future in a production process may
reduce future production costs rather than
increase future revenues.
============================================================================================
B. Recognition of an intangible asset
An intangible asset shall be recognized if the
following conditions are present:
1) It is probable that the future economic benefits
attributable to the asset will flow to the entity;
and
2) The cost of the intangible asset can be measured
reliably
C. Measurement of intangible asset
PAS 38 paragraph 24, provides that an intangible
asset shall be measured initially at cost. If an
intangible asset can be measured reliability,
particularly so if the purchase consideration is in the
form of cash or other monetary asset. The cost of a
separately acquired intangible asset comprises:
1) Purchase price
2) Import duties and nonrefundable purchase tax
3) Directly attributable costs of preparing the asset
for the intended use.
Directly attributable costs include the following:
1) Cost of employees benefit arising directly from
bringing the asset to its working condition
2) Professional fee arising directly from bringing the
asset to its working condition
3) Cost of testing whether the asset is functioning
properly
Costs which are not capitalized
Examples of costs that are not included in the cost of
an intangible asset but expressed immediately are:
1) Cost of introducing a new product or service,
including cost of advertising and promotional
activity
2) Cost of conducting business in a new location or
with a new class of customer, including cost of
staff training
3) Administrative and other general overhead cost
4) Cost incurred while an asset capable of operating
in a manner intended by management has yet to
be brought into use
5) Initial operating loss
D. Internally generated intangible asset
The cost of an internally generally 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. Example of directly attributable costs
are:
1) Cost of material and services used or consumed
in generating the intangible asset
2) Cost of employee benefits arising from the
generation of the intangible asset
3) Fee to register a legal right
4) Amortization of patent used to generate the
intangible asset.
Page 1 of 4
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 17 – PAS 38: INTANGIBLE ASSETS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
However, the following expenditures are not PAS 38 specifically pertains to identifiable intangible
components of the cost of an internally generated assets. If the intangible asset is acquired through
intangible asset: purchase, there is a transfer of legal right that
1) Selling, administrative and other general would make the asset identifiable. Moreover, if the
overhead asset could be sold, transferred, licensed, rented or
2) Clearly identified inefficiency and initially sold separately, the intangible asset is identifiable.
operating loss Examples of identifiable intangible assets are:
3) Expenditure on training staff to operate the asset 1) Patent
2) Copyright
PAS 38, paragraph 63, explicitly provides that 3) Franchise
internally generated brand, masthead, publishing 4) Trademark or brandname
title, customer list and other item similar in substance 5) Customer list
shall not be recognized as intangible asset. Such 6) Computer software
items cannot be identified separately from the cost of 7) Broadcasting license, airline right and fishing
developing the business as a whole. right

Instead such items are seen as being component of
internally generated goodwill. PAS 38 paragraph 48,
provides that internally generated goodwill shall not
be recognized as an asset. Accordingly, such
expenditures shall be expensed when incurred.
Recognition as an expense
1) An expenditure on an intangible asset that does
not meet the recognition criteria for an intangible
asset shall be expensed when incurred
2) Examples of expenditures that are expensed
when incurred include:
a. Start-up costs
Start-up costs may consist of organization
costs such as legal and secretarial costs
incurred in establishing a legal entity.
Start-up costs also include preopening costs
or expenditures to open a new facility or
business, and pre-operating costs or
expenditures for commencing new operation
or launching new product
b. Training costs
c. Advertising and promotional costs
d. Business relocation or reorganization costs
Subsequent expenditures
As a rule, a subsequent expenditure on an intangible
asset shall be recognized as expense. The reason is
that most subsequent expenditures are likely to
maintain only the expected future economic benefits
embodied in the intangible asset. However, the
subsequent expenditure may be capitalized or added
to the cost of the intangible asset if the following
recognition criteria for an intangible asset are met:
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
E. Identifiable intangible assets
Unidentifiable intangible asset
An intangible asset is unidentifiable if it cannot be
sold, transferred, licensed, rented or exchange
separately. The intangible asset is inherent in a
continuing business and can only be identified with
the entity as a whole. This unidentifiable intangible
assets squarely describes a goodwill.
F. Measurement after recognition
An entity shall choose either the cost model or
revaluation model as an accounting policy.
1) Cost model – an intangible asset shall be carried
at cost less any accumulated amortization and
any accumulated impairment loss
2) Revaluation model – an intangible asset shall be
carried at a revalued amount less any
subsequent amortization and any subsequent
accumulated loss. The revalued amount is the
fair value at the date of revaluation and is
determined by reference to an active market.
Thus, an intangible asset can only be carried at
revalued amount if there is on active market for
the asset.
G. Amortization of intangible assets
PAS 38 provides the following on the amortization of
intangible assets:
1) Paragraph 97 states that intangible assets with
limited or finite life are amortized over their
useful life.
2) Paragraph 107 and 108 state that intangible
assets 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.
Definition of amortization
Amortization is the systematic allocation of the
amortization amount of an intangible asset over the
useful life. The amortization amount is the cost of
the intangible asset less residual value. The
amortization is recorded by debiting amortization

============================================================================================
Page 2 of 4
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 17 – PAS 38: INTANGIBLE ASSETS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING
=============================================================================
expense and crediting the intangible asset account.
Normally, the intangible asset account is credited
directly for the periodic amortization but an
accumulated amortization may be maintained.
Amortization period
The amortization amount of an intangible asset shall
be amortized on a systematic basis 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.
Amortization shall cease when the intangible asset is
derecognized.
Useful life of intangible asset
The useful life of an intangible asset must be
assessed as either indefinite or finite. If finite, the
useful life may be expressed in terms of years or the
number of units to be produced. The useful life of an
intangible asset is indefinite when there is no
foreseeable limit to the period over which the asset is
expected to generate net cash flows. In other words,
the useful life is indefinite when there are no legal,
contractual, competitive and other factors that would
limit the useful life of the intangible asset. The major
problem for an intangible asset is determining the
useful life.
Factors affecting useful life
1) Technical, technological, commercial or other
type of obsolescence
2) Expected action by competitors or potential
competitors
3) Expected usage of the asset by the entity
4) Typical product life cycle for the asset
5) Stability of the industry in which the asset
operates
6) Level of maintenance expenditure required to
obtain the expected future economic benefits
from the asset
7) The useful life of the asset may be dependent on
the useful life of the other assets of the entity
8) Period of control over the asset and legal or
similar limits of the use of the asset, such as
expiry dates of related leases.
Amortization method
The method of amortization shall reflect the pattern
in which the future economic benefits from the assets
are expected to be consumed by the entity.
However, if such pattern cannot be determined
reliably, the straight line method of amortization shall
be used.
Residual value
The residual value of intangible asset shall be
presumed to be zero, except:
============================================================================================
1St SEMESTER 2019 – 2020
1) When a third party is committed to buy the
intangible asset at the end of the useful life
2) When there is an active market for the intangible
asset so that the expected residual value can be
measured and it is probable that there will be a
market for the asset at the end of the useful life.
The residual value is reviewed at each financial year
end. A change in the residual value is accounted for
as a change in accounting estimate.
Impairment of intangible asset
Intangible assets with finite useful life are tested
for impairment whenever there is an indication of
impairment at the end of reporting period.
Intangible assets with indefinite useful life are
tested for impairment at least annually and whenever
there is an indication of impairment. An impairment
loss on an intangible asset is recognized if the
recoverable amount is less than the carrying amount.
H. Derecognition of intangible asset
An intangible asset shall be derecognized or
eliminated from the statement of financial position:
1) On disposal of the asset
2) When no future economic benefits are expected
from its use and disposal
Gain and loss arising from the derecognition of an
intangible asset shall be determined as the difference
between the net disposal proceeds and the carrying
amount of the asset.
I. Research and development cost
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.
PAS 38 paragraph 53, provides that if an entity
cannot distinguish the research phase from the
development phase, the entity treats the
expenditures as if it were incurred in the research
phase only.
Definition of Research
Research is original and planned investigation
undertaken with the prospect of gaining scientific or
technical knowledge and understanding. Stated
differently, a research activity is undertaken to
discover new knowledge that will be useful in
developing new product.
Examples of research activities are
1) Laboratory research activities aimed at obtaining
new knowledge
Page 3 of 4
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 17 – PAS 38: INTANGIBLE ASSETS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
2) Searching for applications of research findings or incurred. The reason is that at the research phase of
other knowledge a project, an entity cannot be certain that future
3) Conceptual formulation and design of possible economic benefits would probably flow to the entity.
products, or process alternative
4) Testing in search for product or process At the research stage, there is too much uncertainty
alternative about the likely success of the project. In the
research phase, an entity cannot demonstrate that an
Definition of Development cost intangible asset exists that will generate probable
Development is the application of research findings or future economic benefits.
other knowledge to a plan or design for the
production of new or substantially improved material,
Accounting for Development cost
device, product, process, system or service, prior to
In contract with research cost, development cost is
the commencement of commercial production.
incurred at a later stage in a project and probability
Simply stated, a development activity involves the
of success may be more apparent. Development cost
application of research findings to develop a new
may or may not be recognized as an intangible asset
product.
depending on very strict criteria.
 Examples of development activities are:
1) The design, construction and testing of pre-
Criteria for recognition
production or pre-use prototypes and models;
Development cost may qualify as intangible asset if
2) The design of tools, jigs, molds and dies
and only if the entity can demonstrate all of the
involving new technology;
following:
3) The design, construction and operation of a pilot
1) The technical feasibility of completing the
plant that is not of a scale economically feasible
intangible asset so that it will be available for use
to the entity for commercial production; and
or sale.
4) The design, construction and testing of a chosen
2) The intention to complete the intangible asset
alternative for new or improved products, and
and use or sell it
processes.
3) The ability to use or sell the intangible asset
4) How the intangible asset will generate probable
Activities not considered research and
future economic benefit
development
5) Availability of resources or funding to complete
Research and development activities typically occur
development and to use or sell the asset
prior to the beginning of commercial production and
6) The ability to measure reliably the expenditure
distribution of a product or process. Accordingly,
attributable to the intangible asset during its
activities that relate to commercial production do not
development
result to research and development cost.
Examples of activities not considered R and D
K. Capitalizable expenditures
1) Engineering follow through in an early phase of
Expenditures for research and development which
commercial production
have alternative future use, either in additional
2) Quality control during commercial production
research project or for production purposes, can be
including routine testing
capitalized. This means that cost incurred for
3) Trouble shooting breakdown during production
materials, equipment and intangible assets related to
4) Routine on-going effort to refine, enrich or
research and development activities which have an
improve quality of an existing product
alternative future use can be capitalized.
5) Adaptation of an existing capability to a
Subsequently, the following should be charged to
particular requirement or customer need
research and development expenses:
6) Periodic design changes to existing products
1) Cost of materials used
7) Routine design of tools, jigs, mold and dies.
2) Depreciation of equipment used in research and
8) Activity, including design and construction
development
engineering related to construction, relocation,
3) Amortization of intangible asset used in research
rearrangements or start-up facilities and
and development.
equipment.

J. Accounting for research cost & development

cost
Accounting for research cost
PAS 38 paragraph 54 provides that expenditures on
research or on the research phase of an internal
project shall be recognized as expense when

============================================================================================
Page 4 of 4