No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

FINANCIAL ACCOUNTING AND REPORTING

Intangible Assets

INTANGIBLE ASSETS
An intangible asset is an identifiable non-monetary asset without physical substance (IAS 38,
par. 8). To qualify as intangible asset, an item must meet all of the following essential criteria:
 Identifiability
 Control
 Future economic benefits

Identifiability
 An intangible asset must be identifiable to distinguish it from goodwill. An asset is
considered identifiable when:
(1) It is separable.
(2) It arises from contractual or other legal rights.

Control
 An entity controls an asset if the entity has the power to obtain the future economic
benefits flowing from the underlying resource and to restrict the access of others to
those benefits.
 Control over an asset normally stem from legal or contractual rights that are
enforceable by law.

Future economic benefits

 The future economic benefits flowing from an intangible asset may include revenue from
the sale of products or services, cost savings, or other benefits resulting from the use of
the asset by the entity.

INITIAL RECOGNITION
An intangible asset shall be recognized if:
(a) It is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
(b) The cost of the asset can be measured reliably.

MEASUREMENT
Initial measurement
 An intangible asset shall be measured initially at cost (IAS 38, par. 24). The cost of an
intangible asset generally consists of:
1. Purchase price (or fair value), and
2. Any directly attributable cost of preparing the asset for its intended use.

Modes of Acquisition:
1. Separate acquisition
 The cost of a separately-acquired intangible comprises:
(a) Its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use

Directly attributable costs include the following:

 Costs of employee benefits arising directly from bringing the asset to its working
condition.
 Professional fees arising directly from bringing the asset to its working condition.
 Costs of testing whether the asset is functioning properly.

Costs which are not capitalizable and should be expensed immediately are the following:
 Costs of introducing a new product or service, including costs of advertising and
promotional activities.
 Costs of conducting business in a new location or with a new class of customer,
including costs of staff training.
 Administration and other general overhead costs.
 Costs incurred while an asset is already capable of operating in a manner intended by
management has yet to be brought into use.

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

 Initial operating loss

Note: Recognition of costs in the carrying amount of an intangible asset ceases when the asset
is in the condition necessary for it to be capable of operating in the manner intended by
management.

2. Deferred basis
 If payment for an intangible asset is deferred beyond normal credit terms, its cost is
the cash price equivalent. The difference between this amount and the total
payments is recognized as interest expense over the credit period.

3. Acquisition as part of business combination

 The cost of the intangible asset acquired in a business combination is equal to its
fair value on the date of acquisition.

4. Government grant
 The entity may choose to recognize both the intangible asset and the grant initially
at:
(1) Fair value, or
(2) Nominal amount plus any expenditures that is directly attributable to preparing
the asset for its intended use.

5. Exchange
 With commercial substance
Fair value of asset given up XX
Cash payment XX
Cash received (XX)
Cost XX

 Without commercial substance

Carrying value of asset given up XX
Cash payment XX
Cash received (XX)
Cost XX

Note: The initial measurement principles of intangible assets is very similar as that of the
property, plant and equipment.

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 the management.

Examples of directly attributable costs are:

 Costs of materials and services used or consumed in generating the intangible asset.
 Costs of employee benefits arising from the generation of the intangible asset.
 Fees to register a legal right.
 Amortization of patents and licenses that are used to generate the intangible asset.

The following do not form part of the cost of an internally-generated intangible asset and should
be expensed immediately:
 Selling, administrative and other general overhead, unless these expenditures can be
directly attributed to preparing the asset for use.
 Inefficiencies and initial operating losses incurred before an asset achieves planned
performance.
 Expenditure on training staff to operate the asset.

To assess whether an internally generated intangible asset meets the criteria for recognition, an
entity shall classify the generation of the asset into:
(a) Research phase; and
(b) Development phase

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Research
Research refers to the original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.

Examples of research activities:

(a) Activities aimed at obtaining new knowledge;
(b) The search for, evaluation and final selection of, applications of research findings or
other knowledge;
(c) The search for alternatives for materials, devices, products, processes, systems or
services; and
(d) The formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services.

Accounting for research costs

 All research costs or costs incurred in the research phase shall be recognized as
expense.

Development
Development refers to the application of research findings or other knowledge to a plan or
design for the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.

Examples of development activities:

(a) The design, construction and testing of pre-production or pre-use prototypes and
models;
(b) The design of tools, jigs, molds and dies involving new technology;
(c) The design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production; and
(d) The design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.

Accounting for development costs

 An intangible asset arising from development (or from the development phase of an
internal project) shall be recognized if, and only if, an entity can demonstrate all of the
following:
(a) The technical feasibility of completing the intangible asset so that it will be available
for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output of
the intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
(e) The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
(f) Its ability to measure reliably the expenditure attributable to the intangible asset
during its development.

Otherwise, the development costs shall be recognized as an expense.

Note:
 If an entity cannot distinguish the research phase of an internal project to create an
intangible asset from the development phase, the entity treats the expenditure for that
project as if it were incurred in the research phase.
 Expenditures for research and development (R&D) which have alternative future use
can be capitalized.

Activities not considered research and development

 Research and development activities occur prior to the beginning of commercial

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

production and distribution. Accordingly, activities that relate to commercial production

are not considered research and development activities.

Examples:
(a) Engineering follow through in an early phase of commercial production.
(b) Quality control during commercial production including routine testing.
(c) Trouble shooting breakdown during production.
(d) Routine on-going effort to refine, enrich or improve quality of an 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.

Note: Internally generated brands, mastheads, publishing titles, customer lists and items similar
in substance shall not be recognized as intangible assets (IAS 38 par. 63)

SUBSEQUENT MEASUREMENT
After initial recognition, an entity chooses either the cost model or the revaluation model as its
accounting policy and applies that policy to an entire class of intangible assets.
 Under the cost model, the intangible asset is carried at cost less accumulated
amortization and accumulated impairment losses.
 Under the revaluation model, the intangible asset is carried at revalued amount, being
the fair value at the date of revaluation, less accumulated amortization and impairment
losses.

Useful life
An entity shall assess whether the intangible asset has:
a. Finite useful life; or
b. Indefinite useful life

Only intangible assets with finite useful life are amortized. Intangible asset with indefinite useful
life are not amortized but tested for impairment at least annually.

An intangible asset with finite useful life is amortized over the period of expected economic
benefits, that is, the shorter between the period of its legal or contractual rights and the period
over which the entity expects to use the asset. In some cases, the amortization period may be
beyond the legal life of the intangible asset if the legal right is renewable and renewal is virtually
certain and will be achieved without significant costs.

Amortization shall begin when the asset is in the location and condition necessary for it to be
capable of operating in the manner intended by management.

Amortization method
There are variety of amortization methods. The choice depends on the judgment of the
management. When making the judgment, IAS 38 requires management to choose the method
that best reflects the expected pattern of consumption of the future economic benefits embodied
in the asset. If that pattern cannot be determined reliably, the entity shall use the straight-line
method. IAS 38 prohibits the use of an amortization method that is based on revenue.

Residual value
An intangible asset’s residual value is assumed to be zero unless the entity can demonstrate its
ability to sell the intangible asset before the end of its economic life, as evidenced by existence
of:
a. A third party commitment to purchase the asset at the end of its useful life; or
b. An active market where the asset can be sold at the end of its useful life.

IDENTIFIABLE INTANGIBLE ASSETS

PATENT
 A government-granted license conferring the sole right to an inventor to exclude others
from making, using or selling an invention.

Cost of Patent
1. Acquired by purchase

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Purchase price XX
Import duties XX
Nonrefundable purchase taxes XX
Directly attributable cost of preparing the asset for the intended use XX
Cost of patent XX

2. Internally developed patent

 The cost normally includes:
(1) Licensing
(2) Other related legal fees in securing the patent rights
 All research and development costs are expensed immediately.
 Exception: all development costs incurred from the time the technology feasibility
is established are capitalized as cost of the patent.

Amortization of Patent
(a) Patent acquired by purchase. The cost shall be amortized over the remaining legal life
or useful life, whichever is shorter.
(b) Internally developed patent. The original cost shall be amortized over the legal life or
useful life, whichever is shorter.
(c) Acquisition of competitive patent to protect the original patent. The cost of the
competitive patent shall be amortized over the remaining life of the old patent.
(d) Acquisition of a related patent
 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.
 No extension of life.
o New patent – amortized over its own useful life.
o Old patent – amortized over its remaining useful life.

Impairment of Patent
 Legal life: The legal life of patent is 20 years.
 Classification of patent: Intangible asset with a definite life.
 Impairment method: Tested for impairment whenever there is an indication of
impairment at the end of reporting period.

Cost of Litigation
 Whether the litigation is successful or not, the cost of litigation is expensed.
 However, if the litigation is unsuccessful, the patent is also written off as a loss.

TRADEMARK
 A distinctive design, symbol, or name that uniquely identifies a product.

Cost of Trademark
1. Acquired by purchase
Purchase price XX
Directly attributable costs related to acquisition XX
Cost of trademark XX

2. Internally developed trademark

 The cost includes expenditures required to establish it such as:
(1) Filing fees
(2) Registry fees
(3) Other expenses incurred in securing the trademark such as design cost of the
trademark

Amortization and Impairment of Trademark

 Legal life: The legal life of trademark is 10 years and may be renewed for periods of 10
years each.
 Classification of trademark:
1. Intangible asset with an indefinite useful life.
2. Intangible asset with a definite life.
 Amortization: The trademark may or may not be amortized depending on its
classification.

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

 If the trademark is classified as having a definite life, it is amortized at the

shorter between its useful life and legal life.
 If the trademark is classified as having an indefinite life, it is not amortized.
 Impairment method:
 Trademark with indefinite life: Tested for impairment (1) at least annually and
(2) whenever there is an indication of impairment.
 Trademark with definite life: Tested for impairment whenever there is an
indication of impairment at the end of reporting period.

Cost of Litigation
 Whether the litigation is successful or not, the cost of litigation is expensed.
 However, if the litigation is unsuccessful, the trademark is also written off as a loss.

COPYRIGHT
 A government-granted license or right to an author, composer or artist enabling them to
publish, sell or otherwise benefit from the literary, musical or artistic work.

Cost of Copyright
 The cost of copyright consists of all expenditures in the production of the work including
those expenditures required to establish or obtain the right.

Copyright acquired by purchase

Cash paid to acquire the copyright XX
Directly attributable costs necessary for the intended use XX
Cost of copyright XX

Amortization and Impairment of Copyright

 Legal life: The term of protection is during the life of the author and for 50 years after
death.
 Classification of copyright:
3. Intangible asset with an indefinite useful life.
4. Intangible asset with a definite life.
 Amortization: The copyright may or may not be amortized depending on its
classification.
 If the copyright is classified as having a definite life, it is amortized at the shorter
between its useful life and legal life.
 If the copyright is classified as having an indefinite life, it is not amortized.
 Impairment method:
 Copyright with indefinite life: Tested for impairment (1) at least annually and
(2) whenever there is an indication of impairment.
 Copyright with definite life: Tested for impairment whenever there is an
indication of impairment at the end of reporting period.

FRANCHISE
 A right granted by a party called the franchisor to another party called the franchisee to
sell its products using its name.

Cost of Franchise
Initial franchise fee XX
Directly attributable costs necessary for its intended use
(e.g., legal fees and other expenses incurred in connection with the acquisition of the right) XX
Cost of franchise XX

Continuing franchise fee or periodic payment is considered outright expense.

Amortization and Impairment of Franchise
 Classification of franchise: Intangible asset with a definite useful life.
 Amortization: The franchise is amortized over the period stated in the agreement.
 Impairment method: Tested for impairment whenever there is an indication of
impairment at the end of reporting period.

CUSTOMER LIST
 A database containing the names, contact information, order history and other relevant

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

information for a list of customers.

Cost of Customer list

1. Acquired by purchase
Purchase price XX
Directly attributable costs XX
Cost of Customer list XX

2. Internally-generated
 All costs incurred in generating the customer list shall be expensed and not
capitalized.

DERECOGNITION
 An intangible asset shall be derecognized on disposal or when no future economic
benefits are expected from its use or disposal.
 The gain or loss arising from derecognition of an intangible asset shall be determined as
the difference between the net disposal proceeds and the carrying amount of the asset.
This amount is recognized in profit or loss in the period when the asset is derecognized.

FINANCIAL STATEMENT PRESENTATION

 Intangible assets is presented under the non-current assets section of the statement of
financial position.

Problem 1:
On January 2, 2020, Silver Line Company developed a new machine for manufacturing
baseballs. Because the machine is considered very valuable, the company had it patented.

The following expenditures were incurred in developing and patenting the machine:
Purchase of special machine to be used solely for development of the new P1,800,000
machine
Research salaries and fringe benefits for engineers and scientists 200,000
Cost of testing prototype 250,000
Legal cost for filing of patent 150,000
Fees paid to government patent office 50,000
Drawings required by patent office to be filed with patent application 40,000

The company elected to amortize the patent over ten years.

On January 2, 2022, the company paid P72,000 to successfully defend the patent in an
infringement suit.

On January 3, 2023, the company determined that the remaining useful life of the patent is five
years.

1. What amount should be capitalized as cost of patent on January 2, 2020?

2. What amount of research and development cost should be expensed in 2020?
3. What is the patent amortization expense for the year 2022?
4. What is the patent amortization expense for the year 2023?
5. What is the carrying value of the patent on December 31, 2023?

Problem 2:
On January 2, 2012, El Professor Co. spent P392,000 to apply for and obtain a patent on a
newly developed product. The patent had an estimated useful life of 10 years. At the beginning
of 2014, the company spent P56,000 in successfully prosecuting an attempted infringement of
the patent.

At the beginning of 2017, the company purchased for P120,000 a patent that was expected to
prolong the life of its original patent by 5 years. On July 1, 2020, a competitor obtained rights to
a patent that made the company’s patent obsolete.

7|P a g e RSORIANO/JM AGLINAO/ TSIY

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

1. What is the patent amortization expense for 2013?

2. What is the patent amortization expense for 2014?
3. What is the carrying value of the patent at December 31, 2016?
4. What is the patent amortization expense for 2017?
5. What is the carrying value of the patent at December 31, 2017?
6. How much is the impairment loss to be recognized for 2020?

Problem 3:
RDC Company incurred the following research and development costs in the current year:

Equipment acquired for use in various R and D projects 975,000

Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000

What total amount of research development costs should be recognized as expense for
the current year?
A. 850,000 C. 1,235,000
B. 1,085,000 D. 1,825,000

Problem 4:
Ned Company made the following expenditures relating to Product AA:

Legal costs to file a patent on Product AA. Production of the finished product
would not have been undertaken without the patent 100,000
Special equipment to be used solely for development of Product AA.
The equipment has no other use and has an estimated useful life of four years 600,000
Labor and material costs incurred in producing a prototype model 2,000,000
Cost of testing the prototype 800,000

What is the total amount of costs that should be expensed when incurred?
A. 2,800,000 C. 3,400,000
B. 2,950,000 D. 3,500,000

Problem 5:
You noted the following items relative to the GONE IN THE WIND Corp.’s "Intangible Assets” in
connection with your examination of the GONE IN THE WIND Corp.’s financial statements for
the year 2020.

Franchise
On January 1, 2020, the company signed an agreement to operate as franchisee of Jolly
Donalds Company for an initial franchise fee of P680,000. Of this amount, P200,000 was paid
when the agreement was signed and the balance was payable in four annual payments of
P120,000 each, beginning January 1, 2021. The agreement provides that the down payment is
not refundable and no future services are required of the franchisor. The implicit rate for a loan
of this type is 14%. The agreement also provides the 5% of the revenue from the franchise must
be paid to the franchisor annually. The company’s revenue from the franchise for 2020 was
P8,000,000. The company estimates the useful life of the franchise to be ten years.

Patent
On July 1, 2020, the company purchased a patent from an inventor who asked P1,100,000 for
it. The company paid for the patent as follows: cash, P400,000; issuance of 10,000 shares of its
own ordinary shares, par P10 (market value, P20 per share); and a note payable due at the end
of three years, face amount, P500,000, noninterest bearing. The current interest rate for this
type of financing is 12 percent. The company estimates the useful life of the patent to be ten
years.

Trademark
The company purchased for P1,200,000 a trademark for a very successful six pack abs-
inducing drink it markets under the name “Bread Tummy Drink”. The trademark was determined

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

to have an indefinite life. A competitor recently introduced a product that is in direct competition
with the “Bread Tummy Drink”, thus suggesting the need for an impairment test. Data gathered
by the entity suggests that the useful life of the trademark is still indefinite, but the cash flows
expected to be generated by the trademark have been reduced either to P40,000 per year (with
a probability of 70%) or to P80,000 per year (with 30% probability). The appropriate discount
rate is 5%.

Based on the above and the result of your audit, determine the following: (Round of PV
factors to four decimal places)
1. Carrying amount of franchise as of December 31, 2020
2. Carrying amount of patent as of December 31, 2020
3. Carrying amount of trademark as of December 31, 2020
4. Total expenses related to the intangible assets in 2020

END OF HANDOUT

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