Subtopic #1: Intangible Asset

Intangible Asset - Identifiable non-monetary asset without physical substance

- Must be controlled as a result of a past event and future economic benefits are
expected to flow to the entity
Essential Criteria a. Identifiability
b. Control
c. Future Economic Benefit
Identifiability a. Separable
- Capable of being separated and sold, transferred, licensed, rented or exchanged

b. Arises from contractual or other legal rights

- Regardless of whether these rights are transferable or separable from the entity
or from other rights and obligations

Control - Power of the entity to obtain future economic benefits flowing and restrict
others from enjoying the same benefits
- Normally would stem from legal rights that are enforceable in a court of law

Future Economic - May include revenue from the sale of products or services
Benefits - Cost savings
- Other benefits resulting from the use of the asset

Recognition a. Probable that future economic benefits attributable to the asset will flow to the
entity
b. Cost can be measured reliably

Judgment – assessing the degree of certainty of the future economic benefits and based
on external evidence

Initial Measurement - Initially at cost

Cost depends on:

a. Separate acquisition
b. Acquisition as part of a business combination
c. Acquisition by way of a government grant
d. Acquisition by exchange
e. Acquisition by self-creation or internal generation

Separate acquisition - Purchase consideration is in the form of cash or other monetary assets

Composition of Cost
a. Purchase price
b. Import duties and non-refundable purchase taxes
c. Directly attributable costs of preparing the asset for the intended use

Directly attributable a. Cost of employee benefits arising directly from bringing the asset to its working
costs condition
b. Professional fees arising directly from bringing the asset to its working condition
c. Cost of testing whether the asset is functioning properly

Costs that are not a. Cost of introducing a new product or service

capitalizable b. Cost of conducting business in a new location or with a new class of customer

Acquisition as part of a
business combination
Acquisition by way of a
government grant
Measurement
Acquisition by exchange
Internally Generated
Intangible Asset
Directly Attributable
Costs
Not Components of the
Cost of an Internally
Generated Intangible
Asset
Not Recognized as
Intangible Asset
Recognition as Expense
Subsequent
c. Administration and other general overhead costs
d. Costs incurred while asset is capable of operating in a manner intended by
management has yet to be brought into use
e. Initial operating loss
- Based on the FV on the date of acquisition
- Free of charge or for nominal consideration
a. Airport land rights
b. Licenses to operate radio or television stations
c. Import licenses, quotas, or rights to access restricted resources
a. FV
b. Nominal amount or zero, plus any expenditure that is directly attributable to
preparing the asset for its intended use
- FV of assets given up plus any cash payment
- Unless the exchange transaction lacks commercial substance
- All directly attributable costs necessary to create, produce and prepare the asset
to be capable of operating it in the manner intended by management
a. Cost of materials and services used or consumed in generating the intangible
asset
b. Costs of employee benefits arising from the generation of the intangible asset
c. Fees to register a legal right
d. Amortization of patents and licenses that are used to generate the intangible
asset
a. Selling, administrative and other general overhead, unless this expenditure can
be directly attributed to preparing the asset for use
b. Clearly identified inefficiencies and initial operating losses incurred before an
asset achieves planned performance
c. Expenditure on training staff to operate the asset
1. Brands
2. Mastheads
3. Publishing titles
4. Customer lists
5. Items similar in substance
- Cannot be identified separately from the cost of developing the business as a
whole
a. Start-up costs
i. Organization costs
ii. Pre-opening costs
b. Training costs
c. Advertising and promotional costs
d. Business relocation or reorganization costs
- Expensed based these are likely to maintain only the expected future economic
Expenditure benefits embodies in the intangible asset

Capitalizable
a. Probable that economic benefits that are attributable specifically to the
subsequent expenditure will flow to the entity
b. The subsequent expenditure can be measured reliably

- It is not possible to determine if it is likely to enhance the economic benefits that

will flow. Thus, only rarely result to an addition to the cost of the intangible asset

Identifiable Intangible - Acquired through purchase – transfer of legal right that would make the asset
Assets identifiable
- If can be sold, transferred, licensed, rented, or sold separately

Examples:
1. Patent
2. Copyright
3. Franchise
4. Trademark or brand name
5. Customer list
6. Computer software
7. Broadcasting license, airline right and fishing right

Unidentifiable - If cannot be sold, transferred, licensed, rented, or sold separately

Intangible Assets
Goodwill
- Inherent in a continuing business and can only be identified with the entity as a
whole

Classification of a. Intangible Assets with definite life

Intangible Assets 1. Patent
2. Copyright
3. Franchise with fixed term
4. Computer software
5. Customer list
6. License

b. Intangible Assets with indefinite life

1. Goodwill
2. Trademark
3. Perpetual franchise

Measurement after 1. Cost Model

Recognition
2. Revaluation Model
- FV at the date of revaluation
- Can only be carried at revalued amount if there is an active market

Amortization and a. Limited or finite life

impairment of - amortized over useful life
intangible assets - tested for impairment whenever there is an indication of impairment at the end
of reporting date
 b. Indefinite life
- not amortized
- tested for impairment at least annually and whenever there is an indication of
impairment

Impairment loss on an - Recognized if the recoverable amount is less than the carrying amount
intangible asset - Recoverable amount – higher between the FV less cost of disposal and value in
use

Amortization - Systemic allocation of the amortizable amount over the useful life

Amortization period - Begin when the asset is available for use or is in the location and condition for
the intended use
- Cease when derecognized or classified as “held for sale”

Residual Value - Presumed to be zero except:

a. When a third party is committed to buy the intangible asset at the end of the
useful life
b. When there is an active market

Change in amortization - Reviewed at each financial year-end

method and useful life - Amortization shall be changed to reflect the new pattern
- Treated currently and prospectively

Derecognition of an a. Disposal
intangible asset b. No future benefits are expected from use and disposal of the asset

Gain or loss on derecognition

- Difference between net disposal proceeds and the carrying amount of the asset
Subtopic #2: Goodwill
Goodwill - Most intangible of all the intangible assets
- Cannot be bought and sold
- Can only be identified with the entity as a whole
- Not inherently identifiable, inherent in a continuing business and relates to the
entity as a whole

Recognition a. Developed goodwill or internal goodwill

- Not recorded

b. Purchased goodwill
- Goodwill paid for and it arises when a business is purchased
- Recognized as an asset

Measurement - matter for the purchaser and seller to agree upon in fixing the purchase price of
the business

Approaches
a. Residual Approach
b. Direct Approach

Residual Approach - Purchase price less net tangible and identifiable assets (total asset excluding
goodwill) less liabilities assumed
 - Net assets acquired at FV

Direct Approach - Measured on the basis of future earnings to the entity

a. Normal rate of return for representative entities in the industry

b. FV of tangible assets and any identifiable intangible assets
c. Estimated future normal earnings of the entity
d. Probable duration of any “excess earnings” attributable to goodwill

Method 1: Purchase of Average Earnings xx

“Average Excess Normal Earnings (% x net assets)
Earnings” Average Excess Earning
Multiply: Years
Goodwill

Method 2: Average Earnings xx

Capitalization of Normal Earnings (% x net assets)
“Average Excess Average Excess Earning
Earnings” Divided by: Capitalization rate
Goodwill

Method 3: Average Earnings xx

Capitalization of Divided by: Capitalization rate
“Average Earnings” Net assets, including goodwill or purchase price
Less: Net Assets, excluding goodwill
Goodwill

Method 4: Present Average excess earnings

Value Method PV of ordinary annuity
Goodwill

Impairment of goodwill - Shall not be amortized because of indefinite life

- Tested for impairment at the operating segment level or any lower level
- Impairment loss recognized shall not be reversed in a subsequent period

Negative Goodwill - Gain on bargain purchase

Subtopic #3: Identifiable Intangible Assets

Patent - Exclusive right granted by the govt to an inventor enabling him to control the
manufacture, sale or other use of invention for a specified period of time
- Legal life 20 years
- Cannot be renewed but life can be extend beyond legal life by a new patent for
improvements and changes
- Technology based

Cost of Patent Purchased

a. Purchase price
b. Import duties
c. Non-refundable purchase taxes
d. Any directly attributable cost of preparing the asset for the intended use

Internally generated
a. Licensing and other related legal fees in securing the patent rights
 All related R&D costs – expensed as incurred

Time technological feasibility

- Patent is not technically and commercially feasible
- any additional development cost to develop the patent to full manufacturing
stage may be:
a. Capitalized as patent cost
b. Separately accounted for as development cost
- Recognized as intangible asset and amortized

Cost of litigation a. Legal fees and other costs of successfully prosecuting or defending a patent –
expensed
b. If unsuccessful, legal costs and remaining costs of the patent – loss

Amortization of Patent a. Internally generated – original cost over useful or legal life (shorter)
b. Acquired from original patentee – cost over useful or legal life (shorter)
c. Competitive patent to protect an original patent – amortized over remaining life
of the old patent
d. Related patent to extend life of old parent – cost of related patent and
unamortized cost of the old patent amortized over extended life

Impairment of Patent - Since with useful life, amortized

- Tested for impairment whenever there is an indication of impairment at the end
of reporting period

Trademark - Symbol, sign, slogan, or name used to mark a product to distinguish it from other
product
- Market related

Legal life - 10 years and may be renewed for periods of 10 years each
- Automatic renewal, considered with indefinite life

Impairment - Not amortized but tested for impairment

Copyright - Exclusive right granted by the gov’t to the author, composer, or artist enabling
the grantee to publish, sell or otherwise benefit from literary, musical, or artistic
work
- Artistic related

Amortization Theory: Amortized over the useful life or period in which benefits, sales, and royalties are
expected

Practice: write off the costs of the copyright against the revenue of the first printing

Useful life
- During the life of the author and for 50 years after death

Franchise - Franchisor grants certain rights to franchisee

a. Between gov’t and private entity or individual

b. Between private entities or individuals
Between gov’t and - Allowed by the gov’t to use public property in performing the services
private entity or
individual
Between private - Franchisee acquires the right to use the trademark, patent, and the process of
entities or individuals the franchisor
Franchise cost - Lump sum payment for the acquisition
- Directly attributable costs necessary for the intended use
- Legal fees and expenses incurred

Periodic Payment
- Outright expense
- Period franchise fee

Amortization of a. Definite life – amortized and tested for impairment annually

Franchise b. Indefinite life – not amortized but tested for impairment
Lease right IFRS 16
- Right of use asset – lease term
- Lease liability – obligation to make lease payments

Leasehold improvement
- Alteration or modification on the lease property made by the lessee
- Not included in the right of use asset but accounted for separately
- Residual value is ignored in computing depreciation because legally it will revert
to the lessor upon termination
- Renewal option that is too uncertain is ignored in determining lease term

Customer list - Customer database containing the

a. Name
b. Contact information
c. Order history
d. Other vital and social statistics

If internally generated – not recognized as intangible asset

If acquired – intangible asset and amortized over useful life

Organization cost - Cost incurred in forming or organizing a corporation

a. Legal fees
b. Incorporation fees
c. Share issuance costs

Start-up costs in establishing a legal entity is EXPENSED when incurred

Share issuance cost – debited to share premium

If not sufficient – share issuance costs and contra-equity account

Website Development - Purpose of promoting and advertising does not meet the requirements to be an
Cost intangible asset
- Expensed as incurred

Subtopic #4: R&D Cost (Computer Software)

Introduction Internally generated intangible asset classifies into
a. Research phase
b. Development phase

If cannot be distinguished, research phase only

Research - Original and planned investigation undertaken with prospect of gaining scientific
or technical knowledge and understated
- Discover new knowledge that will be useful in developing new product or that
will result in significant improvement of existing product

Accounting for Research - Expensed when incurred

Cost - Cannot be certain that future economic benefits would probably flow to the
entity

Development cost - application of research findings to develop a new product

Accounting for - probability of success may be more apparent

Development cost
Criteria for Recognition (all)
a. technical feasibility of completing the IA so that it will be available for use or sale
(prototype or model)
b. Intention to complete
c. Ability to use or sell
d. How the IA will generate probable future economic benefits
e. Availability of resources or funding to complete development and to use or sell
the asset
f. Ability to measure reliably the expenditure attributable to the IA during the
development

American Standard - Which have alternative future use can be capitalized

R&D expense
a. Cost of materials used
b. Depreciation of equipment used in R&D
c. Amortization of IA used in R&D

Activities not - Occur prior to the beginning of production and distribution

considered R&D - Relate to commercial production do not result to R&D expense

Examples of Activities a. Engineering follow-through in an early phase of commercial production

not considered R&D
b. Quality control during commercial production
c. Troubleshooting breakdown during production
d. Routine ongoing 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, jugs, molds, and dies
h. Activity, including design and construction engineering relation to construction,
relocation, rearrangement or start-up of facilities and equipment

Internally developed - Expensed until a technical feasibility gas been established for the product
computer software - Established when an entity produced wither a detailed program design of the
software or a working model

Capitalizable Software a. Cost of coding and testing

Costs b. Cost to produce the product masters

Inventory - Cost incurred to actually produce the software from masters and package the
 software for sale
Amortization of - Reflect the pattern in which the future economic benefits are expected to be
Computer Software consumed by the entity
- Cannot be determined reliably, straight line
Impairment of - Amortized over the useful life
Computer Software - Tested for impairment
Classification of a. General Rule: Intangible Asset
Computer Software b. Computer Software purchased for resale: Inventory
c. Computer Software purchased as an integral part of a computer-controlled
machine tool that cannot operate without the specific software: PPE
- Not an integral part – intangible asset