PAS 38 - Intangible Assets

PAS 38 Intangible Assets

Learning Objectives
• Define an intangible asset.
• State the initial measurement of intangible assets that
are (a) externally acquired and (b) internally generated.
• State the subsequent measurement of intangible assets
that (a) have finite useful life and (b) indefinite useful
life.
 Intangible assets
• An intangible asset is an identifiable non-monetary asset
without physical substance.

• Goodwill acquired in a business combination is outside the

scope of PAS 38 because it is unidentifiable. Goodwill is
accounted for under PFRS 3 Business Combinations and PAS
36 Impairment of Assets.
 Essential criteria in the definition of
intangible assets
1. Identifiability – separable or arises from contractual rights
2. Control – power to obtain (or restrict others from obtaining)
the economic benefits from an asset.
3. Future economic benefits – 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.
 Recognition

An intangible asset shall be recognized if management can

demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic benefits will
flow to the entity; and
3. The cost of the asset can be measured reliably.
 Initial measurement

An intangible asset shall be measured initially at cost.

Measurement of cost depends on how the intangible asset is
acquired. Intangible assets may be acquired through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation
 Separate acquisition
The cost of a separately acquired intangible asset comprises:
1. Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts
and rebates; and
2. Any directly attributable cost of preparing the asset for its
intended use.
 Acquisition as part of a business
combination
• The cost of intangible asset acquired in a business
combination is its fair value at the acquisition date.
 Acquisition by way of a government
grant
Intangible assets acquired by way of government grant may be
recorded at either:
1. fair value
2. alternatively, at nominal amount or zero, plus direct costs
incurred in preparing the asset for its intended use
 Exchanges of assets
• If the exchange has commercial substance, the intangible asset is initially recognized
using the following order of priority:

a. Fair value of the asset Given up (Plus cash Paid or

minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash
Paid or minus cash received)

• If the exchange has lacks commercial substance, the intangible asset is initially
recognized using (c) above.

• An exchange transaction has a commercial substance if the expected future cash

flows from the asset received significantly differ from those of the asset given up.
Internally generated intangible assets
The costs of self-creating an intangible asset are classified
into:
a. Research costs – include costs of searching new
knowledge and identifying and selecting possible
alternatives.
b. Development costs – include costs of designing from
selected alternative and using knowledge gained from
research.

• If an entity cannot identify in which phase a cost is

incurred, the cost is regarded as incurred in research
phase.
 R&D Costs
1. Costs incurred in research phase are expensed
immediately.
2. Costs incurred in development phase are
expensed immediately, unless they meet all of
the following conditions for capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.
 R&D Costs
The following are not R&D expenses but rather regular expenses.
a. Costs incurred during commercial production:
i. Trouble-shooting during commercial production
ii. Periodic or routine design changes to existing products
iii. Modification of design for a specific customer
iv. Design, construction and operation of plant that is feasible for
commercial production
v. Engineering follow through in an early phase of commercial
production
vi. Quality control during commercial production
b. Advertising and other marketing expenses
c. Training costs

(HINT: R&D expense relates to something that is still in the process of being
invented. It does not relate to periodic changes to an existing product . The
following terms generally indicate that a cost is not an R&D expense:
‘commercial,’ ‘customer,’ ‘advertising’ and ‘market’.)
 Items of PPE used in R&D activities
• If the item of PPE can be used in various R&D
activities or other purposes, the cost of the
PPE is capitalized and depreciated. The
amount of depreciation is included as R&D
expense.
• If the item of PPE is can only be used on one
specific R&D project, the cost of the PPE is
expensed immediately in its entirety as R&D
expense.
 Items not recognized as intangible
assets
• The cost of internally generated brands, mastheads,
publishing titles, customer lists, goodwill and items similar in
substance are expensed when incurred.
 Subsequent expenditure
• Subsequent expenditures on an intangible asset are generally
recognized as expense.
Reinstatement of costs in subsequent
period
• Expenditure on an intangible item that was initially recognized
as an expense shall not be recognized as part of the cost of an
intangible asset at a later date.
 Measurement after recognition

• After initial recognition, an entity shall choose as its

accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.
 Amortization
• Intangible assets with finite useful life are amortized over the
shorter of the asset’s useful life and legal life.
• Intangible assets with indefinite useful life are not amortized
but tested for impairment at least annually.
• The default method of amortization is the straight line
method.
 Homework
1. The essential elements of an intangible asset do not include
a. identifiability.
b. probable outflow of resources embodying economic benefits.
c. control.
d. future economic benefits.

2. According to PAS 38, which of the following may be recognized as

cost of intangible asset?
a. Research costs incurred in self-generating an intangible asset
b. Costs of an internally generated customer lists
c. Purchase cost of an externally acquired publishing title
d. Abnormal amount of wasted labor in self-generating an
intangible asset
 Homework
3. On January 1, 20x1, Entity A registers a patent for a total
registration and legal costs of ₱600,000. Entity A estimates
that the patent has a remaining useful life of 25 years. How
much is the amortization expense for 20x1?
a. 30,000 c. 16,000
b. 24,000 d. 0