ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPA Licensure Examination  Week No. 10

FINANCIAL ACCOUNTING & REPORTING C. UBERITA  J. BINALUYO  G. MACARIOLA

FAR-4312: INTANGIBLE ASSETS

INTANGIBLE ASSET – is a long-term asset that is non-monetary in nature and without physical existence, its
value dependent on the rights or benefits that possession confers upon the owners. It is usually an asset that
brings benefits over several accounting periods. The lack of physical existence is not by itself a sufficient criterion
to distinguish an intangible asset from a tangible asset because many assets lack physical existence but they are
not classified as intangible assets. The non-monetary criterion is equally important because intangible assets are
not associated with money or claims to money.

FULL APPLICATION OF THE ACCOUNTING STANDARDS

1. Recognition – An intangible is recognized if, and only if
a. It is probable that future economic benefits attributable to the asset will flow to the enterprise
b. The cost of the asset can be measured reliably

Identifiable and separable– costs or other values attributable can be defined, identified and reliably
measured. Capable of realization or sale separate from the business as a whole. Example – product
patents, process patent, copyrights, franchises, certain trademarks and branded product names.

Identifiable but not separable –costs or other values attributable may be defined or identified but
usually cannot be reliably measured. Incapable of separation from the business as a whole.
Examples; license, concessions, brand names associated with business names and most trademarks.

Not identifiable and not separable – costs or other values cannot usually be defined or identified.
Examples; goodwill, super earnings, business names and connections and reputations.

2. Measurement of intangibles - Initial Recognition: The intangible asset is initially recognized and
recorded at cost. The cost of an identifiable intangible asset includes all directly attributable costs incurred
to develop or acquire the asset, plus other incidental costs necessary to prepare the asset for its intended
use.

By purchase – the purchase price including any import duties and non-refundable purchase taxes
and any directly attributable expenditure on preparing the asset for its intended use . Directly
attributable costs include:
a) Cost of employee benefits directly from bringing the asset to its working condition
b) Professional fees arising from bringing the asset to its working condition
c) Cost of testing whether the asset is functioning properly. Any trade discounts and rebates are
deducted in arriving at the cost.

By a deferred plan beyond a normal credit terms – the cash price equivalents (the cash price or
the present or discounted value for a non-interest long term liability). The difference of the cash price
equivalents and the total amount of payments is interest and recognized as expense over the term of
the credit period.

By the issuance of equity instruments – the fair market value of the instruments, which is equal to
the fair market value of the intangible.

By way of government grant - an intangible may be acquired free of charge, or for nominal
consideration. The entity may choose to recognize both the intangible asset and the grant initially at
fair value. If an entity chooses not to recognize the asset initially at fair value, the entity recognizes
the asset initially at a nominal value plus any expenditure that is directly attributable to preparing the
asset for its intended use.

By part of a business combination – the fair market value on the date of acquisition. The fair
market value is equal to the following.
• if there is an active market – quoted market price which is usually the current bid price.
• If there is no active market – the amount, which would have been paid by the company in an
arm’s length transaction between knowledgeable and willing parties (by discounting estimated
cash flows from the intangible asset).

If the fair market value of the intangible asset in a business combination cannot be measured reliably,
the asset is not recognized as a separate intangible but is included within the over-all cost of purchase
goodwill.

By exchange – the cost of the intangible asset is measured at the fair market value unless the transaction
lacks commercial substance. If the exchange lacks the necessary commercial substance, the
intangible asset is not measured at fair market value but its cost is the carrying value of the asset
given up.

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Internally generated intangible – are the cost that can be directly attributed or allocated on a
reasonable and consistent basis to creating, producing and preparing the asset for its intended use.
The cost includes the following:
• cost of materials and services used or consumed in generating the intangible asset.
• Salaries and wages and other employment related cost of personnel directly engaged in
generating the asset.
• Expenditure that is directly attributable to generating the asset such as fees to register a legal
right and amortization of patents and licenses that are used to generate the asset.
• Overhead that are necessary to generate the asset and that can be allocated on a reasonable and
consistent basis to the asset.

3. Measurement subsequent to acquisition: An entity shall choose either the cost model or the
revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation
model, all the other assets in its class shall also be accounted for using the same model, unless there is
no active market for those assets.

Cost model – after initial recognition, the intangible asset shall be carried at its cost less any accumulated
amortization and any accumulated impairment losses.

Revaluation model – after initial recognition, an intangible asset shall be carried at a revalued amount,
being its fair value at the date of revaluation less any subsequent accumulated amortization and any
accumulated impairment losses.

4. Amortization period – the amortizable/depreciable amount of an intangible asset should be allocated

on a systematic basis over the best estimate of its useful life. The intangible assets with a limited life are
amortized over their useful life. The intangible assets with indefinite life are not amortized but are tested
for impairment at least annually. The method of amortization shall reflect the pattern in which the future
economic benefits from the asset are expected to be consumed by the entity. If the pattern cannot be
determined reliably, the straight line method is used The residual value of an intangible asset shall be
presumed to be zero, unless a third party is committed to buy the intangible asset at the end of its useful
life or unless there is an active market. Any change in the method of amortization or life of an intangible
should be treated as a change in estimate.

Useful Life – the accounting standard requires that an entity shall assess whether the useful life of an
intangible asset is finite or indefinite and, if finite, the length of or number of production or similar units
constituting that useful life. An intangible asset shall be regarded by the entity as having an indefinite
useful life when, based on an analysis of all of the relevant factors, there is no forseeable limit to the
period over which the asset is expected to generate net cash flows for the entity. However, for private
entities (IFRS for SME’s) considers all intangible assets to have finite useful life, and if a private entity us
unable to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed to
be 10 years.

Review of Amortization period and amortization method - IAS 38 requires that the amortization
period and the amortization method should be reviewed at least at each financial year end. If the expected
useful life of the asset is significantly different from previous estimates, the amortization period should
be changed accordingly. If there has been a significant change in the expected pattern of economic
benefits from the asset, the amortization method should be changed to reflect the changed pattern. Such
changes should be accounted for as changes in accounting estimates in accordance with the accounting
standard IAS 8 Accounting Policies, Changes in Estimates and Errors, by adjusting the amortization charge
for the current and future periods.

5. Subsequent cost in relation to intangible assets – PAS 38 does not deal with subsequent
expenditure on all intangible assets except for “acquired in-process research and development project”
acquired separately, or in a business combination. In accordance generally accepted accounting
principles, subsequent expenditure incurred on a recognized intangible asset can only be capitalized if
the expenditure increases the future economic benefits of the asset beyond its original assessed
standard of performance. This increase in standard of performance includes extension of useful life and
increase in revenue capacity of the intangible asset.

Any other subsequent costs expenditure should be recognized as an expense in the period incurred. For
an in-process research and development project that is acquired shall be distinguished into those that are
research and those that are development. Only development costs shall be capitalized.

6. Specific guidelines on specific intangibles:

Patent- an exclusive right granted by the government to an inventor enabling him to control the
manufacture, sale or other use of his invention for a specified period of time.

The cost of a purchased patent should be amortized over its legal life (20 years) or useful life
whichever is shorter.

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The cost of a developed patent (the cost should include only the licensing and other related legal fees in
securing the patent rights) should be amortized the shorter of the legal life or useful life.
If a competitive patent was acquired to protect the old patent, the competitive patent should be amortized
over the remaining life of the old patent.
Legal fees and other costs of successfully prosecuting or defending a patent should be charged outright
as an expense. Any cost of unsuccessful litigation on patent should also be charged outright as an
expense including the unamortized cost of the patent.
If a new patent negates the old patent’s value, the cost of the new patent can be made for adding the
unamortized cost of the old patent, however, most business enterprises rely on the conservatism
constraint and immediately write-off the unamortized cost of the old patent.

Copyright – exclusive right granted by the government to the author, composer or artist enabling to publish,
sell or otherwise benefit from his literacy, musical and artistic work.
The costs (the expenses incurred in the production of the work including those required to establish or
obtain the right) should be amortized over the period it is expected to provide a revenue or legal life
whichever is shorter. However, if revenues are expected to be received for an indefinite period of time
and renewal and registration can be done with minimal effort and cost, it should not be amortized but
should however be reviewed for impairment at each reporting date.

Franchise – an exclusive right granted by the franchisor (government or private companies) to a franchisee
to use the property or the rights (trademark, patent and process of the franchisor).

The cost of the franchise should be should be amortized or should be reviewed at each reporting period
for impairment.
a. If the franchise has a definite period – it should be amortized over the definite period (not exceeding
20 years) or useful life whichever is shorter.
b. If the franchise has an indefinite life – it is not amortized but should however be reviewed for
impairment at each reporting date.

Trademark/trade name/brand name – is a symbol, sign, slogan or name use to mark a product to
distinguish it from other products. The cost of the intangible should include
a. When purchased –the purchase price or the cash price equivalents.
b. When developed –the expenditures required to establish including filing fees, registry fees and other
expenses incurred in securing the trademark.

The legal life of a trademark or trade name or brand name is 10 years and maybe renewed for periods
of 10 years each – R.A. No. 8293). The cost of a trademark is not amortized but subject to test of
impairment at least annually as a result of the almost automatic renewal. Trademark may be properly
classified as an intangible asset with an indefinite life. However, if its life is no longer considered
indefinite, it should be amortized over its remaining useful life.

Goodwill:
Only a purchased goodwill (external) should be recognized as an asset. Developed (internal) goodwill
should be charged outright as an expense. Subsequent costs related to the goodwill should be charged
immediately against income. The cost of goodwill is determined by the following computations:
a. Acquisition cost less the fair market value of net asset acquired
b. Purchase of average excess earnings: average earnings – normal earnings x number of years
c. Capitalization of average excess earnings: average earnings – normal earnings  capitalization rate
d. Capitalization of average earnings: average earnings  capitalization rate – net assets

The cost of goodwill is not amortized because its useful life is indefinite. However, goodwill shall be tested
for impairment at least annually or more frequently if events or changes in circumstances indicate a possible
impairment.

The amount of goodwill impairment is determined by comparing the recoverable amount for the cash-
generating unit (CGU) to which the goodwill belongs against the carrying value of the cash-generating unit
to which the goodwill belongs.
• If the recoverable amount of the CGU exceeds the carrying value of the CGU, the CGU and the goodwill
allocated to that unit shall be regarded as not impaired.
• If the carrying amount of the CGU exceeds the recoverable amount of the unit, the company must
recognize an impairment loss.

Research – an activity undertaken to discover new knowledge that will be useful in developing new product or
that will result in significant improvement of existing product. Examples of these are:
1. laboratory research aimed at obtaining or discovering new knowledge
2. searching for application of research findings and other knowledge
3. conceptual formulation and design of possible product or process alternative, and
4. testing in search for product or process alternative.

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Development: is the application of research findings or other knowledge to a plan or design for the production
of new or substantially improved material, device, product, process, system, and prior to the commencement
of commercial production. Examples of these are:
1. design, construction and testing of pre-production prototype and model
2. design of tools, jigs, molds and dies involving new technology
3. design, construction and operation of a pilot plant that is not of a scale economically feasible to the
enterprise for commercial production, and
4. design, construction and testing of a chosen alternative for new or improved product or process.

The standard allows recognition of an intangible asset during the development phase, provided
the enterprise can demonstrate all the following:

a. 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 either use it or sell it.
c. Its ability to use or sell the intangible asset
d. The mechanism by which the intangible will generate probable future economic benefits.
e. The availability of adequate technical, financial and other resources to complete the development and to
use or sell the intangible asset, and
f. The entity’s ability to reliably measure the expenditure attributable to the intangible asset during its
development.

If the company cannot distinguish the research phase from the development phase, the company treats the
expenditure as if it was incurred in the research phase only.

Internally Developed Computer Software- the cost incurred on the research stage in creating the software
should be charged outright to expense when incurred until a technological feasibility has been established for
the product. Technological feasibility is established when a company has produced either a detailed program
design of the software or a working model. After establishing technological feasibility, the cost of software
to be capitalized should include the costs of coding and testing and the cost to produce the product
masters.

The cost of the computer software should be allocated base on the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. If such pattern cannot be determined reliably, the
straight-line method is used.

Purchased Software:
a. If it is for sale – should be treated as an inventory
b.If it is held for licensing or rental to others - recognized as an intangible asset
c. If it is for used and integral part to the hardware – treated as part of the hardware and capitalized as property,
plant and equipment.

7. Impairment of Intangible Assets Other Than Goodwill:

a. Subject to amortization
b. Not subject to amortization

If the recoverable amount of an intangible asset is less than its carrying amount, the carrying amount of the
intangible asset should be reduced to its recoverable amount, the reduction is an impairment loss. If there is
an impairment loss on a non-revalued intangible asset, it is recognized in profit or loss. If there is an impairment
loss on a revalued intangible asset, the carrying value based on the revalued amount less the fair value of the
intangible less the existing revaluation surplus is the measure of impairment loss.

8. Impairment of Goodwill – related to the acquisition of a business:

a. Compute the recoverable value (higher of the fair value less cost to sell and value in use) of each reporting
unit to which goodwill has been assigned.
b.If recoverable amount of the reporting unit exceeds the net carrying value of the assets (including goodwill)
and liabilities of the reporting unit, the goodwill is assumed not to be impaired and no impairment loss is
recognized.
c. If the recoverable amount of the reporting unit is less than the net carrying amount of the assets and liabilities
of the reporting unit, then a new fair value of the goodwill is computed.

Reversal of impairment loss for an Individual Asset:

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss
shall not exceed the carrying amount that would have been determined (net of amortization or depreciation)
had no impairment loss been recognized for the asset in prior years.

A reversal of an impairment loss for an asset other than goodwill shall be recognized immediately in profit or
loss, unless the asset is carried at revalued amount. A reversal of impairment loss on a revalued asset is
credited directly to equity under the heading revaluation surplus. However, to the extent that an impairment
loss on the same revalued asset was previously recognized in profit or loss, a reversal of that impairment loss
is also recognized in profit or loss.

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Week 10: INTANGIBLE ASSETS

PROBLEM SOLVING

Problem 1: Peso Company incurred P100,000 of research and development costs to develop a product
for which a patent was granted on January 1, 2020. Legal fees and other costs associated with
registration of the patent totaled P300,000. The patent is being amortized over its legal life. On July
1, 2022, Peso Company won and paid legal fees of P80,000 for the successful defense of the patent
against an infringement lawsuit filed by PHP Company.

1. How much is the amortization expense for the year 2020?

a. 5,000 c. 15,000
b. 20,000 d. 30,000

2. How much is the carrying value of the patent on December 31, 2022?
a. 255,000 c. 248,800
b. 262,500 d. 335,000

3. How much is the total expenses for the year 2022?

a. 15,000 c. 95,000
b. 80,000 d. 87,500

4. How much is the total expenses for the year 2022 assuming Peso Company did not
win the lawsuit?
a. 80,000 c. 262,500
b. 87,500 d. 350,000

Problem 2: On December 31, 2021, Chile Company had three existing patents as shown in the table
below.
Date Acquired Cost Useful Life
Patent C March 1, 2017 P150,000 8 years
Patent L January 1, 2020 P200,000 10 years
Patent P July 1, 2020 P72,000 5 years

During 2022, Chile Company had the following transactions and assessments pertaining to its patents:

• Due to the emerging competition relating to the product being manufactured in Patent C, it is
expected that the right will be useful only in 2022 and 2023.

• On June 30, 2022, the company unsuccessfully attempted to defend its rights to Patent P. Legal fees
of P15,000 were incurred in this action. The asset was immediately derecognized in the accounts.

The company’s policy is to take full year amortization in the year of acquisition and no amortization in
the year of derecognition using straight-line method. The company reports on a calendar-year basis.

5. How much is the total amortization expense for the year 2022?
a. 28,125 c. 49,688
b. 48,125 d. 51,725

Problem 3: On January 1, 2022, Uruguay Company acquired both a License and a Trademark from
UYU Company in exchange for 1,000 shares of Uruguay, P100 par ordinary shares. The shares are
selling for P125 per share on January 1, 2022. The trademark is worth thrice as much as the license.
The license may be used for five years while Uruguay Company intends to renew the trademark
continuously because the said trademark is expected to contribute to net cash flows indefinitely.

6. How much is the amortization expense for the year 2022?

a. 21,875 c. 23,958
b. 6,250 d. 0

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Problem 4: On April 1, 2022, Mexico Company purchased from MXN Company, a franchise to operate
a 24-hours café at for P3,125,000. In addition, the franchise contract stipulates that Mexico Company
shall pay MXN Company 5% of its sales exceeding P5,000,000, payable at the end of the month
following the end of every quarter. For the nine months ended December 31, 2022, Mexico Company’s
sales amounted to P8,500,000. Mexico estimates that the useful life of the franchise is 10 years.

7. How much is Mexico Company’s amortization expense and franchise fee expense for
the year 2022?
a. 312,500 and 425,000
b. 234,375 and 425,000
c. 312,500 and 175,000
d. 234,375 and 175,000

Problem 5: Colombia-COP Company incurred P1,500,000 (P400,000 in 2019 and P1,100,000 in 2020)
to develop a computer software product wherein P500,000 was expended before technological
feasibility was established in early 2020. Based on the pattern of consumption of economic benefit
from the computer software, the product will earn future revenues of P4,000,000 over its 5-year life,
as follows: 2020 – P1,000,000; 2021 – P1,000,000; 2022 – P800,000; 2023 – P800,000; and 2024 –
P400,000.

8. How much is the total expenses for the year 2020?

a. 250,000 c. 300,000
b. 350,000 d. 750,000

Problem 6: On January 1, 2022, Dominican Company is contemplating to acquire all the issued and
outstanding ordinary shares of Republic Company in a business combination accounted for as a
purchase. The following data regarding on this matter are: Normal rate of return- 8%; Total
accumulated earnings of Republic Company for 5 years –P800,000; Capitalization rate was 10%.
Republic’s assets were carried in its books at P3,000,000 while their fair values were P3,450,000.
Republic’s liabilities totaled P1,750,000. Goodwill is computed by capitalizing the average excess
earnings.

On April 1, 2022, Dominican Company acquired the net assets of DOP Company. The recorded assets
and liabilities of DOP Company on April 1, 2022 were P6,000,000 and P2,500,000, respectively. All of
DOP’s assets’ book values approximate their fair values, except for Land, which has a fair value that
is 400,000 greater than its book value. On April 1, 2022, Dominican Company paid P4,000,000 to
acquire DOP Company. During 2022, Dominican Company incurred additional costs of developing
goodwill, P50,000 and P20,000 for training employees. The expected useful life of the acquired
goodwill is 5 years.

9. How much is the total goodwill acquired by Dominican Company?

a. 340,000 c. 220,000
b. 410,000 d. 240,000

Problem 7: Cuba Corporation provided the following information regarding its Research CUP192 for
the year 2022:

Research CUP192 is for a research project which consists of the following charges:

Salaries of research staff P18,000

Patent acquired solely for the use in the project 12,000
Special Equipment acquired and useful for various
similar research activities 10,000
Patent acquired for use in several research
projects including CUP192 16,000

The Equipment and Patents have been found to be useful for approximately five years. You have
further discovered both Patents and the Equipment were acquired at the beginning of 2022.

10.How much should be recognized as research and development expense for the year
2022?
a. 56,000 b. 18,000 c. 35,200 d. 0

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Problem 8: Argentina-ARS Company provided you the following information pertaining to its Research
and Development activities for the year 2022:

Searching for applications of new research findings P57,000

Trouble-shooting in connection with breakdowns during
commercial production 87,000
Adaptation of an existing capability to a particular
requirement or customer’s need as a part of
continuing commercial activity 39,000
Engineering follow-through in an early phase of
commercial production 45,000
Laboratory research aimed at discovery of new knowledge 204,000
Design of tools, jigs, and molds involving new technology 72,000
Quality control during commercial production, including routine
testing of products 174,000
Testing in search for product or process alternative 300,000
Design and construction of preproduction prototype and model 384,000
Routine and on-going efforts to refine, enrich, or otherwise,
improve upon the qualities of an existing product 750,000

11.What is the total amount to be classified and expensed as research and development
for 2022?
a.1,095,000 b. 1,017,000 c. 456,000 d. 561,000

THEORIES

1. Under PAS 38, which of the following is not part of the definition of intangible assets
a. Identifiable non-monetary assets
b. Controlled by the enterprise
c. Future economic benefits
d. With physical substance

2. It is the systematic allocation of the cost of the intangible asset, less any residual value, as an
expense over the asset’s useful life
a. Amortization
b. Impairment
c. Bifurcation
d. Realization

3. If an intangible asset is acquired in a purchase business combination, its cost is equal to

a. Carrying amount of the acquiree
b. Carrying amount of the acquirer
c. Fair value at the date of acquisition
d. Fair value at the date of balance sheet

4. Legal fees in the registration of patent rights were incurred by an entity at the beginning of the
year. Towards the end of the year, legal fees were incurred in successfully defending the entity’s
patent rights. What is the proper treatment of these legal fees?
a. Both legal fees are capitalized.
b. Both legal fees are expensed in the period incurred.
c. Legal fees in the registration are capitalized while legal fees in the patent
defense are expensed.
d. Legal fees in the registration are expensed while the legal fees in the patent
defense are capitalized.

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5. Intangible assets with indefinite useful lives are

a. Amortized over a period of twenty years.
b. Amortized over a period of twenty years and must be tested for impairment at
least annually.
c. Not amortized, but must be tested for impairment at least annually.
d. Not amortized and need not be tested for impairment.

6. The residual value of an intangible asset with a finite useful life shall be assumed to be zero
unless:
Statement I: There is a commitment by a third party to purchase the asset at the end of its
useful life
Statement II: There is an active market for the asset and it is probable that such a market will
exist at the end of the asset’s useful life.
a. Only statement I is true
b. Only statement II is true
c. Both statements are false
d. Both statements are true.

7. Which of the following statements is false regarding Patent?

a. If the patent is acquired by purchase, then its capitalizable cost includes purchase price
and other incidental costs
b. If the patent is internally developed, then related R&D expenditures are expensed as
incurred; the capitalizable cost includes only licensing and legal fees incurred in securing
the patent rights.
c. Legal fees and other costs of successfully defending a patent are capitalized as
patent cost
d. Patent should be amortized over the legal life or useful life, whichever is shorter

8. Which of the following statements is false regarding Franchise?

a. Franchise agreement maybe made between government and private entities
b. The cost of franchise includes the lump sum payment and all legal fees and expenses
incurred in connection with franchise acquisition (initial franchise fee)
c. Required periodic or continuing franchise fee should be expensed in the period incurred
d. Franchise should be amortized over contract term or useful life, whichever is
longer

9. Which of the following statements is false regarding Goodwill?

a. Internally developed goodwill is not recognized as an intangible asset
b. Purchased goodwill arising from business combination is recognized as an asset
c. Purchased goodwill can be measured based on either the direct valuation (excess earnings)
approach or indirect valuation approach
d. Goodwill should be amortized over its useful life but not to exceed 20 years

10. Which of the following statements is false regarding Trademark?

a. It is a symbol, sign, name, or logo or other distinctions given to companies for exclusive use
b. The legal life of the trademark in the Philippines is for a non-renewable term for
10 years.
c. The trademark with an indefinite life is not amortized but tested regularly for impairment
d. Cost of successfully defending a trademark in courts are expensed outright

11. Which of the following statements is false regarding Research and Development (R&D) costs?
a. Research activity is the original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding on a project
b. Development is the application of research findings or other knowledge to a plan or design
for the production of new product prior to the start of commercial production
c. Research cost is recognized as an outright expense in all cases
d. Development cost is recognized as an outright expense in all cases

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