AASI: Audit of Intangible Asset

Intangible Asset Recognition and measurement

Intangible asset is an identifiable non-monetary asset without Per PAS 38, recognition of intangible assets must meet the

physical substance. They are different from other kinds of assets such following conditions: a.Identifiability: the definition of an intangible

as equipment, machinery, and building, which we can see with our asset requires an intangible asset to be identifiable to distinguish it

eyes. Similar to other assets on the balance sheet, we perform the from goodwill. An asset is identifiable if it either (a) is separable or (b)

audit of the intangible asset by testing several audit assertions such as arises from contractual or other legal rights. b.Control: Intangible

existence, valuation, right and obligation, and completeness. assets must be under the control of the entity. An entity controls an

Audit assertion for intangible asset asset if the entity has the power to obtain the future economic

The audit assertions for intangible assets are included in the benefits flowing from the underlying resource and to restrict the

table below: access of others to those benefits c.Future economic benefit: The
entity expects to generate future economic benefits from assets. The
Assertion Description Audit procedures
future economic benefits flowing from an intangible asset may
Existence The intangible assets reported on 1. Obtain analysis of ledger include revenue from the sale of products or services, cost savings, or
the balance sheet really exist at accounts for intangibles
the reporting date 2. Examine documentation
other benefits resulting from the use of the asset by the entity. d.The
supporting intangibles cost of the asset can be measured reliably. Intangible assets shall be
measured initially at cost.
Completeness All intangible asset transactions 3. Vouch additions to or
that should have been recorded acquisitions during the year Examples of Intangible Assets
have been recorded. 4. Evaluate dispositions and
1. Patent: is the intellectual property that gives the owner an exclusive
write-offs during the year
right to his or her innovation. It prevents the copycat from taking
Right and The company really owns all 5. In addition to no. 2, perform benefit from the owner by copying the original idea.
obligation intangible assets reported on the analytical procedures
balance sheet as of the reporting 2. Trademark: is the written mark which company uses to identify its
date goods or service. It is a unique design that differentiates from the
competitor.
Valuation The balance of intangible assets 6. In addition to nos. 3 & 4,
truly reflects their actual evaluate amortization policy 3. The customer list: is the list of previous company customers which is
economic value. and verify the computation of
the potential to make more sales in the future.
amortization
4. License: is the official permit from the government, which allows the
Presentation and Intangible assets have been 7. Evaluate financial statement entity to run a business, provide a particular service, or own
disclosure properly presented on the presentation and disclosure for
balance sheet and adequate intangibles something.
disclosure has been made in the 5. Software: is the computer application which allows the human to
note to financial statements.
perform many tasks on the computer.
Internally generated goodwill
Internally generated goodwill shall not be recognized as an
asset. Internally generated goodwill is not recognized as an asset
because it is not an identifiable resource (i.e., it is not separable, nor
does it arise from contractual or other legal rights).
Internally generated intangible assets
To assess whether an internally generated intangible asset
meets the criteria for recognition, an entity classifies the generation of
the asset into: (a) a research phase; and (b) a development phase.
Research Phase Development Phase
No intangible asset arising from research (or An intangible asset arising from
from the research phase of an internal development (or from the development
project) shall be recognized. Expenditure phase of an internal project) shall be
on research (or on the research phase of recognized if, and only if, an entity can
an internal project) shall be recognized as demonstrate all of the following:(a) the
an expense when it is incurred. Examples of technical feasibility of completing the
research activities are: (a) activities aimed intangible asset so that it will be available for
at obtaining new knowledge; (b) the use or sale. (b) its intention to complete the
search for, evaluation and final selection of, intangible asset and use or sell it. (c) its ability
applications of research findings or other to use or sell the intangible asset. (d) how the
knowledge; (c) the search for alternatives intangible asset will generate probable
for materials, devices, products, processes, future economic benefits. Among other
systems or services; and (d) the formulation, things, the entity can demonstrate the
design, evaluation and final selection of existence of a market for the output of the
possible alternatives for new or improved intangible asset or the intangible asset itself
materials, devices, products, processes, or, if it is to be used internally, the usefulness
systems or services. 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.
Examples of development activities are: (a)
the design, construction and testing of pre
production or pre-use prototypes and
models; (b) the design of tools, jigs, moulds
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.
If an entity cannot distinguish the research phase from the
development phase of an internal project to create an intangible
asset, the entity treats the expenditure on that project as if it were
incurred in the research phase only.
Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance shall not be recognized
as intangible assets. Expenditure on internally generated brands,
mastheads, publishing titles, customer lists and items similar in
substance cannot be distinguished from the cost of developing the
business as a whole. Therefore, such items are not recognized as
intangible assets.
Measurement after recognition
An entity shall choose either the cost or revaluation models 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, an 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 the revaluation
less any subsequent accumulated amortization and any subsequent
accumulated impairment losses. Under this model, the increasing
value will be recorded as comprehensive income and accumulated
in “revaluation surplus” in equity. The decreasing amount will reverse
back from this surplus. For the purpose of revaluations under this
Standard, fair value shall be measured by reference to an active
market. Revaluations shall be made with such regularity that at the
end of the reporting period the carrying amount of the asset does not
differ materially from its fair value.
Amortization
Intangible assets with finite useful lives
The depreciable amount of an intangible asset with a finite
useful life shall be allocated on a systematic basis over its useful life.
The amortization method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by
the entity. If that pattern cannot be determined reliably, the
straight-line method shall be used.
Intangible assets with indefinite useful lives
An intangible asset with an indefinite useful life shall not be
amortized. In accordance with PAS 36, an entity is required to test an
intangible asset with an indefinite useful life for impairment by
comparing its recoverable amount with its carrying amount (a)
annually, and (b) whenever there is an indication that the intangible
asset may be impaired.
Problem 1
You gathered the following information related to the Patents account of the
CCC Corporation in connection with your audit of the company's financial
statements for the year 2022. In 2021, CCC developed a new machine that
reduces the time required to insert fortunes into its fortune cookies. Because
the process is considered very valuable to the fortune cookie industry, CCC
patented the machine. The following expenses were incurred in developing
and patenting the machine:
Research and development laboratory expenses P1,000,000
Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Legal expenses to obtain patent 480,000
Wages paid for the employees' work on the research, 1,200,000
development, and building of the machine
(60% of the time was spent in actually building the machine)
Expense of drawing required by the patent office to be 68,000
submitted with the patent application
Fees paid to the government patent office to process application 100,000
During 2022, CCC paid P150,000 in legal fees to successfully defend the patent
against an infringement suit by LCBA Corporation. It is the company's policy to
take a full year of amortization in the year of acquisition.
Based on the given information and the result of your audit, determine the
following:
1. Cost of patent
a. P580,000 c. P798,000 b. P648,000 d. P1,128,000
2. Cost of machine
a. P1,040,000 c. P1,236,000 b. P1,168,000 d. P1,648,000
3. Total amount that should be charged to expense when incurred in
connection with the development of the patented machine
a. P0 c. P1,480,000 b. P1,000,000 d. P1,608,000
4. Carrying amount of patent as of December 31, 2022
a. P522,000 c. P837,900 b. P583,200 d. P1,015,200
Problem 2
In connection with your audit of the CCC Corporation's financial statements
for the year 2022 you noted the following items relative to the company's
Intangible assets. A patent was purchased from LCBA Company for P4,000,000
on January 2, 2021. CCC estimated that the remaining useful life of the patent
would be 10 years. The patent was carried in LCBA's accounting records at a
carrying value of P4,000,000 when LCBA sold it to CCC.
During 2022, a franchise was purchased from SJC Company for P960,000. In
addition, 5% of the revenue from the franchise must be paid to SJC. Revenue
from the franchise for 2022 was P5,000,000. CCC estimates the useful life of the
franchise to be 10 years and takes a full year's amortization in the year of
purchase. CCC incurred research and development costs of P866,000 in 2022.
CCC estimates that these costs will be recouped by December 31, 2025.
On January 1, 2022, CCC, because of recent events in the industry, estimated
that the remaining life of the patent purchased on January 2, 2021, is only 5
years from January 1, 2022.
Based on the given information and the result of your audit; determine the
following:
1. Amortization of patent for 2022
a. P400,000 c. P800,000 b. P720,000 d. P900,000
2. Carrying amount of patent as of December 31, 2022
a. P2,400,000 c. P2,880,000 b. P2,700,000 d. P3,200,000
3. Carrying amount of intangible assets as of December 31, 2022
a. P3,264,000 c. P3,744,000 b. P3,564,000 d. P4,610,000
4. Total expenses to be recognized in 2022
a. P1,066,000 c. P2,012,000 b. P1,932,000 d. P2,112,000
Problem 3
In connection with your audit of the CCC Corporation, you noted the following
transactions during 2022:
Jan. 2 Paid legal fees of P450,000 and other costs of P249,000 to complete
organization of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and
hound out pamphlets and candy to create goodwill for the new entity. Clown
cost, P30,000; pamphlets and candy, P15,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P1,287,000
Patent application and licensing fees 190,500
Total P1,477,500
It is estimated that in 6 years other companies will have developed
improved processes, making the CCC Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a
distinctive trademark to be printed on the container in exchange for 18,000
shares of CCC's no-par ordinary shares selling for P50 per share. The license is
worth twice as much as the trademark, both of which may be used for 6 years.
July 1 Constructed a shed for P3,930,000 to house prototypes of experimental
models to be developed-in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product
development totaling P750,000 in 2022.
It is the company's policy to take a full year of amortization in the year of
acquisition.
Based on the given information and the result of your audit, determine the
following:
1.Cost of patent
a. P0 c. P1,287,000 b. P 190,500 d. P1,477,500
2. Cost of licenses
a. P0 c. P450,000 b. P300,000 d. P600,000
3. Cost of trademark
a. P0 c. P450,000 b. P300,000 d. P600,000
4. Carrying amount of Intangible Assets as of December 31, 2022
a. P0 c. P2,026,250 b. P1,981,250 d. P2,031,250
5. Total amount resulting from the foregoing transactions that should be
expensed when incurred 0
a. P0 c. P2,971,500 b. P1,494,000 d. P5,424,000
Problem 4
4.1 CCC Company incurred the following costs during 2022 in connection with
its research and development activities:
Cost of equipment acquired that will have alternative
uses in future research and development projects
over the next 5 years P1,400,000
Materials consumed in research and development projects 295,000
Consulting fees paid to outsiders for research
and development projects 500,000
Personnel costs of persons involved in research and
development projects 640,000
Indirect costs reasonably allocable to research and
development projects 250,000
Materials purchased for future research and development 170,000
1. Compute the amount that will be classified and recognized as research and
development expenses.
a. P1,465,000 c. P1,965,000 b. P1,685,000 d. P2,135,000
4.2 CCC, Inc. incurred the following costs during the year ended December
31, 2022:
Laboratory research aimed at discovery of new knowledge P 300,000
Radical modification to the formulation of
a chemical product 217,500
Research and development costs reimbursable under a
contract to perform research and development
for LCBA Corporation 525,000
Testing for evaluation of new products 337,500

2. Compute the amount that will be classified and recognized as research and
development expenses.
a P300,000 c. P855,000 b. P637,500 d. P1,380,000