MODULE 6

INTANGIBLE ASSETS

12-1
 Intangible Asset Definition

An identifiable nonmonetary asset without physical

substance.

3 Essential Criteria:

(1) Identifiability – separable; arises from contractual or

other legal rights

(2) Control – power to enjoy future benefits

(3) Future economic benefits – revenue; cost savings

Normally classified as non-current asset.

12-2
 Intangible Asset Issues

Initial Recognition
At cost and it depends on the following:
 Separate acquisition
Typical costs include:
 Purchase price.
 Import duties and nonrefundable purchase taxes
 Directly attributable cost or other incidental
expenses.
 Acquisition as part of a business combination
 Based on fair value on date of acquisition
12-3
 Intangible Asset Issues

Initial Recognition
At cost and it depends on the following:
 Acquisition by way of a government grant
 Either at Fair value or nominal amount or zero plus
any expenditure that is directly attributable to
preparing the asset for its intended use.
 Acquisition by exchange
 Fair value plus any cash payment (w/ C. Substance)

 Carrying value plus any cash payment (w/O C. Substance)

 Acquisition by self-creation or internal generation

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 All directly attributable costs to prepare the asset
 Intangible Asset Issues

Identifiable Intangibles Assets Unidentifiable Intangibles Assets

Acquired through purchase or it CANNOT be sold, transferred,

it can be sold, transferred, licensed, or rented separately
licensed, or rented separately  Goodwill
 Patent  Trademark
 Copyright  Perpetual Franchise
 Franchise
 Trademark/Brand name
 Customer List
 Computer Software
 Broadcasting License,
airline right, fishing right

12-5
 Intangible Asset Issues

Subsequent Recognition
Choose either:
 COST MODEL
 At cost less accumulated amortization and
accumulated impairment loss
 REVALUATION MODEL
 Revalued amount less any subsequent accumulated
amortization and subsequent accumulated
impairment loss

12-6
 Intangible Asset Issues

Amortization of Intangibles
Limited-Life Intangibles:
 Amortize by systematic charge to expense over useful life.

 Useful life should reflect the periods over which the asset
will contribute to cash flows.

 Method of amortization should reflect the pattern in which

the future economic benefits from the asset is expected to
be consumed by the entity. However, if pattern cannot be
determined reliably, the straight line method must be used.

 PAS requires companies to assess the residual values and

12-7
useful lives of intangible assets at least annually.
 Intangible Asset Issues

Amortization of Intangibles
Indefinite-Life Intangibles:
 No foreseeable limit on time the asset is expected to
provide cash flows.

 No amortization.

 Must test indefinite-life intangibles for impairment at least

annually.

12-8
 Types of Intangibles

Goodwill
 Most intangible of all intangibles

 Conceptually, represents the future economic benefits arising

from the other assets acquired in a business combination that
are not individually identified and separately recognized as it
related to the entity as a whole

 It arises when earnings exceed normal earnings by reason of

good name, capable staff, high credit standing, good reputation
etc.

 Either Developed/Internal Goodwill or Purchased Goodwill

12-9
 Types of Intangibles

Recognition of Goodwill
 Internally created goodwill should not be capitalized. Only
recorded when an entire business is purchased.

 2 approaches in measuring goodwill:

RESIDUAL DIRECT

Goodwill is measured as Goodwill is measured on ...

the excess of ...
basis of future earnings
purchase price over the of the entity
FV of the identifiable
net assets purchased.
12-10
 Recording Goodwill- RESIDUAL

Illustration: Multi-Diversified, Inc. decides that it needs a parts

division to supplement its existing tractor distributorship. The
president of Multi-Diversified is interested in buying São Paulo,
Brazil. The illustration presents the statement of financial position
of Tractorling Company.

Illustration 12-4

12-11 LO 6 Describe the accounting procedures for recording goodwill.

 Recording Goodwill - RESIDUAL

Illustration: Multi-Diversified investigates Tractorling’s underlying

assets to determine their fair values.
Illustration 12-5

Tractorling Company decides to accept Multi-Diversified’s offer of

$400,000. What is the value of the goodwill, if any?
12-12 LO 6 Describe the accounting procedures for recording goodwill.
 Recording Goodwill - RESIDUAL

Illustration: Determination of Goodwill.

Illustration 12-6

12-13 LO 6 Describe the accounting procedures for recording goodwill.

 Recording Goodwill - RESIDUAL

Illustration: Multi-Diversified records this transaction as

follows.

Property, Plant, and Equipment 205,000

Patents 18,000
Inventories 122,000
Receivables 35,000
Cash 25,000
Goodwill 50,000
Liabilities 55,000
Cash 400,000

12-14 LO 6 Describe the accounting procedures for recording goodwill.

  Book Exercise-Goodwill

High Company

 Casanova Company
 Star Company
 Clever Company

12-15
 Types of Intangibles

Patent
 An exclusive right granted by the government to an inventor
enabling him to control the manufacture, sale or other use of
invention for a specified period of time.
 Patent gives holder exclusive use for a period of 20 years.
 Capitalize costs of purchasing a patent includes purchase
price, import duties and taxes and other cost attributable in
preparing the asset for intended use.
 Expense any R&D costs in developing a patent and
litigation expenses.
 Amortize over legal life or useful life, whichever is shorter.

12-16
 Types of Intangibles

Trademark
 Is a symbol, sign, slogan or name used to mark a product
to distinguish it from others products
 Trademark has a legal life of 10 years and legal protection for
indefinite number of 10 year renewal periods.
 Capitalize acquisition costs plus cost directly attributable to the
acquisition.
 No amortization due to unlimited renewal but tested for
impairment annually.

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 Types of Intangibles

Patent Vs. Trademark

 Examples:
Source:Trademarks & Patents : Two Sides of the Same Coin | IPOPHL (ipophil.gov.ph)

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 Recording Patent
 An entity developed a patent at P200,000 and spent P120,000
for licensing the patent on Jan 1, 2019.
Jan 1, 2019
R&D Expense 200,000
Patent 120,000
Cash 320,000
Dec 31, 2019 and 2020 Amortization:
Amortization of Patent 6,000 (120K/20)
Patent 6,000
 On Jan 1, 2021 entity paid P180,000 for attorney’s legal fees.
Jan 1, 2019
R&D Expense 180,000
12-19 Cash 180,000
 Recording Patent
 On Jan 1, 2022 entity purchased a competing patent for
P170,000 to protect the original patent.
Jan 1, 2022
Patent 170,000
Cash 170,000
Dec 31, 2022 Amortization:
Amortization of Patent 16,000 (120K/20+ 170K/17)
Patent 16,000
 On Dec 31, 2022 the product covered by the patent was
withdrawn by the government due to hazardous product.
Dec 31, 2022
Patent Write-off 256,000
12-20
Patent 256,000
  Book Exercise-Patent

 Brazen Company
 Safehouse Company
 Gray Company
 Harmonious Company

12-21
 Recording Trademark
 On Jan 1, 2019 entity acquired a trademark for P3M. The
trademark has a remaining legal life of 8 years. The trademark
is expected to generate cash flows of P250,000 per year and
the appropriate discount rate is 10%.
Jan 1, 2019
Trademark 3,000,000
Cash 3,000,000
Impairment:
Impairment Loss 500,000
Trademark 500,000
Carrying Amount 3M
Present Value (250K/10%) 2.5M
Impairment Loss 500K
12-22
  Book Exercise-Trademark
 Centennial Company
 Royal Company
 Downtown Company

12-23
 Types of Intangibles

Copyright
 An exclusive right granted by the government to the
author or artist enabling the grantee to publish, sell or
otherwise benefit from the literary, musical or artistic
work.
 Copyright granted for the life of the creator plus 50 years.
 Capitalize costs of acquiring and defending.
 Amortized to expense over useful life.

and Mickey
Mouse

12-24 LO 4
 Types of Intangibles

Franchise
 Under an agreement, one party called the franchisor
grants certain rights to another party called the
franchisee
 The franchise agreement maybe between:
* government and private entity/individual
* private entities or individuals
 Franchise (or license) with a limited life should be amortized
to expense over the life of the franchise.
 Franchise with an indefinite life should be carried at cost
and not amortized.
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 Types of Intangibles

Franchise
 Examples:

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 Types of Intangibles

Lease Right
 Under the new lease standard, a lessee is required to
initially recognize a right of use asset for the lease term
and the lease liability for the obligation to make lease
payments.

Broadcasting License

Airline Right

12-27
 Types of Intangibles

Customer List
 A customer database containing name, contract
information, order history and other vital information

 Capitalize acquisition costs.

 Internally generated list shall not be recognized as

intangibles

 Amortized to expense over useful life.

12-28 LO 4 Describe the types of intangible assets.

 Impairment of Intangible Assets

Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets in previous chapter
Illustration 11-15

12-29
 Book Exercise-Other Intangibles
 Seashore Company - franchise
 Averse Company – leasehold improvement (PPE)
 Ames Company - leasehold improvement (PPE)
 Cute Company – organization cost

12-30
 Research and Development Costs

Research and development (R&D) costs are not in

themselves intangible assets.

Frequently results in something that a company patents or

copyrights such as:

► new product, ► formula,

► process, ► composition, or

► idea, ► literary work.

12-31
 Research and Development Costs

Identifying R & D Activities

Research Activities Examples

Original and planned investigation Laboratory research aimed at discovery of
undertaken with the prospect of gaining new knowledge; searching for applications of
new scientific or technical knowledge new research findings; conceptual formulation
and understanding. or testing process alternatives

Development Activities Examples

Application of research findings or other Conceptual formulation and design of
knowledge to a plan or design for the possible product or process alternatives;
production of new or substantially construction of prototypes and
improved materials, devices, products, operation of pilot plants.
processes, systems, or services
before the start of commercial
production or use.

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 Research and Development Costs

 Research costs must be expensed as incurred.

 Development costs may or may not be expensed as

incurred.

 Capitalization begins when the project is far enough along

in the process such that the
economic benefits of the R&D
project will flow to the company
(the project is economically
viable).

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 Research and Development Costs

Criteria for Recognition

Development cost may qualify as intangible asset if and only
if the entity can demonstrate all of the following:

 Technical feasibility (a prototype must be produced)

 Intention to complete, use or sell an intangible asset

 Ability to use or sell the intangible asset

 How the intangible asset generate probable future benefits

 Availability of resources or funding to complete development

and use/sell the asset

 Ability to measure reliably the expenditures

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 Research and Development Costs

Activities not considered R & D

Activities:
 Engineering follow through in early phase of
commercialization
 QC during commercial production
 Trouble shooting breakdown
 Routine on-going effort
 Adaptation of an existing capability
 Periodic design changes
 Routine design
 Activity related to construction, relocation, and startup of
facilities and equipment.

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 Book Exercise- R&D
 Alexandria Company - 1. A 1M; 2. B 7M; 3. A 1.6M
 Grouchy Company – A 1.6M
 Luminary Company – D 525K
 Stamina Company- A 1,220,000
 Nuisance Company – B 1,380,000
 Outspoken Company – C 3.4M
 Beta Company – B 6.5M
 Fear Company – C 650K
 Metal Company – B 1.5M
 Courage Company – A 1,650,000
 West Company – C 1.1M
 Awesome Company – 1. B 3.4M; 2. B 2.3M; 3. C 5.9M
 Standard Company – A 3M
 Yellow Company – B 6,050,000
 Mutant Company – D 0
12-36  Summer Company – C 750K