INTANGIBLE

ASSETS
 is an identifiable, non-monetary asset without
Intangible Asset
physical substance.

The required characteristics of intangible assets are:

Identifiability
Control (power to obtain benefits from the asset)
Future Economic Benefits
Non-monetary and Lacks of Physical Substance
 Identifiability

Intangible Asset Shall be IDENTIFIABLE when it:

a. separable- capable of being separated or divided from the

entity and sold, transferred, licensed, rented or exchange,
regardless of the entity’s intention;
b. arises from contractual or other legal rights, regardless of
whether those rights are separable from the entity or from
other rights and obligations.
The following expenditures are not recognized as intangible
assets since the related economic benefits are not identifiable:

a. Internally generated goodwill

b. Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance.
 Control power to obtain benefits from the asset.

Legal enforceability of a right may demonstrate the entity’s capacity to

control future economic benefits from an intangible asset.
For example, the following intangible assets are recognized since the
entity has control over the underlying economic resource:
1. Trademarks, patent, copyright- the entity can restrict the access of
others from the economic benefits by filing infringement cases
against infringing entities.
2. Franchise- a franchise entity is usually given an exclusive right to
operate within a radius of certain number of kilometers.
On the other hand, no intangible asset shall be recognized for the
following since the entity has not obtained control over the underlying
resource:
1. Training expenditures for employees- generally, an entity does not
control the talent of its skilled employees since it cannot prevent
their resignation.
2. Cost of maintaining customer relationship- since the loyalty of
customers is not assured to remain with the entity.
3. Advertising Cost- since it is not assured that the customers will
buy the entitys products upon seeing the advetrtisements.
 Future Economic Benefits

Future economic benefits from an intangible asset may include

revenue from the sale of products or services, cost savings, or
other benefits from the use of the asset by the entity.
 Non-Monetary and Lacks Physical Physical Substance

cannot be received in fixed or determinable number of units of currency

Intangible asset may also have physical substance, such as compact disc
or legal documentation. In this case judgement shall be applied in
determining which of the tangible or the intangible elements is more
significant. For example, involving computer software:

Classified as PPE Classified as Intangible Assets

Operating systems (e.g., windows OS Specific-purpose software, such as

or Mac OS) since these are required spreadsheets, word processing,
for the related hardware to work accounting software, and other
properly. “apps”.
 EXAMPLES OF PATENT

Marketing-related:
 EXAMPLES OF PATENT

Technology-related:

Computer Software
 EXAMPLES OF PATENT

Contract-related:
 EXAMPLES OF PATENT

Customer-related:
 EXAMPLES OF PATENT

Artistic-related:
 RECOGNITION AND INITAL MEASUREMENT OF
INTANGIBLE ASSET

The recognition of an item as an intangible asset requires an entity to

demonstrate that the item meets;
1. the definition of an intangible asset; and
2. the following recognition criteria:
a. it is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity; and
b. the cost of the asset can be measured reliably.
 MANNERS OF ACQUIRING INTANGIBLE ASSET

The measurement of cost depends on the manner of acquiring intangible

assets, which can be through one or combination of the following;
a. separate acquisition
b. business combination
c. basket purchase
d. government grants
e. deferred payments terms (short-term or long-term)
f. issuance of debt securities
g. issuance of own equity instruments
h. non-monetary exchanges
i. donations from shareholders
j. internal generation of intangible assets
 Separate Acquisition
Intangible assets may be acquired on an individual item basis. For example,
a. a trademark for one of the entity’s products may be sold to another entity.
b. franchise may be “acquired” by entering into a franchise agreement with a
franchisor.
The cost of a separately acquired intangible asset compromises;
1. purchase price, including import duties and non-refundable purchases taxes, after
deducting trade discounts and rebates
2. any directly attributable cost of preparing the asset for its intended use. For
example:
a. costs of employee benefits arising directly from bringing the asset to its
working condition
b. professional fees arising directly from bringing the asset to its working
condition
c. costs of testing whether the asset is functioning propery.
Illustration 1
An entity acquired an accounting software from a foreign developer for
P3,000,000. Other costs incurred were the following:
Purchase taxes of P500,000, 30% of which is non-refundable.
P600,000 costs of incorporating the software to the entity’s existing
IT system.
P200,000 testing the accounting software to look for bugs and
incompatibilities.
P100,000 other costs incurred after the software became ready for
use.
P250,000 payment for the after-sales support of the developer
related to the maintenance of the software.
Solution

Purchase Price to be P3,000,000

Add: Non-refundable purchase taxes (P500k* 30%) 150,000
Costs of incorporating the software 600,000
Testing Costs 200,000
Capitalizable cost of software P 3,950,000
 Part of Business Combination

An entity may acquire intangible assets through business combination. In this case,
an intangible asset shall be measured equal to its fair value as of acquisition date,
provided it is separately identifiable from the goodwill.

In addition, an intangible asset may also be recognized even if it is not recorded in

the acquired business, provided it meets the requirements for it to be recognized
as such. Lastly, in-process research and development project may also be
recognized as an intangible asset provided:
a. it meets the definition of an asset; and
b. it is identifiable
Illustration 2
An entity acquired acquired the business of another entity for a total
consideration of P4,000,000. Included in the acquired assets are the
following intangible assets:

Carrying Amount Fair Value

Trademark P 600,000 P 800,000
Patent 400,000 250,000
Brand name - 500,000
In-process research &
development project - 300,000
 Basket Purchase of Intangible Assets

involve the acquisition of more than one asset

limited to the purchase of solely the assets and liabilities (no business involved)
Amount of consideration paid shall be allocated to the intangible assets based
on their relative fair values.

Illustration 3
An entity acquired some of the assets of another entity, with corresponding fair
values, through a basket purchase price of P 2,000,000:

Land P1,000,000
Patent 1,200,000
Trademark 300,000
Total P 2,500,000
In this case, the basket purchase price shall be allocated as follows:

Fair Value Proportion (A) Alloc. Cost (P2M* A)

Land P 1,000,000 1,000/2,500 P 800,000
Patent 1, 200,000 1,200/2,500 960,000
Trademark 300,000 300/2,500 240,000
P 2,500,000 2,500/2,500 P 2,000,000
 Internally Generated Intangible Assets

Similar to PPEs, intangible assets may also be generated internally. However, unlike
in the PPE, intangible assets will generally not result to assets with physical
substance. Consequently, the requirements for the capitalization of some of the
internally generated assets are strict and requires many conditions.

In accounting for internally generated intangible assets, it is necessary to group the

expenditures into a research phase and a development phase. Research phase
necessarily precedes the development phase.
Phases Accounting Procedures

Example of research activities:

a. activities aimed at obtaining new knowledge
b. search for, evaluation and final selection of, applicants of research findings, or other
RESEARCH knowledge
c. the search for alternatives for materials, devices, products, processes, systems or services
d. the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services.

Example of development activities:

a. design, construction, and testing of pre-production or pre-use prototypes and models
b. the design tools, jigs, molds, and dies involving new technology
DEVELOPMENT c. the design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production
d. the design, construction, and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.
 Internally Generated Intangible Assets

The following are additional principles on internally generated intangible assets:

a. amount previously recognized as expenses shall not form part of the capitalized
cost of the intangible asset.
b. internally generated goodwill, brands, mastheads, publishing titles, customer lists,
and items similar in substance shall not be recognized as intangible assets.

However, except for goodwill, the above items shall be capitalized if these are
separately purchased or acquired as part of business combination. Goodwill shall
be recognized only from business combination transactions.
The cost of an internally generated intangible asset comprises all directly attributable costs
necessary to create, produce, and prepare the asset to be capable of operating in the manner
intended by management. Examples of directly attributable costs are:

a. costs 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.
e. depreciation of PPEs used in developing the intangible asset - for PPEs that can be used for
other purpose.
f. cost of PPEs used in developing the intangible asset- for PPEs that is usable only for the
single project;
g. professional fees incurred in a project; and
h. borrowing costs, if the intangible asset is considered as qualifying asset.

Note: Not all of these costs are capitalizable. Only those costs that were incurred after
meeting all of the capitalization criteria during the development phase are capitalized.
Illustration 4 : An entity a game developer, incurred the following costs
related to one its online games under development:
Costs shall be accounted as follows:
SUBSEQUENT MEASUREMENT OF INTANGIBLE ASSET
INPUTS IN DETERMINING AMORTIZATION
START DATE AND END DATE OF RECOGNIZING
AMORTIZATION
 AMORTIZATION BASED ON REVENUE

Amortization of intangible assets shall not be based on the amount of revenue.

Limited circumstances that intangible assets may be amortized based on revenue:

A. In which intangible asset is expressed as a measure of revenue or;
B. When it can be demonstrated that revenue and consumption of the economic
benefits of intangible assets are highly correlated.

Conditions in which an entity can use amortization based on revenue:

A. "Predominant limiting factor" inherent for the intangible asset is the achievement of
a revenue threshold; and
B. The contract has set a fixed amount of revenue to be generated as the basis or
denominator in the computation of amortization.
AMORTIZATION BASED ON REVENUE
 REPORTING OF AMORTIZATION

Recognized in profit or loss unless it is included in the carrying amount of another asset.

INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIFE

There is no foreseeable limit to the period which the intangible asset is expected to
generate future economic benefits to the entity.
Common example: Trademark
 Accounting for Specific Intangible Assets- Patents
1. The capitalizable cost of patent shall be determined as follows:
a. If it is internally generated, then only the filing and legal costs are capitalized. All of research and
development costs are expensed since the benefit of a patent shall depend on the approval of authorities.
b. In all other cases, its cost shall depend on the manner of its acquisition, which were already discussed
earlier and in Chapter 20, by analogy to PPE items.
2. Subsequent to initial recognition, patent shall be amortized over the shorter of its remaining useful life
and remaining legal life. It is very unlikely that the patent will have an indefinite useful life since its legal life is
nonrenewable. Again, the patent's legal life is 20 years from the date of filing.
3. Legal costs incurred on an infringement case, in which the entity is the defendant, shall be expensed
outright. If the entity lost the case, the carrying amount of the patent shall be expensed outright.
If the entity is the plaintiff (i.e., the party claiming damages), legal costs shall be expensed outright. The
outcome of the case has no bearing on the carrying amount of the patent, except if there is an impairment
indicator.
4. If a competing patent was acquired to protect the entity's right in its existing patent, the acquisition cost
of the competing patent shall be amortized over the estimated remaining useful life of the existing patent.
5. The cost of patent acquired to extend the useful life of the existing patent plus the carrying amount of
the related existing patent shall be amortized over the extended useful life.
Accounting for Specific Intangible Assets- Patents
 Accounting for Specific Intangible Assets- Franchise

1. The initial franchise fee shall be capitalized at cost, which will depend on the related
payment terms as follows:
a. If the initial franchise fee is paid in cash, the amount of cash payment.
b. If the initial franchise fee is deferred, the present value of the payments discounted
using the prevailing market rates plus down payment, if any.
2. Additional franchise fees, usually stated as a percentage of revenues, shall be expensed
outright.
3. Interest expense from the deferred payment of initial franchise fee, if any, shall be
expensed outright.
4. Subsequent accounting for initial franchise fee will depend on the terms of the franchise:
a. If it is renewable for indefinite number of times for insignificant cost, it may be
considered as having indefinite useful life and shall not be amortized but tested for
impairment annually, regardless of existence of impairment indicators.
b. In all other cases, amortize the capitalized amount of initial franchise fee over the
expected useful life.
Accounting for Specific Intangible Assets- Franchise
 BASIC ACCOUNTING FOR GOODWILL
As previously mentioned, goodwill is recognized only from transactions involving business
combinations. Specifically, its amount is determined as the positive amount of difference
between the following:

If there is a negative difference, a gain on bargain purchase shall be recognized in profit or loss.
Details on these terminologies, including the "non-controlling interest" are discussed in
Accounting for Business Combinations subject.

Subsequent to initial recognition, goodwill shall not be subject to amortization but will be
tested for impairment every reporting period, regardless of impairment indicators. This is the
reason why the cash-generating units containing goodwill shall be tested for impairment
annually.
BASIC ACCOUNTING FOR GOODWILL
 ACCOUNTING TREATMENT UNDER PAS 38 FOR
OTHER EXPENDITURES
In general, expenditures incurred with no corresponding intangible asset or other
recognizable assets shall be recognized as expenses:
1. At the time when the entity has a right to access to goods:
a. it already owns the goods purchased; or
b. the goods purchased have been constructed by a supplier in accordance with terms
of a supply contract, and the entity can demand delivery of them in return for payment.
2. As the entity receives the services.

However, an entity may recognize a prepayment asset for the following:

a. Payment to suppliers made in advance before obtaining a right to access the related
goods.
b. Payment to suppliers (i.e., service-provider) made in advance before receiving the
related services.
 ACCOUNTING TREATMENT UNDER PAS 38 FOR
OTHER EXPENDITURES
The following expenditures shall not be capitalized as assets:
1. Start-up costs- expenditure on start-up activities.
Start-up costs may consist of:
a. Pre-opening costs - establishment costs such as legal and secretarial costs
incurred in establishing a legal entity, expenditure to open a new facility or business; o
b. Pre-operating costs - expenditures for starting new operations or launching
new products or processes.
2. Expenditure on training activities.
3. Expenditure on advertising and promotional activities (including mail order
catalogues).
4. Expenditure on relocating or reorganizing part or all of an entity.
ACCOUNTING TREATMENT UNDER PAS 38 FOR
OTHER EXPENDITURES
 ACCOUNTING FOR ENTITY'S WEBSITE

The accounting for costs related to the entity's website will depend on the purpose of
the website to the entity:
Solely or primarily for promoting and advertising its own products and services:
All costs shall be expensed outright.
All other purposes (e.g., website where the customers can place their orders):
The costs shall be capitalized if they meet the capitalization requirements that
will be mentioned in the development phase (e.g., technical feasibility, intention to
complete the project, etc.). Otherwise, the costs shall be expensed outright.

The accounting treatment for costs related to websites developed other than for
promotional or advertising purposes shall depend on what stage the cost was
incurred.
 ACCOUNTING FOR ENTITY'S WEBSITE
1. Planning stage
Accounting Treatment: All costs incurred shall expensed outright.
2. Application and Infrastructure Development stage
3. Graphical Design stage
4.Content Development stage
Accounting Treatment: may be capitalized depending on meeting all of the
capitalization requirements as stated in paragraph 57 of PAS 38. Costs related to
contents being developed to advertise the entity's products and services shall
be expensed outright.
5. Operating stage
Accounting Treatment: Generally recognized as expense, unless it meets the
definition of intangible asset and the criteria for recognition as an asset.

Note: Regardless of the stage, the following costs shall be expensed outright.
ACCOUNTING FOR ENTITY'S WEBSITE
Thank you for
listening!
Don't hesitate to ask any questions!