Chapter 38

INTANGIBLE ASSETS

What is an Intangible
Asset?
ACCORDING TO PAS 38:

An identifiable nonmonetary asset

without physical substance

Must be controlled by the entity as a

result of past event

From which future economic

benefits are expected to flow to the
entity.

3 Essential Criteria of an
Intangible Asset

I.

Identifiability

II. Control
III.Future

economic
benefits

I. Identifiablity
An asset is identifiable when:
It

is separable.

Capable of being separated from the entity

Can be sold, transferred, licensed, rented or

exchanged, either individually or together with a

related asset or liability
It

arises from contractual or other legal

rights.
Regardless of whether these rights are transferable

or separable from the entity or from other rights and

obligations

II. Control
The

power of the entity to obtain

the future economic benefits
flowing from the intangible asset and
restrict the access of others to
those benefits.

REMEMBER: The capacity to control

normally would stem from legal
rights
that are enforceable in court of law.

III. Future Economic

Benefits
Revenue

from the sale of

products or services

Cost

savings

Other

benefits resulting
from the use of the asset by
the entity

When do we RECOGNIZE an
Intangible Asset?
It

is probable that future economic

benefits attributable to the asset will
flow to the entity.
The cost of the intangible asset can
be measured reliably.

Measurement of Intangible
Assets
Initial

COST

measurement: at

Depends on how it is acquired

oSeparate acquisition
oAcquisition as part of a business
combination
oAcquisition by way of a government
grant
oAcquisition by exchange
o

How do we compute
for the COST?

A. SEPARATE ACQUISITION
Option 1: Purchase consideration
is in the form of cash or other
monetary assets
Cost

= Purchase price + :

Import duties
AFTER deducting
Nonrefundable trade discounts and

rebates
purchase taxes
Directly attributable cost of preparing
the asset for its intended use

A. SEPARATE ACQUISITION
Option 2: Payment is deferred
beyond normal credit terms

Cost = Cash price

equivalent
REMEMBER:
a) Total payments Cash price equivalent =
Interest expense
b) Costs which are NOT capitalizable (see p.
1346)

B. ACQUISITION AS PART OF BUSINESS

COMBINATION
Cost = Fair value on the date of

acquisition

Case 1: There is an active market

Fair value = Quoted price of an identical (in the

absence, similar) asset

(current bid price)

Case 2: There is NO active market

Fair value = Any available quoted price for

identical or similar asset

Case 3: Developed by the entity

Fair value = Best available information from

the entitys own data

C. ACQUISITION BY GOVERNMENT
GRANT
Government grant occurs when the government
transfers or allocates to an entity intangible assets
such as:
Airport land rights
Licenses to operate radio or television stations
Import licenses/quotas or rights to access
restricted resources

Cost is equal to either:

Fair value
Nominal amount or zero + any directly
attributable cost of preparing the asset for its
intended use (measurement used if the problem
is silent)

D. ACQUISITION BY EXCHANGE
In exchange for:
a) nonmonetary asset
b) a combination of monetary and nonmonetary asset
Case 1: Exchange transaction has commercial
substance
Cost = Fair value (measurement used if the problem is
silent)

Case 2: Exchange transaction lacks commercial

substance OR the fair value of neither the asset
given up nor asset received is reliably
measurable
Cost = Carrying amount of the asset given up

E. ACQUISITION BY SELF-CREATION OR INTERNAL

GENERATION

(Internally generated intangible asset)

Cost = ALL directly attributable costs

necessary to create, produce and prepare
the asset to be capable of operating it in the
manner intended by management
REMEMBER: Internally generated brands,
mastheads*, publishing titles, customer lists
and items similar in substance shall NOT be
recognized as intangible assets they are
components of internally generated GOODWILL
expensed when incurred.

*Masthead the name of a publication (as a newspaper) displayed on the top of the first
page

intangible item as an
EXPENSE and not as an
asset?
When it does not meet the
recognition criteria for an intangible
asset.
So what do we do? Expense it when
incurred.
Examples:
a) Start up costs (organization costs,
preopening costs, preoperating costs)
b) Training costs
c) Advertising and promotional costs

How do we treat Subsequent

Expenditure?
Generally

recognized as expense

WHY? It is likely to MAINTAIN only the

expected future economic benefits
embodied in the intangible asset.

Rarely

capitalized as addition to the

cost of the intangible asset

Identifiable vs.
Unidentifiable
IDENTIFIABLE
INTANGIBLE ASSETS
Acquired through purchase
(there is a transfer of legal
right)
Could be sold, transferred,
licensed, rented or sold
separately
Examples: patent,
copyright, franchise,
trademark/brand name,
leasehold/lease right,
computer software,
broadcasting license, airline
right, fishing right

UNIDENTIFIABLE
INTANGIBLE ASSETS
Inherent in a continuing
business and can only be
identified with the entity as a
whole
Could NOT be sold,
transferred, licensed, rented
or sold separately

Example: Goodwill

Measurement AFTER
Recognition
Either:

Cost model
o Carrying amount = Cost (Accumulated
amortization + Accumulated impairment loss)

Revaluation model
o Carrying amount = Revalued amount*
(Subsequent amortization + Subsequent
impairment loss)
*Revalued amount fair value at the date of revaluation,
determined by reference to an active market

Something to think about

Whats the difference (if any)
between subsequent
expenditures and measurement
after recognition?

Subsequent expenditures:
Expenses after initial recognition
Measurement after recognition:
Carrying amount

What is Amortization?
The

systematic allocation of the

cost or revalued amount of an
intangible asset (less any residual
value), as an expense over the
assets useful life.

REMEMBER:
Cost residual value = Amortizable
amount

Definition of Residual
Value
Presumed

to be ZERO unless:

A third party is committed to buy the

intangible asset at the end of its
useful life
There is an active market for the
intangible asset

When Do We Amortize?
START:

when the asset is available for

use
When the asset is in the location
and condition for its intended use
STOP:

when the asset is derecognized

OR
: when the asset is classified as
held for
sale (Note: Whichever
comes earlier)

What Amortization Method Should

We Use?
The

one which reflects the pattern

in which the future economic benefits
from the asset are expected to be
consumed by the entity.

If

pattern CANNOT be determined

reliably (or if the problem is silent):
Straight Line Method

How Do We Amortize Intangible

Assets?
Option 1: Intangible assets with limited
or finite life
Over their useful life

Option 2: Intangible assets with

indefinite life
NOT amortized
Tested for impairment at least annually

and whenever there is an indication of such

condition.

Useful Life
A.

Finite
Useful life may be expressed in terms of years or
the number of units to be produced

B.

Indefinite
When there is no foreseeable limit to the period
over which the asset is expected to generate net
cash flows.

REMEMBER: The useful life of an intangible asset that

arises from contractual or other legal rights SHALL
NOT EXCEED the period of the contractual or legal
rights but may be shorter depending on the period
over which the entity expects to use the asset.

Impairment of Intangible
Assets
When

the recoverable amount is

less than the carrying amount.
(Impairment loss)
HIGHER:
Fair value LESS cost to sell/cost of
disposal
Value in use

Change in Amortization Method &

Useful Life
TREATMENT:

Change in accounting

estimates

Currently and prospectively

Review: When Do We
Amortize?
START:

when the asset is available

for use
STOP:

when the asset is

derecognized OR
: when the asset is classifies
as held for
sale (Whichever
comes earlier)

Derecognition of Intangible
Assets
Elimination

from the statement

of financial position

When?
a) on disposal
b) when no future economic benefits

are expected from its use and

disposal