INTANGIBLE ASSETS

PAS 38
 INTANGIBLE ASSET

• An identifiable nonmonetary asset without physical substance

• It is controlled by the entity as a result of past event and from

which future economic benefits are expected to flow to the
entity.

THREE ESSENTIAL CRITERIA:

1. Identifiability
2. Control
3. Future economic benefits
 RECOGNITION

Intangible assets shall be measured initially at cost.

Subsequent measurement:

1. COST MODEL – cost less any accumulated amortization and

any accumulated impairment loss

2. REVALUATION MODEL – revalued amount less any

subsequent amortization and any subsequent accumulated
impairment loss.

Note: Revaluation model can only be used if there is an active market for the asset.
DIFFERENT MEANS OF ACQUIRING INTANGIBLE ASSET

1. SEPARATE ACQUISITION – the cost of the intangible asset comprises:

a. the purchase price
b. import duties and nonrefundable purchase taxes, and
c. directly attributable cost

2. ACQUISITION AS PART OF A BUSINESS COMBINATION – the cost of

intangible asset is based on the fair value on the date of acquisition
 DIFFERENT MEANS OF ACQUIRING INTANGIBLE ASSET
3. ACQUISITION BY WAY OF A GOVERNMENT GRANT – cost of intangible asset
is either:
a. Fair value
b. Nominal amount or zero, plus any directly attributable expenditures

4. ACQUISITION BY EXCHANGE – cost of intangible asset is measured at fair value

of asset given up plus any cash payment (if with commercial substance)
If without commercial substance, carrying amount of asset given up plus any cash
payment
 DIFFERENT MEANS OF ACQUIRING INTANGIBLE ASSET

5. INTERNALLY GENERATED INTANGIBLE ASSET – cost of intangible asset

includes all directly attributable costs necessary to create, produce and prepare the
asset
However, internally generated brands, mastheads, publishing titles, customer
lists and items similar in substance shall not be recognized as intangible assets, but
are expensed when incurred.
 CLASSIFICATION OF INTANGIBLE ASSETS

1. Intangible assets with definite life

Examples: patent, copyright, franchise with fixed term,

computer software, customer list, and license

2. Intangible assets with indefinite life

Examples: goodwill, trademark, and perpetual franchise

• AMORTIZATION – the systematic allocation of the amortizable amount of an
intangible asset over the useful life
• AMORTIZABLE AMOUNT – cost of intangible asset less residual value
• RESIDUAL VALUE of an intangible asset – presumed to be zero, except:

a. when a third party is committed to buy the intangible asset at the end of
useful life
b. when there is an active market for the intangible asset that the residual
value can be measured reliably
AMORTIZATION AND IMPAIRMENT OF INTANGIBLE ASSETS

Intangible assets with limited or finite life are amortized over their useful
life. They are also tested for impairment whenever there is an indication of
impairment at the end of the reporting period.

Intangible assets with indefinite life are not amortized but are tested for
impairment at least annually and whenever there is an indication that the
intangible asset may be impaired,
 PATENT

• An exclusive right granted by the government to an inventor enabling the

grantee to control the manufacture, sale or other use of invention for a specified
period of time.
• It is regarded as technology-based intangible, with a legal life of 20 years from
the date of filing the application.
• Its life can be extended beyond its legal life by a new patent for
improvements/changes.

This is in accordance with R.A. No. 8293 or the Intellectual Property Code of the Philippines.
 PATENT

• Cost of patent includes purchase price, import duties, non refundable

purchase taxes and any directly attributable cost.
• For internally developed, the cost includes cost of licensing and other related
legal fees in securing the patent rights.
• All research and development costs are expensed.
• Cost to defend a patent, successful or not are also expensed immediately
by virtue of recognition criteria for subsequent costs capitalization.
 AMORTIZATION OF PATENT

• Patent shall be amortized over its legal life or useful life whichever is
shorter.
• If a competing patent is acquired in protection of the original patent, its
cost shall be amortized over the remaining useful life of the old patent.
• For a related patent that is acquired, the cost of which and the unamortized
cost of the old patent is to be amortized over the extended life. If there is no
extension, cost of old and related patent is amortized over their remaining
useful life.
EXAMPLE 1
An entity developed a patent for 800,000 and spent 480,000 for the licensing of
the patent including legal fees and cost of models and drawings that accompany the
registration on
January 1, year 1. The patent will be useful for the entire legal life of 20 years.
On January 1, year 3, the entity paid 720,000 to attorneys for the services in
connection with a successful defense of the patent.
On January 1, year 4, the entity purchased a competing patent for 680,000 in
order to protect the original patent. The competing patent has 18 years to run from
the date of acquisition.
On December 31, year 4, the product covered by the patent was withdrawn
from sale under a government order because of potential hazard in the product.
EXAMPLE 1 journal entries
To record development of patent
Research and Dev’t expense 800,000
Cash 800,000

To record the cost of licensing of patent

Patent 480,000
Cash 480,000

To record amortization of patent for year 1

Amortization of patent (480T/20) 24,000
Patent 24,000

To record amortization of patent for year 2

Amortization of patent 24,000
Patent 24,000
EXAMPLE 1 journal entries cont.
To record cost of successful defense of patent in year 3
Legal expenses 720,000
Cash 720,000

To record amortization of patent for year 3

Amortization of patent 24,000
Patent 24,000

To record acquisition of competing patent

Patent 680,000
Cash 680,000

To record amortization of patent for year 4

Amortization of patent 64,000
Patent 64,000

To write-off patent account in year 4

Patent written off 1,024,000
Patent 1,024,000
 TRADEMARK

• Is a symbol, sign, slogan or name used to mark a product to

distinguish it from other products.
• It is a market-related intangible asset
• Its legal life is 10 years and renewable for periods of 10 years
each. Hence, trademark is regarded as having indefinite life.
 GOODWILL
• Is inherent in any continuing business and is identified to a company as a
whole. It is unidentifiable asset.
• It cannot be sold, transferred, licensed, rented, or exchanged separately.
• It is the most intangible of all intangible assets
• It arises when earnings exceed normal earnings by reason of good
relationship between an entity and its customers
• If purchase price is less than net fair value of the identifiable assets, the
difference is negative goodwill which is recognized in profit or loss as “gain
on bargain purchase.”
 RECOGNITION OF GOODWILL

DEVELOPED GOODWILL or INTERNALLY GENERATED GOODWILL shall

not be recognized as an asset.

PURCHASED GOODWILL arises when a business is purchased and is

recognized as an asset because it has been paid for.
 MEASUREMENT OF GOODWILL

FIRST APPROACH: RESIDUAL APPROACH

Goodwill is measured by comparing the purchase price for the entity with the
net tangible and intangible identifiable assets

Goodwill = Purchase price less fair value of net asset acquired

 MEASUREMENT OF GOODWILL

SECOND APPROACH: DIRECT APPROACH

Goodwill is measured on the basis of future earnings of the entity.

When future earnings exceed normal earnings, it is an indication of an

unidentifiable intangible asset or goodwill.

FOUR METHODS:
1. Purchase of average excess earnings
2. Capitalization of average excess earnings
3. Capitalization of average earnings
4. Present value method
 COPYRIGHT

• An exclusive right granted by the government to the author, composer or

artist enabling the grantee to publish, sell, or otherwise benefit from the
literary, musical, or artistic work.
• It is a artistic-related intangible asset
• The term of protection for copyright is during the life of the author and for
50 years after death.
 FRANCHISE
• A franchise is a contract-based type of intangible whereby there are two
parties in a franchise agreement, the franchisee and the franchisor.
• The franchise cost is equal to the amount of the lumpsum acquisition cost
and any directly attributable costs necessary for its intended use.
• Any required periodic franchise fee is expensed as incurred and not
capitalizable cost of the franchise. The entry to record such periodic
franchise fee is:
Franchise fee expense XX
Cash XX