(Intermediate Accounting 2)

Intangible Assets

By: ZEUS VERNON B. MILLAN

Chapter 21 INTANGIBLE ASSETS
Related standard: PAS 38 Intangible Assets

Learning Competencies
• Define Intangible asset.
• State the initial measurement of intangible assets
that are (a) externally acquired and (b) internally
  developed.
• State the subsequent measurement of intangible
assets that (a) have finite useful life and (b)
indefinite useful life.
• Account for subsequent expenditures on intangible
assets.
• Give examples of intangible assets within the scope
of PAS 38 and explain their accounting
requirements.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Intangible assets
• An intangible asset is an identifiable non-monetary asset
without physical substance.

• Goodwill acquired in a business combination is outside

the scope of PAS 38 because it is unidentifiable.
Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.

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Essential criteria in the definition of
intangible assets

1. Identifiability – separable or arises from contractual

rights
2. Control – power to obtain (or restrict others from
obtaining) the economic benefits from an asset.
3. Future economic benefits – may include revenue
from the sale of products or services, cost savings, or
other benefits resulting from the use of the asset by the
entity.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Recognition

An intangible asset shall be recognized if management can

demonstrate that:
1. The item meets the definition of intangible asset;
2. It is probable that the expected future economic
benefits will flow to the entity; and
3. The cost of the asset can be measured reliably.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible asset is
acquired. Intangible assets may be acquired through:
1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of a government grant
4. Exchanges of assets
5. Internal generation

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Separate acquisition

The cost of a separately acquired intangible asset

comprises:
1. Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade
discounts and rebates; and
2. Any directly attributable cost of preparing the asset for
its intended use.

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Acquisition as part of a business combination

• The cost of intangible asset acquired in a business

combination is its fair value at the acquisition date.

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Acquisition by way of a government grant

Intangible assets acquired by way of government grant may

be recorded at either:
1. fair value
2. alternatively, at nominal amount or zero, plus direct
costs incurred in preparing the asset for its intended use

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MILLAN)
 Exchanges of assets
• If the exchange has commercial substance, the intangible asset is initially
recognized using the following order of priority:
a. Fair value of the asset Given up (Plus cash Paid or minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash Paid or minus cash
received)

• If the exchange has lacks commercial substance, the intangible asset is initially
recognized using (c) above.

• An exchange transaction has a commercial substance if the expected

future cash flows from the asset received significantly differ from those of the
asset given up.
INTERMEDIATE ACCTG 1B (by:
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Internally generated intangible assets

The costs of self-creating an intangible asset are classified into:

a. Research costs – include costs of searching new knowledge
and identifying and selecting possible alternatives.
b. Development costs – include costs of designing from selected
alternative and using knowledge gained from research.

• If an entity cannot identify in which phase a cost is incurred, the cost

is regarded as incurred in research phase.
 

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R&D Costs
1. Costs incurred in research phase are expensed immediately.
2. Costs incurred in development phase are expensed
immediately, unless they meet all of the following conditions for
capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.

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R&D Costs (continuation)
The following are not R&D expenses but rather regular expenses.
a. Costs incurred during commercial production:
i. Trouble-shooting during commercial production
ii.Periodic or routine design changes to existing products
iii.Modification of design for a specific customer
iv.Design, construction and operation of plant that is feasible for commercial
production
v. Engineering follow through in an early phase of commercial production
vi.Quality control during commercial production
b. Advertising and other marketing expenses
c. Training costs

(HINT: R&D expense relates to something that is still in the process of being invented. It does not
relate to periodic changes to an existing product . The following terms generally indicate that a
INTERMEDIATE ACCTG 1B (by:
cost is not an R&D expense: ‘commercial,’ ‘customer,’
MILLAN) ‘advertising’ and ‘market’.)
Items of PPE used in R&D activities

• If the item of PPE can be used in various R&D activities or other

purposes, the cost of the PPE is capitalized and depreciated. The
amount of depreciation is included as R&D expense.
• If the item of PPE is can only be used on one specific R&D
project, the cost of the PPE is expensed immediately in its
entirety as R&D expense.

INTERMEDIATE ACCTG 1B (by:

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Items not recognized as intangible assets

• The cost of internally generated brands, mastheads,

publishing titles, customer lists, goodwill and items
similar in substance are expensed when incurred.

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Subsequent expenditure

• Subsequent expenditures on an intangible asset are

generally recognized as expense.

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Reinstatement of costs in subsequent period

• Expenditure on an intangible item that was initially

recognized as an expense shall not be recognized as part
of the cost of an intangible asset at a later date.

INTERMEDIATE ACCTG 1B (by:

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Measurement after recognition

• After initial recognition, an entity shall choose as its

accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.

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MILLAN)
Amortization

• Intangible assets with finite useful life are amortized

over the shorter of the asset’s useful life and legal life.
• Intangible assets with indefinite useful life are not
amortized but tested for impairment at least annually.
• The default method of amortization is the straight line
method.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 Type of
intangible Initial cost Amortization
asset
Patent  Purchase cost + direct cost,  Over shorter of
if purchased. useful life and
 Legal and registration costs legal life of 20
only, if self-created. years.
Copyright  Purchase cost + direct cost if  Over shorter of
purchased. useful life and
 All necessary costs that meet legal life equal to
all of the conditions for the creator’s life
capitalization, if internally plus 50 years.
generated.  May be expensed
  outright, if
internally
generated.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
 Type of
intangible Initial cost Amortization
asset
Franchise  Purchase cost + direct cost  Over finite useful
if purchased. life.
   Not amortized if
with indefinite
useful life.
Trademark  Purchase cost + direct cost  Not amortized;
if purchased. legal life is 10
 All necessary costs that years renewable
meet all of the conditions for indefinitely.
capitalization, if internally
generated.
 

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 Type of
intangible Initial cost Amortization
asset
Computer  Purchase cost + direct cost  Over useful life.
software if purchased.
 Only costs after
technological feasibility is
established, normally
include:
i. Costs of coding and testing
after technological
feasibility,
ii. Cost of producing product
master, and
iii. Cost of installation for
internal use software
 
INTERMEDIATE ACCTG 1B (by:
MILLAN)
 Type of
intangible Initial cost Amortization
asset
Web site cost  Purchase cost + direct cost  Over useful life
if purchased. which should be
 Only costs incurred in short.
i. Application and
Infrastructure Development
ii. Graphical Design stage, and

iii. Content Development

stages are capitalized as
intangible asset, if self-
created.
 
 Costs of web sites used
solely for advertisement
and promotion are
expensed.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
 Type of
intangible Initial cost Amortization
asset
Brands,  Recognized only if  Over useful life.
mastheads, externally generated.
customers’  
list, order or  Internally generated are
production expensed immediately.
backlog and
similar items

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 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

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 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

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 END
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