Intangible Assets

IA 1 | J. Tamayao
 INTANGIBLE ASSETS

An INTANGIBLE ASSET is an identifiable nonmonetary asset

without physical substance. It must be controlled by the
entity as a result of past event and from which future
economic benefits are expected to flow to the entity. (PAS
38, par. 8)
ESSENTIAL CHARACTERISTICS

IDENTIFIABLE

CONTROL

FUTURE ECONOMIC BENEFITS

RECOGNITION CRITERIA

PROBABLE

MEASURABLE
 MEASUREMENT

Initial Cost

Cost
– Accumulated Amortization
Cost Model – Accumulated Impairment Loss
Subsequent CA
Fair Value
– Accumulated Amortization
Revaluation Model – Accumulated Impairment Loss
Subsequent CA
 RESEARCH AND DEVELOPMENT COSTS

RESEARCH DEV’T

Very Uncertain More Apparent

Expensed Capitalize*
 WHEN TO CAPITALIZE DEVELOPMENT COSTS?
PAS 38, paragraph 57, states that an intangible asset arising from
development or from development phase of an internal project
shall be recognized if and only if the entity can demonstrate all of
the following: (AITAEMe)
v Availability of Resources
v Intention to Complete
v Technical Feasibility
v Ability to Use or Sell
v Economic Benefits
v Measured Realiably
 EXAMPLE:
CDH Company is involved in the distribution of electricity in Mindanao
Management was concern about the entity’s contribution to forest fires, as the
heat generated from its systems have been identified as a major cause of these
fires. CDH Company’s research and technology division is developing an infrared
camera that may be attached to a helicopter. The camera is capable of
identifying hot-stops in the system and will enable management to take
preventive action. During 2016, management spent P300,000 to develop the
camera. In a presentation to the BOD on December 20, 2016, the R&D team
was able to prove the technical feasibility of the project and how it could aid the
company in reducing repair cost as well as prevent any potential losses due to
forest fires. The team, however, has also informed the board that the existence of
the technology needed to complete the project is not yet available (pending
approval from the government).
 EXAMPLE:
CDH Company is developing a medicine delivery device. Total
expenditures incurred for the project was P7,500,000 of which
P3,400,000 was incurred before July 1, 2019. CDH Company’s
management team determined that the device will generate
probable future economic benefits and has achieved technical
feasibility of July 1, 2019.
The amount of development cost to be capitalized as an
intangible asset is:
 SUBSEQUENT EXPENDITURES
A subsequent expenditure on an
General Rule intangible asset shall be recognized
as an expense.

A subsequent expenditure may be

Exception capitalized when: Probable and
Measurable
 AMORTIZATION
AMORTIZATION is the systematic allocation of the
depreciable amount of an intangible asset over the asset’s
useful life.

The amortization method shall reflect

the pattern in which the economic
benefits from the asset are
METHOD consumed. If such pattern cannot be
determined reliably, the straight line
method is used.
 RESIDUAL VALUE
The residual value of an intangible
General Rule asset shall be presumed to be zero.

When at the end of its useful life,

there is a committed third party
buyer.
Exception When at the end of its useful life,
there is an active market for its
residual value.
 AMORTIZATION OF INTANGIBLE ASSETS

FINITE INFINITE

Amortized over useful life. Not amortized but tested

for impairment.
 IMPAIRMENT OF INTANGIBLE ASSETS
Impairment of intangible assets is recognized in accordance
with PAS 36 on impairment of assets.

FINITE INFINITE

Tested for impairment Tested for impairment

when there is indication of annually or when there is
impairment indication of impairment
 PATENTS
The exclusive right given by the government to the inventor to
make, use, or sell his invention for a term of years.

Under US GAAP, it is classified as technology-based intangible

asset.
 PATENTS: CAPITALIZED COST

PURCHASED DEVELOPED

PP + Directly Attributable Licensing and other

Costs related legal fees in
securing the patent rights.
 PATENTS: COST EXPENSED

All research and development costs incurred;

Legal fees and other costs of successfully

prosecuting or defending a patent. If the litigation is
unsuccessful, the legal costs and the remaining cost
of the patent shall be written off as a loss.
 PATENT AMORTIZATION

Original Cost Related Patent

Cost / CA of Old Patent + Related Patent

Lower of Legal or Useful Life New Life

CA of Old Patent + Related Patent

Old Life
*Legal Life = 20 years and non-renewable
 PATENT AMORTIZATION
Acquired patent on July 1, 2018 for P900,000. It was expected
that the patent would last for 25 years.
On July 1, 2020, the patent was successfully defended against an
infringement case in which the legal cost amounted to P65,000.

What is the amortization Expense on 2020?

The CA of the Patent on December 31, 2020?
 PATENT AMORTIZATION
Acquired patent on July 1, 2018 for P900,000. It was expected
that the patent would last for 16 years.
On July 1, 2020, the patent was successfully defended against an
infringement case in which the legal cost amounted to P65,000.

What is the amortization Expense on 2020?

The CA of the Patent on December 31, 2020?
 PATENT AMORTIZATION
Acquired patent on January 1, 2018 for P900,000. It was expected that the
patent would last for16 years.
On January 1, 2020, the patent was successfully defended against an
infringement case in which the legal cost amounted to P65,000. On the
same date a related patent was purchased for 300,000.

Assuming the related patent extends the life of the patent for additional 6
years.
Assuming the related patent does not extend the life of the patent.

What is the amortization Expense on 2020?

The CA of the Patent on December 31, 2020?
 COPYRIGHTS
The exclusive legal right granted by the government to the
author, composer or artist to reproduce, publish, sell or
distribute his literary, musical or artistic work.

Under US GAAP, it is classified as artistic-related intangible

asset.
 COPYRIGHT: CAPITALIZED COST

PURCHASED DEVELOPED

PP + Directly Attributable All expenses incurred in

Costs the production of the work
plus any cost required to
establish or obtain the
right.
 COPYRIGHTS: AMORTIZATION

Original Cost
Useful Life

Legal Life = Lifetime of the author and 50 years

after his death
 TRADEMARKS
A symbol, sign, slogan or name used to distinguish a certain
product from the others.

Under US GAAP, it is classified as market-related intangible

asset.
 TRADEMARKS: CAPITALIZED COST

PURCHASED DEVELOPED

PP + Directly Attributable Expenditures required in

Costs establishing the
trademark, including filing
fees, registry fees and
other expenses incurred in
securing the trademark.
 TRADEMARKS: COST EXPENSED

Legal fees and other costs of successfully

prosecuting or defending a trademark. If the
litigation is unsuccessful, the legal costs and the
remaining cost of the trademark shall be written off
as a loss.
 TRADEMARKS: AMORTIZATION

Original Cost
Useful Life

Legal Life = 10 years and renewable for periods of

10 years each
 FRANCHISE
A franchise agreement is a contract whereby one party called
franchisor grants certain rights to another party called the
franchisee.

Under US GAAP, it is a contract-based intangible asset

FRANCHISE: CAPITALIZED COST

PURCHASED

PP + Directly Attributable
Costs
 FRANCHISE: COST EXPENSED

Periodic payments of the franchisee to the

franchisor. It is known as the periodic franchise fee.
 FRANCHISE: AMORTIZATION

If granted for a definite period, the cost of franchise

shall be amortized over the useful life or definite
period whichever is shorter.

If granted indefinitely or perpetually, the cost of the

franchise shall not be amortized but tested for
impairment at least annually.
 COMPREHENSIVE: AMORTIZATION
CDH Company discloses the following items that it had recorded in its
intangible assets section during 2019.
01/02/2019 Purchased franchise (8-year life) 3,500,000
04/01/2019 Purchased patent “X” (18-year useful life) 1,560,000
07/01/2019 Purchased patent “Y” (25-year useful life) 1,560,000
09/30/2019 Purchased copyright (20-year life) 4,500,000
Amortization expense to be reported in 2019 is
 GOODWILL
An intangible asset that is not specifically identifiable, has
an indeterminate life, is inherent in a continuing business
and relate to the entity as a whole. Thus, standing alone,
goodwill cannot be bought and sold.
Arises when earnings exceed normal earnings by reason
of good name, capable staff and personnel, high credit
standing, reputation for fair dealings, reputation for
superior products, favorable location and a list of regular
customers.
 GOODWILL: RECOGNITION
DEVELOPED GOODWILL or INTERNAL GOODWILL is not
recorded. PAS 38, paragraph 48, states that internally
generated goodwill shall not be recognized as an asset.

PURCHASED GOODWILL is the goodwill that has been paid

for. It arises when a business is purchased. It is
recognized as an asset because it has been paid for.
 GOODWILL: MEASUREMENT

RESIDUAL DIRECT

Goodwill is measured by Goodwill is measured on

comparing the purchase the basis of the future
price for the entity with earnings of the entity.
the net tangible and
identifiable assets
 GOODWILL: RESIDUAL
CDH Corporation concluded that the fair value of COA
Company was P80,000 and paid that amount to acquire
all of its net assets. COA reported assets with a book
value of P60,000 and fair value of P98,000 and liabilities
with a book value and fair value of P23,000 on the date of
combination. John also paid P3,000 to a search firm for
finder’s fees related to the acquisition.
What is the acquired goodwill?
 GOODWILL: DIRECT
CDH Co. is contemplating on acquiring COA, Inc. The following information was gathered
through a diligence audit:
The actual earnings of COA, Inc. for the past 5 years are: 20X1 4,800,000; 20X2
5,200,000; 20X3 5,400,000; 20X4 5,000,000; AND 20X5 7,200,000.
Earnings in 20x5 included an expropriation gain of ₱1,600,000. The fair value of COA’s
net assets as of the end of 20x5 is ₱40,000,000. The industry average rate of return is
12%. Probable duration of “excess earnings” is 5 years.

How much is the estimated goodwill using the multiples of average excess earnings
method?
How much is the estimated goodwill using the capitalization of average excess earnings
method (capitalization at 25%)?
How much is the estimated goodwill using present value of average excess earnings
method (discount rate is 10%)?
END