(Financial Accounting &

Reporting 1B)
LECTURE AID

2017

ZEUS VERNON B. MILLAN

FAR PART 1B: 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.
IFA PART 1A: Zeus Vernon B. 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.
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.
IFA PART 1A: Zeus Vernon B. Millan
Asset with both Intangible and Tangible elements

• When the intangible component is an integral part of the asset as a

whole, the intangible asset is treated as property, plant and
equipment.

• When the intangible component is not an integral part of the asset as a

whole, the intangible component is treated as an intangible asset.

• Ex. Computer software for a computer-controlled machine

tool that cannot operate without that specific software is an
integral part of the related hardware and, therefore, treated
as PPE.

IFA PART 1A: Zeus Vernon B. 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.

IFA PART 1A: Zeus Vernon B. 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

IFA PART 1A: Zeus Vernon B. Millan

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.

IFA PART 1A: Zeus Vernon B. Millan

Examples of directly attributable costs are:

• Costs of employee benefits arising directly from bringing the asset to

its working condition;
• Professional fees arising directly from bringing the asset to its
working condition; and
• Costs of testing whether the asset is functioning properly.

IFA PART 1A: Zeus Vernon B. Millan

Examples of expenditures that are not part of the
cost of an intangible asset are:
• Costs of introducing a new product or service (including cost of
advertising and promotional activities);
• Costs of conducting business in a new location or with a new class of
customer (including cost of staff training);
• Administrative and other genera overhead costs;
• Costs incurred while an asset capable of operating in the manner
intended by management has yet to be brought into use; and
• Initial operating losses, such as those incurred while demand for the
asset’s output builds up.

IFA PART 1A: Zeus Vernon B. Millan

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.

IFA PART 1A: Zeus Vernon B. Millan

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

IFA PART 1A: Zeus Vernon B. 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.
IFA PART 1A: Zeus Vernon B. Millan
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.

IFA PART 1A: Zeus Vernon B. Millan

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.

IFA PART 1A: Zeus Vernon B. Millan

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 cost is not an R&D expense: ‘commercial,’ ‘customer,’ ‘advertising’ and
‘market’.)
Application

• Problem 21-2 #4-7 page 438 to 439.

IFA PART 1A: Zeus Vernon B. Millan

Internally generated intangible assets

• PAS 38, par 63, explicitly provides that “internally generated

brands, mastheads, publishing titles, customer lists and items
similar in substance shall not be recognized as intangible assets”.

• Accordingly, such expenditures shall be expense when incurred.

IFA PART 1A: Zeus Vernon B. Millan

Application

• Problem 21-2 #8 page 439.

IFA PART 1A: Zeus Vernon B. Millan

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.

IFA PART 1A: Zeus Vernon B. Millan

Subsequent expenditure

• Subsequent expenditures on an intangible asset are

generally recognized as expense.

IFA PART 1A: Zeus Vernon B. Millan

Application

• Problem 21-2 #12 page 440.

IFA PART 1A: Zeus Vernon B. Millan

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.

IFA PART 1A: Zeus Vernon B. Millan

Subsequent expenditure

• Subsequent expenditures may be capitalized or added t

the cost of the intangible asset if the following
recognition criteria for an intangible asset are met:
o It is probable that future economic benefits that are
attributable specifically to the subsequent expenditure will
flow to the entity.
o The subsequent expenditure can be measured reliably.

IFA PART 1A: Zeus Vernon B. Millan

Identifiable Intangible Assets

• Patent
• Copyright
• Franchise
• Trademark or brandname
• Leasehold or lease right
• Computer software
• Broadcasting license, airline right and fishing right

IFA PART 1A: Zeus Vernon B. Millan

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.

IFA PART 1A: Zeus Vernon B. 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.

IFA PART 1A: Zeus Vernon B. Millan

Impairment of intangible assets
• Intangible assets with finite useful life are tested for impairment
whenever there is an indication of impairment at the end of reporting
period.

• An impairment loss on an intangible asset is recognized if the

recoverable amount is less that the carrying amount.

• The recoverable amount of the intangible asset is the higher between

fair value less cost of disposal and value in use.

• Value in use is he present value of future cash flows expected to be

derived from an asset.

IFA PART 1A: Zeus Vernon B. Millan

Residual value

• The residual value of an intangible asset shall be presumed to be

zero, except:
o When a third party is committed to buy the intangible asset at the end of
the useful life.
o When there is an active market for the intangible asset so that the
expected residual value can be measured and it is probable that there will
be a market for the asset at the end of the useful life.

A change in the residual value is accounted for as a change in accounting

estimate.

IFA PART 1A: Zeus Vernon B. 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.
 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.
 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
 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.
 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
 CLASSROOM
DISCUSSIONS &
COMPUTATIONS
PROBLEM 21-2: THEORY & COMPUTATIONAL

FAR PART 1B: Zeus Vernon B. Millan

 QUESTIONS????
 REACTIONS!!!!!

FAR PART 1B: Zeus Vernon B. Millan

 SEATWORK
(PROBLEM 21-4: CLASSROOM ACTIVITY)

FAR PART 1B: Zeus Vernon B. Millan