Chapter 11 – Intangible Assets Mode of Acquisition Measurement of initial cost
a. Purchase Purchase price plus Direct costs
Introduction (including non-refundable taxes but
Intangible Assets are identifiable non-monetary assets without physical substance excluding trade discounts and
rebates).
Essential elements of an intangible asset If payment is deferred, the cost is cash
1. Identifiability – an intangible asset is identifiable when it: price equivalent.
a. Is separable, i.e., capable, of being separated and divided from the entity b. Non-exchange transaction Fair value at the acquisition date
and sols, transferred, licensed, rented, or exchanged, either individually or c. Exchange With commercial substance (order of
together with a related contract, identifiable asset or liability, regardless of priority):
whether the entity intends to do so; or a. FV of asset given up (plus cash
b. Arises from binding arrangements including contractual or other legal paid/minus cash received).
rights, regardless of whether those rights are transferable or separable b. FV of asset received
from the entity or from other rights and obligations. c. CA of asset given up (plus cash
paid/minus cash received).
2. Control – the entity has the ability to benefit from the intangible asset or prevent
others from benefitting from it. Without commercial substance: CA of
Control of an intangible asset normally arises from legal rights that are asset given up (plus cash paid/minus
enforceable in a court of law. However, legal enforceability of a right is not a cash received).
necessary condition for control because an entity may be able to control the future d. Entity Combination Fair value at the acquisition date
economic benefits or service potential in some other way.
Peculiar measurement is made when the intangible asset is internally generated
3. Future economic benefits or service potential – the future economic benefits or (self-generated).
service potential flowing from an intangible asset may include revenue from the sale
of products or services, cost savings, or other benefits resulting from the use of the e. Internal Generation – to assess whether an internally generated intangible asset
asset by the entity. For example, the use of intellectual property in a production or meets the criteria for recognition, an entity classifies the generation of the asset into:
service process may reduce future production or service costs or improve service (a) research phase; and (b) development phase.
delivery rather than increase future revenues (e.g., an on-line system that allows
citizens to apply or renew licenses more quickly on-pine, resulting in a reduction in 1. Research – is original and planned investigation undertaken with the prospect of
office staff required to perform this function while increasing the speed of gaining new scientific and technical knowledge and understanding.
processing). Expenditures during the research phase are recognized as expense.
Common examples of intangible assets are computer software, patents, copyrights, Examples of research activities:
franchise, motion picture films, trademarks or brand names, licenses, acquired i. Activities aimed at obtaining new knowledge;
import quotas, lists of users of a service, and relationships with users of a service. ii. The search for, evaluation and final selection of, applications of research
findings or other knowledge;
Recognition iii. The search for alternatives for materials, devices, products, processes,
An intangible asset is recognized if it meets the definition of an intangible asset and the systems or services; and
recognition criteria for assets. iv. The formulation, design, evaluation, and final selection of possible
alternatives for new or improved materials, devices, products, processes,
Initial Measurement systems, or services.
An intangible asset is initially measured at cost.
The measurement of cost depends on the mode of acquisition, which is similar to 2. Development – is the application of research findings or other knowledge to a plan
those of PPE and investment property. A summary is provided below: or design for the production of new or substantially improved materials, devices,
products, processes, systems, or services before the start of commercial production
or use.
Expenditures during the development phase are capitalized if the entity can b. Finite life – an intangible asset is considered to have a finite life if iit has a
demonstrate all of the following: limited period of benefit to the entity.
a. Technical feasibility of completing the intangible asset; Intangible assets with finite useful life are amortized using the
b. Intention to complete the intangible asset; straight line method over a period of 2 to 10 years. Amortization starts
c. Ability to use or sell the intangible asset; when the intangible asset is available for use and ceases when the asset
d. Probable future economic benefits or service potential; is derecognized or classifies as held for sale, whichever comes earlier.
e. Availability of adequate resources needed to complete the development Amortization does not cease when the asset is no longer used, except
and to use or sell the intangible asset; and when it is fully depreciated or classified as held for sale.
f. Reliable measurement of the cost of the intangible asset. The residual value is assumed to be zero except when there is a
third party commitment to purchase the asset at the end of its useful life or
If it is not clear whether an expenditure is research or a development cost, it shall be there is an active market where the entity expects to sell the asset at the
treated as research cost. end of its useful life.
The amortization period and amortization method shall be
Expenditures already charges as expenses cannot be subsequently capitalized, i.e., reviewed at each reporting date. Changes in useful life or amortization
reinstatement of expenditure previously recognized as an expense is prohibited. method shall be accounted for as changes in accounting estimates.
Internally generated brands, mastheads, publishing titles, customer lists, and similar Impairment
items shall not be recognized as intangible assets. An entity is required to test for impairment an intangible asset with indefinite useful life or an
intangible asset not yet available for use at least annually or whenever there is an indication of
Selling, administrative and other general overhead, costs of inefficiencies, initial impairment.
operating losses, and training costs are expensed and shall not form part of the cost An entity shall test for impairment an intangible asset with definite useful life only
of an intangible asset. when an indication of impairment exists. Indications of impairment shall be assessed at each
reporting date.
Subsequent expenditures on recognized intangible assets are generally expensed, The accounting for impairment of intangible assets, and reversal thereof, is the
unless they meet the definition of an intangible asset and the asset recognition same as those of investment property and PPE.
criteria.
Derecognition
The accounting for replacement of a part of an intangible asset is the same as those An intangible asset is derecognized when it is disposed or when no future economic benefits
of PPE and investment property. or service potential is expected from the asset.
On derecognition, the difference between the carrying amount and the net disposal
Subsequent Measurement proceeds, if any, is recognized as gain or loss in surplus or deficit.
An intangible asset is subsequently measures at cost less any accumulated amortization
and any accumulated impairment losses. Illustration: Journal entries
Initial and Subsequent Measurement:
Amortization On January 1, 20x1, Entity A acquires a computer software for 1,000,0000, the software’s
Amortization is the systematic allocation of the depreciable amount of an intangible asset useful life is 5 years.
over its useful life.
For purposes of amortization, intangible assets are classified according to their 1/1/x1 Computer Software 1,000,000
assessed useful life as follows: Cash-Modified Disbursement System 1,000,000
a. Indefinite life – an intangible asset is considered to have an indefinite life if (MDS), Regular
there is no foreseeable limit to the period over which it is expected to 12/31/x Amortization-Intangible Assets 200,000
provide economic benefits or service potential to the entity. 1 Accumulated Amortization-Computer 200,000
Intangible assets with indefinite life are not amortized but tested Software (1M/5 yrs.)
for impairment at least annually.
Impairment
Intangible Assets are identifiable non-monetary assets without physical
substance
Essential elements: (1) Identifiability (separable or arises from binding
On December 31, 20x1,);Entity
arrangements A assesses
(2) Control; anFuture
and (3) indication of impairment
economic benefits and estimates a
or service
recoverable amount
potential. of 700,000.
Intangible assets are initially measured at cost. The measurement of cost
12/31/x depends
Impairment
on the Loss-Intangible
mode of acquisition,Assets 100,000
which is similar to those of PPE and
1 Accumulated
investment property. Impairment Losses- 100,000
Computer
Internal generation:Software (700K RA – 800K CA)
1. Research cost – recognized as expense.
2. Development cost – capitalized only if all of the conditions listed in the
Derecognition GAM for NGAs are met.
On January
If it1,is 20x2, Entity
not clear A sellsantheexpenditure
whether computer software for 720,000.
is a research or a development cost, it is
treated as research cost.
1/1/x2 Cash-Collecting Officers 720,000
Reinstatement of costs already expensed is prohibited.
Accumulated Amortization-Computer
Internally generated brands, mastheads, publishing titles, customers lists, and
Software 200,000
similar items are not recognized as intangible assets.
Accumulated Impairment Losses-
Subsequent
Computerexpenditures
Software on recognized intangible assets are generally
100,000
expensedComputer
, unless they meet
Software the definition of an intangible asset and1,000,000
the asset
recognition criteria.
Gain on Sale of Intangible Assets 20,000
Subsequent measurement:
1. Indefinite life – not amortized but tested for impairment at least
Chapter 11 Summary:
annually.
2. Finite life – amortized using the straight line method over a period of 2
to 10 years. The residual value is assumed to be zero except when
the entity has the ability to sell the asset at the end of its useful life.
