FAR09.
Intangibles
NATURE
PAS 38 – Intangible Assets
Definition: Intangible assets are identifiable non-monetary assets without physical substance.
Critical attributes of intangible assets:
1. Identifiability
2. control over the resource
3. existence of future economic benefits
RECOGNITION:
The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets
the definition of an intangible asset and the criteria for recognition.
Criteria:
1. It is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity.
2. The cost of the asset can be measured reliably.
Issues:
1. Acquired – no issue
2. Internally generated – additional criteria that need to be satisfied.
Criteria include: (TIA, PRE)
I. The technical feasibility of completing the intangible asset so that it will be
available for use or sale.
II. Its intention to complete the intangible asset and use or sell it.
III. Its ability to use or sell the intangible asset.
IV. How the intangible asset will generate probable future economic benefits.
V. The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
VI. Its ability to measure reliably the expenditure attributable to the intangible
asset during its development.
Not recognized as intangible assets:
Item Why?
Internally generated goodwill. Not an identifiable resource controlled by the
entity that can be measured reliably at cost.
Team of skilled staff, cost of training employees, An entity usually has insufficient control over the
and specific management or technical talent. expected economic benefits.
Portfolio of customers, market shares, customers An entity usually has insufficient control over the
relationships and customer loyalty. expected economic benefits.
Internally generated brands, mastheads, Expenditure on these items cannot be distinguish
publishing titles, customer lists, and similar items. from the cost of developing the business as a
whole.
Expenditure on start-up, advertising and Difficulty in determining whether there is an
promotional activities (including mail order internally generated intangible asset
catalogs) distinguishable from internally generated
goodwill.
Note: The costs from the above items are expensed when incurred.
RESEARCH DEVELOPMENT PRODUCTION
(discover new ideas and
knowledge) If TIA, PRE is met then capitalize Chargeable to inventory
Expense
R and D activities take place before commercial production.
Watch out for these keywords:
Exclude:
“Commercial production/activity”
Include:
“New”
MEASUREMENT:
An intangible asset shall be measured:
1. Initially at cost.
2. Subsequently:
a. Cost Model
b. Revaluation Model
Specific Intangible Assets:
Patent - it gives the holder exclusive right to use, manufacture, and sell a product or a process
without interference or infringement by others.
Legal Life of Patent: 20 years
Trademark - a word, phrase, or symbol that distinguishes or identifies a particular entity or
product.
Legal Life of Trademark: 10 years
Copyright - The exclusive and assignable legal right, given to the originator for a fixed number of
years, to print, publish, perform, film, or record literary, artistic, or musical material.
Legal Life of Copyright: The life of the creator plus (50) fifty years
Franchise - A contractual arrangement under which the franchisor grants the franchisee the right
to sell certain products or services, to use certain trademarks or trade names, or to perform
certain functions, usually within a designated geographical area.
Customer List and Formula
Computer Software
Subsets of Cryptographic Assets (PIC Q&A No. 2019-02)
Goodwill
Specific Attributes – the attributes and components of goodwill are identifiable and values accordingly.
Examples:
• Highly advantageous strategic location
• Superior management team
• Outstanding sales organization
• Unusually good reputation in the industry
Indirect Valuation – Goodwill is the difference of purchase price and the fair value of the net assets
acquired.
Purchase Price XX
Net Assets Acquired (XX)
Goodwill XX
In accordance with PFRS 3 Business Combinations, the acquirer shall recognize goodwill as of the
acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
i. the consideration transferred measured in accordance with PFRS 3, which generally requires
acquisition-date fair value;
ii. the amount of any non-controlling interest in the acquiree measured in accordance with PFRS
3; and
iii. in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s
previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed
measured in accordance with PFRS 3.
Excess Earnings Approach – Goodwill represents the expected value of future above-normal(superior)
financial performance.
Methods:
1. Purchase of average excess earnings
Average earnings P xx
Less normal earnings (FV of NA x Normal rate of return) xx
Excess earnings xx
x number of years x
Goodwill Pxx
2. Capitalization of average excess earnings
Average earnings Pxx
Less normal earnings (FV of NA x Normal rate of return) xx
Excess earnings xx
/ Capitalization rate %
Goodwill Pxx
3. Capitalization of excess earnings
Average earnings Pxx
/ Capitalization rate %
Net assets, including goodwill xx
Less net assets, excluding goodwill xx
Goodwill Pxx
4. Present value of average excess earnings
Average earnings Pxx
Less normal earnings (FV of NA x Normal rate of return) xx
Excess earnings xx
x PVF using an appropriate rate xx
Goodwill Pxx
DISCLOSURE
I. Whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortization rates
used
II. The amortization methods used for intangible assets with finite useful lives
III. The gross carrying amount and the accumulated amortization (aggregated with accumulated
impairment losses) at the beginning and end of the period
IV. The line item(s) of the statement of comprehensive income in which any amortization of intangible
assets is included
V. A reconciliation of the carrying amount at the beginning and end of the period
