INTANGIBLE ASSETS
AND
R & D COST
Intangible asset
- An identifiable nonmonetary asset
without physical substance
- The asset 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
Recognition
1. It is probable that future
economic benefits will flow to the
entity.
2. The cos t of the asset can be
measured reliably.
INITIAL MEASUREMENT (Par. 24)
- Cost
Items not part of cost
1. Costs of introducing a new product or service
2. Costs of advertising & promotion activities.
3. Costs of conducting business in a new location.
4. Costs of staff training.
5. Administrative costs.
6. Initial Operating losses.
7. Pre-operating cost
8. Research and Development cost.
ACQUISITION OF INTANGIBLE
ASSETS
1. Separate Acquisition
-Purchase price (net of discounts)
-Directly attributable costs
-mport duties & Irrecoverable taxes
2. Acquisition as part of business combination
- FV on the date of acquisition
ACQUISITION OF INTANGIBLE
ASSETS
3. Acquisition by way of deferred payments
- Cash price equivalent
- PV of the liability
4. Acquisition by government grant
Example : Lisences
- Fair value or zero plus directly attributable costs.
ACQUISITION OF INTANGIBLE
ASSETS
5. Acquisition by way of exchange
Has Commercial Substance
- FV of asset given up
- FV of asset received
- CA of asset given up
Lacks of Commercial Substance
- CA of asset given up
ACQUISITION OF INTANGIBLE
ASSETS
6. Acquisition by internal generation
Directly attributable costs
- Materials, Labor, Overhead consumed in generating the
intangible assets
- Fees to register a legal right
- Amortization of other intangible asset that are used to
generate the intangible asset.
SUBSEQUENT MEASUREMENTS
1. COST MODEL
Costs - Accumulated amortization - Accumulated
impairment losses
2. REVALUATION MODEL
Revalued amount - subsequent accumulated
amortization - subsequent accumulated impairment
losses
AMORTIZATION OF INTANGIBLE
ASSET
1. Finite life
- Amortize over the useful life or legal life of
intangible asset (whichever is lower)
2. Indefinite life
IMPAIRMENT OF INTANGIBLE
ASSET
1. Carrying amount < Recoverable amount - Not
impaired
2. Carrying amount > Recoverable amount - impaired
TEST OF IMPAIRMENT
FINITE - If there's an indication of impairments
INDEFINITE- Annually
INTANGIBLE ASSETS
1. IDENTIFIABLE INTANGIBLE ASSETS
Patent
Copyright
Franchise
Trademark
Computer software
2. UNIDENTIFIABLE INTANGIBLE ASSET
Goodwill
SUBSEQUENT EXPENDITURE
General rule : Expense as incurred
Example : Litigations
- Expense whether successful or not.
Exception : If the subsequent expenditures enhances
the future economic benefits of the Intangible Asset.
INTANGIBLE ASSETS
1. Patent – A legal right granted for an invention,
giving the patent holder exclusive rights to use,
make, sell, or license the invention for a certain
period
RA 8293 : Legal life is 20 years which cannot be
renewed.
INTANGIBLE ASSETS
Cost of patent
1. By purchase
- Purchase price
- Import duties and Irrecoverable taxes
- Direct attributable cost
2. Internally generated
- Licensing cost
- Legal cost in securing the patent
- Consulting cost to develop the patent
INTANGIBLE ASSETS
2. Copyright – A form of protection given to the
creators of original works (literature, music, art, etc.),
granting them exclusive rights to reproduce,
distribute, and display the work.
- RA 8293 : Legal life is 50 years after the death of the
author.
INTANGIBLE ASSETS
3. Franchise – A business model where one party (the franchisor)
grants another (the franchisee) the right to operate using its
brand, system, and support in exchange for fees or royalties.
Cost :
- Initial franchise fee
Downpayment
Notes payable - PV
- Directly attributable cost
- Legal fees incurred in connection with the acquisition of the
right
INTANGIBLE ASSETS
4. Trademark – A symbol, logo, word, or phrase
legally registered or established by use to represent
a company or product, distinguishing it from others.
RA 8293 : Legal life is 10 years which may be renewed
for another 10 years
- It can be indefinite or finite
6. Research and Development
Research
- is original and planned investigation undertaken
with the prospect of gaining scientific or technical
knowledge and understanding
- EXPENSE AS INCURRED
RESEARCH AND DEVELOPMENT
Development - the application of research findings
or other knowledge to a plan or design for the
production of new or substantially improved
material, devise, product, process, system, or service
prior to the commencement of commercial
production.
- GENERAL RULE ( EXPENSE AS INCURRED )
CRITERIA FOR RECOGNITION OF
DEVELOPMENT
a. Technical feasibility of the intangible asset so that it will be
available for use or sale.
b. The intention to complete the intangible asset and use or sell it.
c. The ability to use or sell the intangible asset.
d. How the intangible asset will generate probable future
economic benefits.
e. Availability of resources or funding to complete the
development and to use or sell the asset.
f. The ability to measure reliably the expenditure attributable to
the intangible asset during the development.
INTANGIBLE ASSETS
6. Computer software – A set of instructions or
programs used to operate computers and related
devices, which can be protected under copyright and
sometimes patent laws.
- The same with Research and Development
If before technical feasibility - expense
After technical feasibility but before
commencement of production - Capitalize
CLASSIFICATION OF COMPUTER
SOFTWARE
1. Inventory - Computer software purchased for sale
2. PPE - Computer software purchased is an integral
part of a computer controlled machine tool
3. Intangible asset - not integral part
Goodwill
7. Goodwill – An intangible asset that arises when a
business is acquired for more than the fair value of its
identifiable net assets, often reflecting brand reputation,
customer loyalty, and employee relations.
1. Internally generated - not recognize
2. Purchased - Business Combination
Purchase. XX
Less : FV of net asset. (XX)
Goodwill XX
SAMPLE PROBLEMS
1. Which of the following would be considered
research and development?
a. Routine effort to refine an existing product.
b. Periodic alteration to existing production line.
c. Marketing research to promote a new product.
d. Construction of prototype
1. Vanessa Company reported the following data at year-end:
Franchise. 1,000,000
Computer software. 1,500,000
Deferred charges. 100,000
Patent 2,500,000
Customer list purchased 500,000
Copyright. 700,000
Deposit with advertising agency to promote goodwill. 400,000
Bond sinking fund 1,300,000
Goodwill 4,000,000
Trademark 900,000
Research and development cost. 2,000,000
What total amount should be reported as
intangible assets?
a. 11,100,000
b. 11,500,000
c. 10,600,000
d. 13,100,000
3. A company incurred 1,600,00 of research and
development costs to develop a product for which a
patent was granted at the beginning of the year, legal
fees and other other costs associated with
registration of the patent totalled 300,000
At year end the entity paid 450,000 for legal fees in a
successful defense of a patent.
What is the total amount should be Capitalized for
the patent?
SAMPLE PROBLEMS
Cost of patent
1. By purchase
- Purchase price
- Import duties and Irrecoverable taxes
- Direct attributable cost
2. Internally generated
- Licensing cost
- Legal cost in securing the patent
- Consulting cost to develop the patent
DEPLETION
DEPLETION
- is the removal, extraction of a natural resources.
- is the systematic allocation of a depletable
amount of a wasting asset over the period the
natural resources is extracted or produced.
WASTING ASSET
- It is physically consumed
- It is irreplaceable
INITIAL MEASUREMENT OF WASTING ASSET
COST :
a. Acquisition cost
b. Exploration cost
c. Development cost
d. Estimated restoration cost
COST OF WASTING ASSET
a. Acquisition cost
b. Exploration cost
- Full cost method ( successful or not still
capitalizable)
- Successful effort method ( only successful
exploration will be capitalize )
COST OF WASTING ASSET
c. Development cost
Intangible development cost -
If it is part of wasting asset it is subject to
depletion
Tangible development cost
If it is part of PPE is is subject for depreciation
DEPRECIATION
1. MOVABLE - own useful life of asset ( straight line
method will be use )
2. IMMOVABLE - Between own useful life of asset
or useful life of wasting asset whichever is shorter.
If own useful life is used (straight line method
of depreciation will be use)
If the useful life of wasting asset is used (
output method will be use )
d. Estimated restoration cost
@ PV using PV of 1
SUBSEQUENT MEASUREMENT
1. COST MODEL
2. REVALUATION MODEL
DEPLETION METHOD - Output method
Depletion formula = Depletable amount/Total
estimated number of resources * actual extraction.
ACCOUNTING SHUTDOWN
1. No depletion
2. Depreciation continues
( No accounting problem )
-Movable tangible development cost
-Immovable intangible development cost
- Own useful life is less than useful life of wasting asset.
( There's accounting problem )
- own useful life of asset is greater than the useful life of
wasting asset.
SAMPLE PROBLEM
