ACCOUNTING FOR NONCURRENT ASSETS:

INTANGIBLE ASSETS
MFRS 138: INTANGIBLE ASSETS

Learning outcome
At the end of this chapter, you should be able to:
Describe the objective of providing information on
intangible assets to users of accounting information
Identify and classify intangible assets
Recognize intangible assets
Measure initially intangible assets
Disclosure requirement of intangible assets
in the
financial statements

Sub classification of assets

Objective of providing information on Intangible

Assets
Prospective investors are interested to know how an entity creates, manages and values
its intangible assets.
Information on intangible assets allows the users of financial statements to anticipate
possible developments to the entitys financial position in the future since it explains the
entitys competitive advantages, which should generate future economic benefits in the
form of future revenues.

Information on the trend of a customer satisfaction about the entitys products

and services will indicate the customer retention rates. This information will
subsequently lead to the profitability of the entity.

Definitions
MFRS138 Intangible asset is an identifiable
non-monetary asset without physical
substance.
Intangibles must have the following qualities:
Identifiability
Control
Future economic benefit

Two main types:

acquired/externally purchased
internally generated

Definitions
Identifiability (para 11-12)
Separable from the entity

-should be able to distinguish from goodwill

It arises from contractual or other legal rights

Control the entity has the power (para 13-16)

to obtain the future economic benefits and
to restrict the access of others to those benefits

Existence of future economic benefits (para 17)

benefits resulting from the use of such asset eg. revenue from

sales of product, cost saving resulting from intellectual property in a

production process

Types of Intangible Assets

1. Marketing-related intangible assets such as
2.
3.
4.
5.

trademarks, brand names, and Internet domain names.

Customer-related intangible assets such as customer
lists, order backlogs, and customer relationships.
Artistic-related intangible assets such as items
protected by copyright.
Contract-based intangible assets such as licenses,
franchises, and broadcast rights.
Technology-based intangibles such as both patented
and unpatented technologies as well as trade secrets.

Examples of Intangible Assets

A patent is an exclusive right to manufacture a product or

to use a process.
A copyright is an exclusive right of protection given to a
creator of a published work such as a song, film, painting,
photograph, or book.
A trademark or tradename, is an exclusive right to
display a word, a slogan, a symbol, or an emblem that
distinctively identifies a company, product, or a service.
A franchise is a contractual agreement under which the
franchisor grants the franchisee the exclusive right to use
the franchisor's trademark or tradename within a
geographical area usually for a specified period of time.

Examples of Intangible Assets

Goodwill represents the business contracts,

reputation, functioning systems, staff camaraderie, and
industry experience that makes the company more
than just a collection of assets.

Goodwill is a residual number, the value of all of

the synergies of a functioning business that cannot
be specifically identified with any other intangible
factor.

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Initial Recognition of Intangible Assets

Intangible assets are recognized as assets if all of the
following criteria are met:
(a) Definition of intangible assets, i.e. identifiably, control
(b) Recognition criteria
probable future economic benefits are attributable
to the asset will flow to the entity and
the cost of the asset can be measured reliably

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Initial Recognition of Intangible Assets

Internally generated intangibles (such as internally generated brand, trademark,
customer list, goodwill and similar items) are not recognized as assets since it is
difficult to identify and separate them from the business as a whole; and their cost
cannot be measured reliably.
However, purchased brand, trademark, customer list and similar items can be
recognized as intangible assets since the definition of intangible assets and
recognition criteria are met.
Research is not recognized as an asset due to uncertainty in the future economic
benefit.
Intangibles such as research cost is treated as an expense in the period it is
incurred.

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Initial Measurement of Intangible Assets

Intangible asset is initially recognized at cost which
comprises:
(a)its purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts
and rebates; and
(b) any directly attributable cost of preparing the asset for its
intended use.

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Initial Measurement of Intangible Assets

Focus Eye Bhd acquired franchise to produce a new range of contact lenses for RM1,000,000. In

addition, Focus Eye Bhd is required to purchase a special equipment which cost RM500,000. The
equipment is expected to be used for five years. Outline the accounting treatment for the
franchise and equipment.
The franchise is considered an intangible asset because it is identifiable (it is separable from the

whole of the business), the entity has control over the intangible (benefits can be obtained from the
use of the intangible and others have no access to the intangible) and it is expected that future
economic benefits will flow to the entity from the sale of the contact lenses.
The franchise is recognized as intangible asset since its cost can be measured reliably (the
purchase price).
On the other hand, the equipment is treated as an item of plant, property and equipment because it

has physical resource (a steel and concrete structure) purchased by Focus Eye Bhd (past event),
used at the entitys discretion (control) to produce contact lenses and used for five years (more than
one year).
Since the cost of the machine can be measured reliably (the purchase price), the machine can be
recognized as plant, property and equipment.

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Initial Measurement of Intangible Assets

ABC Berhad entered into a contract to acquire the
franchise for Juice Works. ABC Berhad has to pay
RM1,000,000 for the franchise and can manufacture and
sell fruit juice for 5 years. ABC has to have equipment to
make the juice which were bought from the franchiser for
RM 500,000. Discuss the accounting treatment of the
various costs incurred.
RM1,000,000 paid for the franchise can be recognized as

intangible assets.
RM 500,000 spent on equipment and furniture can be
recognized as PPE and depreciated over 5 years.

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Internally Generated Assets

MFRS 138- prohibits the recognition of internally

generated goodwill
goodwill is not an identifiable resource controlled by the entity
Its costs cannot be realizably measured

Purchased Goodwill (ie. in a business combination)- is an

intangible asset
It is the difference between the purchase price and the fair value of

the net assets acquired

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Goodwill
Eddy Company paid $1,000,000 to purchase all of
James Companys assets and assumed James
Companys liabilities of $200,000. James Companys
assets were appraised at a fair value of $900,000. What
amount of goodwill should Eddy company record as a
result of the purchase?

Consideration given
Fair value of net assets:
FV of assets
Less: FV of liabilities assumed
Goodwill

$ 1,000,000
$ 900,000
200,000
$

700,000
300,000

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Internally Generated Assets

Research and development
a. Research Phase
Expenditure on research shall be recognized as an expense when

incurred
b.

Development phase
Capitalize or expense decision- if can identify intangible asset and able

to demonstrate that the asset will generate future economic benefit, then
can recognize as an asset

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Example-Research and development

XYZ Berhad is developing a new computer software.
During 2013, the expenditure incurred was RM120,000 of
which RM 100,000 was incurred before 1st October 2013.
On 1st October 2013, the entity was able to demonstrate
that the project can meet all the criteria for the recognition
as an intangible asset. In 2014, the cost incurred was
RM60,000. Discuss the accounting treatment.

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Example-Research and development

RM100,000 incurred before 1st October 2013 is written off.
The RM 20,000 incurred after 1st October 2013 is

recognized as an asset.
The expenditure of RM60,000 in 2014 is recognized as an
asset and the carrying amount becomes RM 80,000.
The RM100,000 written off is not reinstated.

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Useful Life of Intangible Assets

In determining the useful life of an intangible asset, legal, regulatory or
contractual provisions related to the intangible asset must be considered.
Finite life
There is foreseeable limit to the period over which an intangible asset is
expected to generate net cash inflows for the entity.
Amortize the intangible asset on a systematic basis over its useful life less
any residual value..

Indefinite life
There is no foreseeable limit to the period over which an intangible asset is
expected to generate net cash inflows for the entity.
Do not amortize the intangible asset with an indefinite useful life but the
indefinite life needs to be reviewed at each reporting period.

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Useful Life of Intangible Assets

A trademark that is useful in distinguishing its new product

was acquired in 2010 for RM1,000,000. The trademark is

renewable every 10 years with minimal cost. All evidence
indicates that the trademark product will generate cash
flows for an indefinite period of time.
The trademark is regarded as having indefinite life because it is expected that the

trademark product will generate cash flows for an indefinite period of time.
Therefore, the trademark will not be amortized and the useful life of the trademark
should be reviewed each reporting period to determine whether events and
circumstances continue to support an indefinite useful life assessment for the
trademark.

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Useful Life of Intangible Assets

A patent for its new product was purchased for

RM700,000 on 1 January 2013. It is estimated that the

useful life of the patent is seven years.
The patent is considered as having a finite life since it has limited

period of time in generating net cash inflows.

Therefore, the patent is amortized on a systematic basis over its
useful life of seven years.

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Amortization of Intangible Assets

The amortization process also uses the straight-line
method, but usually assumes residual value = 0.
Amortization period is the shorter of
the assets legal or contractual life.
The amortization entry is:
Amortization expense ..................................
Intangible asset ........

$$$
$$$

To record amortization expense.

A contra-asset account is generally not used when

recording the amortization of intangible assets.

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Amortization of Intangible Assets

Torch, Inc. has developed a new device. Patent
registration costs consisted of $2,000 in attorney fees and
$1,000 in federal registration fees. The device has a
contractual (useful) life of 5 years. The legal life is 20
years.
For year 1, what is Torchs amortization expense?
Use the shorter of contractual life (5 years) or
legal life (20 years).
Amortization

= Cost
Contractual life
= $3,000 5 years
= $ 600 per year

Amortization expense ...................................

Patent ........................
To record amortization of patent.

600
600

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Intangible Assets not

Subject to Amortization

Goodwill and Trademarks

Not amortized.

Subject to assessment
for impairment of
value and may be
written down.

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Presentation of PPE

Example:

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END OF LECTURE