LECTURE NOTES

Nature of Intangible Assets Recognition

Intangible asset is an identifiable nonmonetary asset PAS 38 requires an entity to recognize an intangible asset,
without physical substance. whether purchased or self-created (at cost) if, and only if:
 it is probable that the future economic benefits that
Critical attributes of an intangible asset: are attributable to the asset will flow to the entity; and
 identifiability  the cost of the asset can be measured reliably.
 control (power to obtain benefits from the asset)
 future economic benefits (such as revenues or reduced This requirement applies whether an intangible asset is
future costs) acquired externally or generated internally. PAS 38
includes additional recognition criteria for internally
Identifiability: An intangible asset is identifiable when it: generated intangible assets.
 is separable (capable of being separated and sold,
transferred, licensed, rented, or exchanged, either The probability of future economic benefits must be based
individually or as part of a package) or on reasonable and supportable assumptions about
 arises from contractual or other legal rights, regardless conditions that will exist over the life of the asset. The
of whether those rights are transferable or separable probability recognition criterion is always considered to be
from the entity or from other rights and obligations. satisfied for intangible assets that are acquired separately
or in a business combination.
Types of Intangible Assets
• Marketing-related If recognition criteria not met. If an intangible item does
• Customer-related not meet both the definition of and the criteria for
• Artistic-related recognition as an intangible asset, PAS 38 requires the
• Contract-related expenditure on this item to be recognized as an expense
• Technology-related when it is incurred.
• Goodwill
Business combinations. There is a rebuttable presumption
Marketing-related intangible assets are those assets that the fair value (and therefore the cost) of an intangible
primarily used in the marketing or promotion of products asset acquired in a business combination can be measured
or services. reliably. An expenditure (included in the cost of
acquisition) on an intangible item that does not meet both
Examples the definition of and recognition criteria for an intangible
• Trademarks or trade names asset should form part of the amount attributed to the
• Newspaper masthead goodwill recognized at the acquisition date. PAS 38 notes,
• Internet domain names however, that non-recognition due to measurement
• Noncompetition agreements reliability should be rare.

Customer-related intangible assets occur as a result of
interactions with outside parties.
Examples
• Customer lists
• Order or production backlogs
• Both contractual and noncontractual customer
relationships
Artistic-related intangible assets involve ownership rights
to plays, literary works, musical works, pictures,
photographs, and video and audiovisual material. These
ownership rights are protected by copyrights.
Contract-related intangible assets represent the value of
rights that arise from contractual arrangements.
The only circumstances in which it might not be possible to
measure reliably the fair value of an intangible asset
acquired in a business combination are when the intangible
asset arises from legal or other contractual rights and
either:
 is not separable; or
 is separable, but there is no history or evidence of
exchange transactions for the same or similar assets,
and otherwise estimating fair value would be
dependent on immeasurable variables.
Reinstatement. PAS 38 also prohibits an entity from
subsequently reinstating as an intangible asset, at a later
date, an expenditure that was originally charged to
expense.

Examples
• Franchise and licensing agreements
• Construction permits Initial Recognition: Research and Development Costs
• Broadcast rights
 Charge all research cost to expense.
• Service or supply contracts.
 Development costs are capitalized only after technical
and commercial feasibility of the asset for sale or use
have been established. This means that the entity
must intend and be able to complete the intangible
asset and either use it or sell it and be able to
Technology-related intangible assets relate to innovations demonstrate how the asset will generate future
or technological advances. economic benefits.

Examples If an entity cannot distinguish the research phase of an

• Patented technology internal project to create an intangible asset from the
• Trade secrets development phase, the entity treats the expenditure for
that project as if it were incurred in the research phase
only.

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Initial Recognition: In-process Research and Development
Acquired in a Business Combination
A research and development project acquired in a business
combination is recognized as an asset at cost, even if a
component is research. Subsequent expenditure on that
project is accounted for as any other research and
development cost (expensed except to the extent that the
expenditure satisfies the criteria in PAS 38 for recognizing
such expenditure as an intangible asset).
Initial Recognition: Internally Generated Brands,
Mastheads, Titles, Lists
Brands, mastheads, publishing titles, customer lists and
items similar in substance that are internally generated
should not be recognized as assets.
Initial Recognition: Computer Software
 Purchased: capitalize
 Operating system for hardware: include in hardware
cost
 Internally developed (whether for use or sale): charge
to expense until technological feasibility, probable
future benefits, intent and ability to use or sell the
software, resources to complete the software, and
ability to measure cost.
 Amortization: over useful life, based on pattern of
benefits (straight-line is the default).
Initial Recognition: Certain Other Defined Types of Costs
The following items must be charged to expense when
incurred:
 internally generated goodwill
 start-up, pre-opening, and pre-operating costs
 training cost
 advertising cost
 relocation costs
Initial Measurement
Intangible assets are initially measured at cost.
Measurement Subsequent to Acquisition
An entity must choose either the cost model or the
revaluation model for each class of intangible asset.
Cost model. After initial recognition the benchmark
treatment is that intangible assets should be carried at
cost less any amortization and impairment losses.
Revaluation model. Intangible assets may be carried at a
revalued amount (based on fair value) less any subsequent
amortization and impairment losses only if fair value can
be determined by reference to an active market. Such
active markets are expected to be uncommon for
intangible assets.
PROBLEMS
1. Possible data for the computation of total intangible
assets
Deposits with advertising agency which P 45,000
will be used to promote goodwill
Excess of cost over net assets of
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Under the revaluation model, revaluation increases are
credited directly to "revaluation surplus" within equity
except to the extent that it reverses a revaluation decrease
previously recognized in profit and loss. If the revalued
intangible has a finite life and is, therefore, being
amortized the revalued amount is amortized.
Classification of Intangible Assets Based on Useful
Life
Intangible assets are classified as:
 Indefinite life: No foreseeable limit to the period over
which the asset is expected to generate net cash
inflows for the entity.
 Finite life: A limited period of benefit to the entity.
Measurement Subsequent to Acquisition: Intangible Assets
with Finite Lives
The cost less residual value of an intangible asset with a
finite useful life should be amortized over that life:
 The amortization method should reflect the pattern
of benefits.
 If the pattern cannot be determined reliably,
amortize by the straight line method.
 The amortization charge is recognized in profit or
loss unless another PFRS requires that it be
included in the cost of another asset.
 The amortization period should be reviewed at
least annually.
The asset should also be assessed for impairment in
accordance with PAS 36.
Measurement Subsequent to Acquisition: Intangible Assets
with Indefinite Lives
An intangible asset with an indefinite useful life should not
be amortized.
Its useful life should be reviewed each reporting period to
determine whether events and circumstances continue to
support an indefinite useful life assessment for that asset.
If they do not, the change in the useful life assessment
from indefinite to finite should be accounted for as a
change in an accounting estimate.
The asset should also be assessed for impairment in
accordance with PAS 36.
Subsequent Expenditure
Subsequent expenditure on an intangible asset after its
purchase or completion should be recognized as an
expense when it is incurred, unless it is probable that this
expenditure will enable the asset to generate future
economic benefits in excess of its originally assessed
standard of performance and the expenditure can be
measured and attributed to the asset reliably.
- done -
purchased subsidiary 400,000
Franchise to operate in Cebu 100,000
Marketing costs of introducing new
products 150,000
Organization costs 50,000
Patents 244,000
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Research and development costs Purchases of special equipment to be

expected to benefit future periods 420,000 used solely for development of the
Research and development costs not new machine P1,820,000
expected to benefit future periods 300,000 Research salaries and fringe benefits
Unamortized bond discount 155,000 for engineers and scientists 171,000
Cost of testing prototype 236,000
a. P964,000 c. P1,214,000
Legal costs for filing for patent 127,000
b. P814,000 d. P 744,000
Fees paid to government patent office 25,000
Drawings required by patent office to
2. Gamot, Inc. has been considering the accounting
be filed with patent application 47,000
treatment of its intangible assets and has asked for
your opinion on how the matters below should be Gooden elected to amortize the patent over its legal
treated in its financial statements for the year ended life. At the beginning of the second year, Gooden
March 31, 2009. Enterprises paid P240,000 to successfully defend the
 Gamot has developed and patented a new drug patent in an infringement suit. At the beginning of the
which has been approved for clinical use. The fourth year Gooden determined that the remaining
costs of developing the drug were P12 million. estimated useful life of the patent was five years.
Based on early assessments of its sales success,
The carrying amount of the patent at the end of fourth
independent valuers have estimated its market
year is
value at P20 million.
a. P135,320 c. P1,649,680
 Gamot’s manufacturing facilities have recently
b. P131,100 d. P 39,800
received a favorable inspection by the government
medical scientists. As a result of this, the
5. Alaminos Company acquired three patents in January
company has been granted an exclusive five-year
2009. The patents have different lives as indicated in
license to manufacture and distribute a new
the following schedule:
vaccine. Although the license had no direct cost to
Gamot, its directors feel its granting is a reflection Remaining Remaining
of the company’s standing and have asked Patent Cost useful life legal life
independent valuers to measure the license. A P2,000,000 10 8
Accordingly, they have placed a value of P10 B 3,000,000 5 10
million on it. C 6,000,000 Indefinite 15
 In the current accounting period, Gamot has spent
Patent C is believed to be uniquely useful as long as
P3 million sending its staff on specialized training
the company retains the right to use it. In June 2009,
courses. While these courses have been
the company successfully defended its right to Patent
expensive, they have led to a marked
B. Legal fees of P800,000 were incurred in this action.
improvement in production quality and the staff
The company’s policy is to amortize intangible assets
now needs less supervision. This in turn has led to
by the straight-line method to the nearest half year.
an increase in revenue and cost reductions. The
The company reports on a calendar-year basis. The
directors of Gamot believe these benefits will
amount of amortization that should be recognized for
continue for at least three years and wish to treat
2009 is
training costs as an asset.
a. P1,330,000 c. P1,250,000
 In December 2008, Gamot paid P5 million for a
b. P2,050,000 d. P 950,000
television advertising campaign for its products
that will run for 6 months from January 1 to June 6. On January 1, 2006, San Pedro Company acquired a
30, 2009. The directors believe that increased patent for P500,000 and began amortizing it over its
sales as a result of the publicity will continue for estimated useful life of 10 years. At December 31,
two years from the start of the advertisements. 2009, a significant change in the business climate
Compute the total amount to be recognized as assets caused San Pedro to assess the recoverability of the
in Gamot’s March 31, 2009 balance sheet. (Ignore carrying amount of the patent. San Pedro estimated
amortization) that the discounted future net cash inflows from the
a. P 0 c. P24.5 million patent would be P325,000 and that its fair value was
b. P32.5 million d. P22.0 million P275,000. Accordingly, for the year ended December
ACCA F7 07-08 #29C.17 31, 2009, San Pedro should recognize an impairment
loss of
3. On January 1, 2009, Batangas Company purchased a a. P175,000 c. P25,000
patent from the inventor, who asked P110,000 for it. b. P 50,000 d. P 0
Batangas paid for the patent as follows: cash,
P40,000; issuance of 1,000 shares of its own ordinary 7. On January 1, 2009, Epsi Company developed a
shares, par P10 (market value, P20 per share); and a trademark to distinguish its products from those of its
note payable due at the end of three years, face competitors. Through advertising and other means,
amount, P50,000, noninterest-bearing. The current the company is seeking to establish significant product
interest rate for this type of financing is 12 percent. identification to increase future sales. The similarity
Batangas Company should record the cost of the between the trademark costs and other intangible and
patent at operating costs has caused some confusion over
a. P110,000 c. P95,590 proper accounting. The following items are being
b. P 98,800 d. P85,590 treated as part of the cost of the trademark:
Marketing research to study consumer
4. Gooden Enterprises Inc. developed a new machine for tastes P 400,000
manufacturing baseballs. Because the machine is Design costs of trademark 1,500,000
considered very valuable, the company had it Legal fees of registering trademark 150,000
patented. The following expenditures were incurred in Advertising to establish recognition of
developing and patenting the machine. trademark 200,000

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PROFESSIONAL REVIEW and TRAINING CENTER, INC.

Registration fee with IPO 50,000 breakdowns during commercial production 29,000
Searching for applications of new research
Through renewals, the trademark is expected to have
findings 19,000
an unlimited life. In Epsi’s December 31, 2009 balance
sheet, what amount should be reported as trademark? What is the total amount Nasugbu should report as
a. P1,700,000 c. P2,300,000 research and development expense for 2009?
b. P1,900,000 d. P1,530,000 a. P137,000 c P198,000
b. P169,000 d. P213,000
8. Calatagan Corp. acquired a fast food franchise for a
P50,000 cash down payment and in addition gave a 11. Cavinti Company provided the following information
P150,00, one-year, noninterest-bearing note payable. relevant to the research and development
The implicit interest rate is 12 percent. Calatagan also expenditures for the year 2009:
agreed to pay the franchiser P100,000 per year for the Current period depreciation on the
next 10 years for promotional campaigns, accounting, building housing R and D activities P1,500,000
and related services by the franchiser. Calatagan Cost of market research study 1,000,000
should record the cost of the franchise as: Current period depreciation on a
a. P183,935 c. P 933,935 machine used in R and D activities 500,000
b. P950,000 d. P1,183,935 Salary of R and D director 1,200,000
Salary of Vice-President who spends
9. UR Company purchased a customer database and a ¼ of his time overseeing R and D
formula for a new fuel substitute for diesel fuel for a activities 2,400,000
total of P100,000. UR Company uses the expected Pension costs for salary of R and D
cash flow approach for estimating the fair value of director 50,000
these two intangibles. The appropriate interest rate is Pension costs for salary of Vice-
5%. The potential future cash flows from the two President 100,000
intangibles, and their associated probabilities, are as
follows: The R and D expense for the current period should be
a. P3,875,000 c. P4,875,000
Customer Database: b. P5,750,000 d. P3,800,000
Outcome 1 - 20% probability of cash flows of P10,000
at the end of each year for 5 years. 12. During 2009, Pagsanjan Company incurred costs to
Outcome 2 - 30% probability of cash flows of P2,000 develop and produce a routine, low-risk computer
at the end of each year for 4 years. software product as follows:
Outcome 3 - 50% probability of cash flows of P200 at
the end of each year for 3 years. Completion of detail program design P1,500,000
Cost incurred for coding and testing to
Formula: establish technological feasibility 500,000
Outcome 1 - 10% probability of cash flows of P50,000 Other coding costs after establishment of
at the end of each year for 10 years. technological feasibility 2,500,000
Outcome 2 - 30% probability of cash flows of P30,000 Other testing costs after establishment of
at the end of each year for 4 years. technological feasibility 2,000,000
Outcome 3 - 60% probability of cash flows of P10,000 Costs of producing product masters for
at the end of each year for 3 years. training materials 3,000,000
Duplication of computer software and
How much should be recognized as customer
training materials from product master 4,000,000
database?
Packaging product 1,000,000
a. P11,060 c. P11,295
b. P13,137 d. P 0 In the December 31, 2009 balance sheet, what
amount should be capitalized as software cost subject
10. Nasugbu Company incurred the following costs during to amortization?
2009: a. P7,500,000 c. P4,500,000
Quality control during commercial b. P9,500,000 d. P8,000,000
production, including routine testing of
products P58,000 13. On January 1, 2009, Pila Company had capitalized cost
Laboratory research aimed at discovery of of P10,000,000 for a new computer software product
new knowledge 68,000 with an economic life of 4 years. Sales for 2009 for
Testing for evaluation of new products 24,000 the software product amounted to P4,000,000. The
Modification of the formulation of a plastic total sales of the software over its economic life are
product 26,000 expected to be P20,000,000. However, the pattern of
Engineering follow-through in an early phase the future sales from the computer software cannot be
of commercial production 15,000 determined reliably. Pila should record amortization of
Adaptation of an existing capability to a computer software in 2009 at
particular requirement or customer's need a. P2,500,000 c. P5,000,000
as a part of continuing commercial b. P2,000,000 d. P 0
activity 13,000
Trouble-shooting in connection with

PROBLEM
1. Laguna Company incurred P900,000 of research and paid P400,000 for legal fees in a successful defense of
development cost to develop a product for which a the patent. The total amount capitalized for this
patent was granted on January 2, 2009. Legal fees patent through July 31, 2009 should be
and other costs associated with the registration of the a. P1,500,000 c. P1,100,000
patent totaled P200,000. On July 31, 2009, Laguna b. P 600,000 d. P 200,000

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PROFESSIONAL REVIEW and TRAINING CENTER, INC.

5. Siniloan Company incurred research and development

2. Nagcarlan Company purchased a patent on January 1, costs in 2009 as follows:
2006, for P3,570,000. The patent was being Equipment acquired for use in various
amortized over its remaining legal life of 15 years. R&D projects P6,000,000
During 2009 Nagcarlan determined that the economic Depreciation on the above equipment 1,200,000
benefits of the patent would not last longer than ten Materials used 3,000,000
years from the date of acquisition. What amount Compensation costs of personnel 4,000,000
should be reported in the balance sheet as patent, net Outside consulting fees 1,500,000
of accumulated amortization, at December 31, 2009? Indirect costs appropriately allocated 1,300,000
a. P2,618,000 c. P2,520,000
b. P2,448,000 d. P2,142,000 The 2009 total research and development expense
should be
3. On January 1, 2009, Calamba Company signed an a. P11,000,000 c. P15,800,000
agreement to operate as a franchisee of Bay Company b. P 9,700,000 d. P 9,800,000
for an initial franchise fee of P30,000,000. Of this
amount, P10,000,000 was paid when the agreement 6. Biñan Company incurred the following costs during
was signed and the balance is payable in equal annual 2009:
payment of P5,000,000 beginning December 31, 2009. Design of tools, jigs, molds and dies
The agreement provides that the down payment is not involving new technology P2,500,000
refundable and no future services are required of the Modification of the formulation of a
franchisor. Calamba’s credit rating indicates that it process 3,200,000
can borrow money at 12% for a loan of this type. Trouble shooting in connection of
How much is the cost of franchise? breakdowns during commercial
a. P30,000,000 c. P21,541,500 production 2,000,000
b. P25,186,500 d. P19,065,000 Adaptation of an existing capability to a
particular customer’s need as part of
4. Kuh Lafuh Company purchased a customer list and an a continuing commercial activity 2,200,000
ongoing research project for a total of P400,000. Kuh In its 2009 income statement, Biñan should report
uses the expected cash flow approach for estimating research and development expense of
the fair value of these two intangibles. The a. P2,500,000 c. P3,200,000
appropriate interest rate is 7%. The potential future b. P4,700,000 d. P5,700,000
cash flows from the two intangibles, and their
associated probabilities, are as follows: 7. The following is information related to the development
of a particular software package in the first year of
Customer List
product life:
Outcome 1 - 20% probability of cash flows of P50,000
at the end of each year for 5 years. Development costs prior to reaching
Outcome 2 - 30% probability of cash flows of P30,000 technological feasibility P 4,000
at the end of each year for 4 years. Development costs after reaching
Outcome 3 - 50% probability of cash flows of P10,000 technological feasibility 6,000
at the end of each year for 3 years. Costs of duplicating salable product 9,000*
Estimated revenues over 3 year total
Ongoing Research Project product life 300,000
Outcome 1 - 10% probability of cash flows of P500,000 Revenue in the first year of product life 150,000
at the end of each year for 10 years.
Outcome 2 - 10% probability of cash flows of P10,000 *This represents the entire inventory expected to be
at the end of each year for 4 years. sold over the 3-year period.
Outcome 3 - 80% probability of cash flows of P100 at
What is the total expense related to this software
the end of each year for 3 years.
package to be recognized in its first-year?
How much should be recognized as customer list? a. P16,000 c. P11,500
a. P400,000 c. P 77,025 b. P12,000 d. P 7,000
b. P 84,609 d. P322,975 MC13-45 Cabrera
C.13 FA Vol 1, Cabrera

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