Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET
FINACC4 – INTERMEDIATE ACCOUNTING PART 2
Session 1, First Semester, SY 2020-21

LEARNING PACKET NO. 04 DATE: August 31, 2020

TOPIC: Intangible Assets Week No.: 4
a. Definition Session: 1
b. Recognition
c. Measurement

INTENDED LEARNING OUTCOME:

At the end of this learning units, the learners shall:
1. Define an intangible asset.
2. State the initial measurement of intangible assets that are (a) externally acquired and (b) internally
generated.
3. State the subsequent measurement of intangible assets that (a) have finite useful life and (b) indefinite
useful life.
4. Give examples of intangible assets within the scope of PAS 38 and explain their accounting requirements.

I. CONCEPT NOTES

1. Introduction, Scope and Definitions

• Intangible assets are identifiable, non-monetary assets without any physical substance. Common
examples of intangible assets are as follows:
a. Patents
b. Trademarks or brand-names
c. Copyrights
d. Franchise (books of franchisee)
e. Leasehold or lease rights
f. Computer software
g. Service rights (such as airline rights, fishing rights, broadcasting license)

• The following shall not be considered as intangible assets and any related expenditure shall not be
capitalized, unless they are purchased:
a. Internally generated goodwill
b. Internally generated brands
c. Mastheads and publishing titles
d. Customer lists
e. Items similar in substance with (a) to (d)

• The following are the key definitions from PAS 38:

Intangible asset An identifiable nonmonetary asset without physical substance.
The systematic allocation of the depreciable amount of an intangible asset over
Amortization its useful life.

The amount of cash or cash equivalents paid, or the fair value of other
consideration given to acquire an asset at the time of its acquisition or
Cost construction, or, when applicable, the amount attributed to that asset when
initially recognized in accordance with the specific requirements of other
PFRSs.
Money held and assets to be received in fixed or determinable amounts of
Monetary assets money.
 Original and planned investigation undertaken with the prospect of gaining new
Research scientific or technical knowledge and understanding.
The application of research findings or other knowledge to a plan or design for
Development the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.

2. Recognition
• Due to their nature, our primary concern in accounting for intangible assets is their recognition. The
recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:
a. the definition of an intangible asset; and
b. the recognition criteria

Definition
• The definition of an intangible asset requires an intangible asset to be identifiable. An asset is
identifiable if it is either:
a. Separable, it is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, asset or
liability
b. Arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
• This is so in order to distinguish the intangible asset from goodwill. Goodwill recognized in a
business combination is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognized.
The future economic benefits may result from synergy between the identifiable assets acquired or
from assets that, individually, do not qualify for recognition in the financial statements.

Recognition criteria
• As set forth in PAS 1, an asset shall be recognized if, and only if:
a. It is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity.
b. The cost of the asset can be measured reliably.
• The criteria also presuppose control over the asset. An entity controls an asset if the entity has the
power to obtain the future economic benefits flowing from the underlying resource and to restrict the
access of others to those benefits. The future economic benefits 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 asset by the entity.

3. Initial Measurement
• An intangible asset shall be measured initially at cost. An intangible asset may be recognized
through any of the following:

a. Purchase price, including import duties and non-refundable purchase taxes,

after deducting trade discounts and rebates. If payment is deferred, the cost of
the asset is equal to the cash price equivalent.
b. Any directly attributable cost of preparing the asset for its intended use.
Separate Acquisition i. costs of employee benefits arising directly from bringing the asset to its
working condition;
ii. professional fees arising directly from bringing the asset to its working
condition; and
iii. costs of testing whether the asset is functioning properly
a. costs of introducing a new product or service (including costs of advertising
and promotional activities);
b. costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
Not part of the cost c. administration and other general overhead costs
(expensed immediately) d. costs incurred while an asset capable of operating in the manner intended by
management has yet to be brought into use; and
e. initial operating losses, such as those incurred while demand for the asset’s
output builds up
 Fair value at the acquisition date
Acquisition as part of NOTE: An acquirer recognizes at the acquisition date, separately from goodwill,
business combination an intangible asset of the acquiree, irrespective of whether the asset had been
recognized by the acquiree before the business combination.
• An entity may choose to recognize both the intangible asset and the grant
initially at fair value.
Acquisition by way of • If an entity chooses not to recognize the asset initially at fair value, the entity
government grant recognizes the asset initially at a nominal amount (the other treatment
permitted by PAS 20) plus any expenditure that is directly attributable to
preparing the asset for its intended use.

a. Fair value of the asset given up

b. Fair value of the asset received
Exchange of assets c. Carrying amount of the asset given up
NOTE: However, if the transaction lacks commercial substance, then the cost of
the asset acquired is equal to the carrying amount of the asset given up.
• It is sometimes difficult to assess whether an internally generated intangible
asset qualifies for recognition because of problems in:
a. Identifying whether and when there is an identifiable asset that will
generate expected future economic benefits;
b. Determining the cost of the asset reliably. In some cases, the cost of
generating an intangible asset internally cannot be distinguished from the
cost of maintaining or enhancing the entity’s internally generated
goodwill or of running day-to-day operations.
Internally generated
intangible assets • To assess whether an internally generated intangible asset meets the criteria
for recognition, an entity classifies the generation of the asset into:
a. a research phase; and
b. a development phase

• If an entity cannot distinguish the research phase from the development

phase of an internal project to create an intangible asset, the entity treats the
expenditure on that project as if it were incurred in the research phase only.

• No intangible asset arising from research (or from the research phase of an
internal project) shall be recognized. Expenditure on research (or on the
research phase of an internal project) shall be recognized as an expense
when it is incurred.
• Examples of research activities are:
a. Activities aimed at obtaining new knowledge
Research phase b. The search for, evaluation and final selection of, applications of research
findings or other knowledge
c. The search for alternatives for materials, devices, products, processes,
systems or services
d. The formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products, processes,
systems or services.
• An intangible asset arising from development (or from the development
phase of an internal project) shall be recognized if, and only if, an entity can
demonstrate all of the following:
a. Measure reliably the expenditure attributable to the intangible asset
during its development
b. Ability to use or sell the intangible asset
c. Probable future economic benefits. Among other things, the entity can
demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset
d. Availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
Development phase e. Intention to complete the intangible asset and use or sell it
f. Technical feasibility of completing the intangible asset so that it will be
available for use or sale
• Examples of development activities are:
a. the design, construction and testing of pre-production or pre-use
prototypes and models;
b. the design of tools, jigs, molds and dies involving new technology;
c. the design, construction and operation of a pilot plant that is not of a
scale economically feasible for commercial production; and
d. the design, construction and testing of a chosen alternative for new or
improved materials, devices, products, processes, systems or services.
4. Guidelines on Specific Intangibles

1. Patent
An exclusive right granted by the government to an inventor to control the manufacture, use or
Definition sale of an invention
– If purchased: purchase price and any directly attributable expenditure necessary in
Cost preparing the asset for its intended use
– If developed: licensing and other related legal fees in securing the patent rights
The cost of a patent should be amortized over its legal life (20 years) or useful life, whichever is
Amortization shorter.
– If a competing patent is acquired to protect an original patent. The cost of the new patent
and the carrying amount of the original patent is amortized over the remaining life of the
original patent.
– If a related patent is acquired to extend the life of an existing patent. The cost of the new
Other considerations patent and the carrying amount of the original patent is amortized over the extended period,
unless if the remaining life of the new patent is shorter than the extended period.
– Legal fees and other costs of successfully defending or prosecuting a patent should be
charged outright as an expense. Any costs of unsuccessful litigation on patent should also be
charged outright as an expense including the unamortized cost of the patent.

2. Copyright
An exclusive right granted by the government to the author, composer or artist enabling to
Definition publish, sell or otherwise benefit from his literary, musical and artistic work.
Expenses incurred in the production of the work including those required to establish or obtain
Cost the right
The cost of the copyright should be amortized over the period it is expected to provide a revenue
or legal life, whichever is shorter. However, if revenues are expected to be received for an
Amortization indefinite period of time and renewal and registration can be done with minimal effort and cost,
it should not be amortized but should be reviewed for impairment at each reporting date.
3. Franchise
An exclusive right granted by the franchisor (government or private companies) to a franchisee
Definition to use the property or the rights (trademark, patent and processes of the franchisor).

The cost of the franchise should be amortized or should be reviewed at each reporting period for
impairment.
– If the franchise has a definite period: amortized over the definite period (not exceeding 20
Amortization years) or useful life, whichever is shorter
– If the franchise has an indefinite life: not amortized but reviewed for impairment at each
reporting date

4. Trademark/Trade name/Brand name

An exclusive right granted by the government that permits the use of distinctive symbols, labels,
Definition and designs associated with the product or the organization.
– When purchased: the purchase price or the cash price equivalent
Cost – When developed: the expenditures required to establish including filing fees, registry fees
and other expenses incurred in securing the trademark
– The legal life of a trademark or trade name or brand name is 10 years however it may be
renewed for an additional 10-year period for an unlimited number of times (RA No. 8293).
Therefore, the legal life of a trademark is indefinite and is not subject to amortization but
Amortization instead tested for impairment.
– If its life is no longer considered indefinite, it should be amortized over its remaining useful
life.

5. Goodwill
Definition An unidentifiable intangible asset that allows an enterprise to earn above normal income
– Only a purchased goodwill should be recognized as an asset which is the cost in excess of
the fair value of the net assets acquired in a business combination. This the premium paid in
Recognition acquiring another business or ordinary shares when control is achieved.
– Goodwill generated internally should be charged outright as an expense.
 a. Acquisition cost less fair market value of net assets acquired
b. Purchase of average excess earnings: Average earnings less normal earnings X number of
years
Cost c. Capitalization of average excess earnings: Average earnings less normal earnings /
capitalization rate
d. Capitalization of average earnings: Average earnings / capitalization rate – net assets
– The cost of goodwill is not amortized because its useful life is indefinite. However,
goodwill shall be tested for impairment at least annually or more frequently if events or
changes in circumstances indicate a possible impairment.
– The amount of goodwill impairment is determined by comparing the recoverable amount
for the cash generating unit (CGU) to which the goodwill belongs against the carrying
Amortization amount of the CGU.
– If the recoverable amount of the CGU exceeds the carrying amount of the CGU, the CGU
and the goodwill allocated to that unit shall not be impaired.
– If the carrying amount of the CGU exceeds the recoverable amount of the unit, the company
must recognize an impairment loss.

Illustration: Let us assume that a buyer is planning to buy the business of a competitor. The cumulative net
earnings for the past 5 years were P18,000,000. The current value of net assets of the seller was P10,000,000
only. Meaning if the buyer is able to acquire the assets and assume the liabilities at fair value, the purchase
price would only be P10,000,000. But let us say that buyer will account for the past performance of the seller
and determine it as a contributor to additional income in the future from the purchase of the seller’s business.
Goodwill is determined by the following assuming a 20 percent rate of return and a 25% capitalization rate.
Average earnings (18M / 5) P3,600,000
Less: Normal earnings (10M x 20%) 2,000,000
Excess earnings or earnings from goodwill 1,600,000
Capitalized at 25% or divided by 25%
Goodwill P6,400,000

• The purchase price will then be P16,400,000 which is the price at fair value plus
the goodwill added to the fair value.

Average earnings (18M / 5) P3,600,000

Capitalized at 25% or divided by 25%
Purchase price 14,400,000

6. Computer Software

– Cost incurred on the research stage in creating the software should be charged outright to
expense when incurred until a technological feasibility has been established for the product.
– Technological feasibility is established when a company has produced either a detailed
Internally developed program design of the software or a working model. After establishing technological
feasibility, the cost of software to be capitalized should include costs of coding and testing
and the cost to produce the product masters.

– If for sale – treat as inventory

– If held for licensing or rental to others – recognize as intangible asset
Purchased – If used and integral part of the hardware – treat as PPE
– If used and not integral part of the hardware – treat as intangible asset

– The cost of the computer software should be allocated based on the pattern in which the
Amortization asset’s future economic benefits are expected to be consumed by the entity. If such pattern
cannot be determined reliably, the straight-line method is used.

7. Leasehold Improvements
 Permanent upgrading on leased property under an operating lease. These are alterations or
modifications on the leased property made by the lessee, such as buildings, walkways,
Definition pavements, landscaping, driveways, lighting installations, major repairs or replacements,
partitions, cabinets, shelves, ventilating system, etc. made on the leased asset.
Recognition These are generally classified as property, plant and equipment.
– If the lease is nonrenewable, depreciated using the shorter period between the remaining
lease term and the useful life of the LHI.
– If the lease contract contains a provision for an option to renew and the likelihood of the
renewal option is highly probable, the cost of the LHI should be depreciated over the
Depreciation shorter of the life of the LHI and the remaining extended lease term.
– But when the renewal option is uncertain, the cost of the LHI should be depreciated over
the shorter between the life of the LHI and the remaining lease term, as if there was no
renewal option.

5. Subsequent Measurement
• Similar to items of PPE, an entity shall choose either the cost model or the revaluation model in as
its accounting policy in subsequently valuing intangible assets. If an intangible asset is accounted for
using the revaluation model, all the other assets in its class shall also be accounted for using the
same model, unless there is no active market for those assets.

Cost model
• When the cost model is elected, an intangible asset shall be subsequently valued at its cost less any
accumulated amortization and any accumulated impairment losses. Note that intangible assets
with no active market are subsequently valued using the cost model.

Revaluation model
• After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent accumulated amortization and any
subsequent accumulated impairment losses. For the purpose of revaluations under this Standard,
fair value shall be measured by reference to an active market. Revaluations shall be made with such
regularity that at the end of the reporting period the carrying amount of the asset does not differ
materially from its fair value.

1. Amortization
• The amortization of intangibles follows the same concept with that of depreciating items of PPE.
However, an entity shall assess whether the useful life of an intangible asset is finite or indefinite
and, if finite, the length of, or number of production or similar units constituting, that useful life.
– 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.
• The following should be noted:
– An intangible asset shall be regarded by the entity as having an indefinite useful life when,
based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over
which the asset is expected to generate net cash inflows for the entity.
– The useful life of an intangible asset that arises from contractual or other legal rights shall not
exceed the period of the contractual or other legal rights but may be shorter depending on the
period over which the entity expects to use the asset. The length of time used to amortize
intangibles is the asset’s legal life or useful life, whichever is lower.
Type of intangible Assumed legal life

Patent 20 years
Trademark 10 years

Copyright 50 years
Franchise 20 years

Goodwill (from business combination) Indefinite

– If the contractual or other legal rights are conveyed for a limited term that can be renewed, the
useful life of the intangible asset shall include the renewal period(s) only if there is evidence to
support renewal by the entity without significant cost. However, the useful life of a reacquired
 right recognized as an intangible asset in a business combination is the remaining contractual
period of the contract in which the right was granted and shall not include renewal periods.

Intangible assets with finite lives

• The cost less residual value of an intangible asset with a finite useful life should be amortized over
its useful life or legal life, whichever is shorter:
a. The amortization method should reflect the pattern of benefits.
b. If the pattern cannot be determined reliably, amortize by the straight-line method.
c. The amortization charge is recognized in profit or loss unless another PFRS requires that it be
included in the cost of another asset.
d. The amortization period and method should be reviewed at least annually.
e. If the expected useful life of the asset is different from previous estimates, the amortization
period shall be changed accordingly. If there has been a change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the amortization method
shall be changed to reflect the changed pattern. Such changes shall be accounted for as changes
in accounting estimates in accordance with PAS 8.
f. The asset should also be assessed for impairment in accordance with PAS 36.
g. The residual value of an intangible asset with a finite useful life shall be assumed to be zero
unless:
– there is a commitment by a third party to purchase the asset at the end of its useful life; or
– there is an active market (as defined in PFRS 13) for the asset and:
• residual value can be determined by reference to that market; and
• it is probable that such a market will exist at the end of the asset's useful life.

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.

2. Impairment
• The provisions in recognizing impairment loss and reversals of impairment as set forth IAS 36
shall also apply to intangibles. As discussed in the module of PPE, there is impairment when the
carrying amount of the asset exceeds its recoverable amount (i.e. the higher between the fair value
less cost to sell and the asset’s value in use).
•
• The recoverable amount of an intangible asset with an indefinite useful life is usually equal to its
value in use, since such assets have no known market. Because the term is indefinite, the value in
use is computed using the formula in computing a perpetuity:
Value in use = Expected annual cash flows ÷ Discount rate

6. Retirement and Disposal

• An intangible asset shall be derecognized:
a. On disposal; or
b. When no future economic benefits are expected from its use or disposal.
• The gain or loss arising from the derecognition of an intangible asset shall be determined as the
difference between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be
recognized in profit or loss when the asset is derecognized (unless PAS 17 requires otherwise on a
sale and leaseback.) Gains shall not be classified as revenue.

7. Presentation and Disclosures

• All items of intangible assets should be shown in the statement of financial position within the line
item “Intangibles” under noncurrent assets.
• Goodwill should be separately shown in the statement of financial position.
 • The Standard requires these disclosures for each class of intangible asset, distinguishing between
internally generated and other assets:
a. Whether useful lives are indefinite or finite and, if finite, the useful lives or amortization rates
used • The amortization methods used
b. The gross carrying amount and accumulated amortization and impairment losses at the beginning
and end of the period
c. The line items in the statement of comprehensive income in which amortization is included
d. Additions, separately showing those internally generated, those acquired separately, and those
acquired through business combinations
e. Assets classified as held for sale under PFRS 5
f. Increases or decreases during the period resulting from revaluations
g. Impairment losses
h. Reversals of impairment losses
i. Amortization recognized during the period

II. CHECKING FOR UNDERSTANDING

(A)PROBLEMS

1. On January 1, 2019, Anton Company acquired an intangible asset from a foreign company. The invoice
price of the intangible was P10,000,000 subject to a 10% discount if acquired on a cash basis. Anton
Company paid P2,000,000 import duties and professional fees of P100,000 in relation to its acquisition. At
what amount should the intangible asset be initially recorded in the books of the Anton Company?
A. P9,000,000
B. P9,100,000
C. P11,000,000
D. P11,100,000

2. Baby Company acquired an intangible asset from Candy Company on May 1, 2019 by issuing 5,000,000 of
its ordinary shares with a par value of P2.00 per share but currently selling in the stock exchange for P3.00
per share and an additional amount of P2,000,000. Baby Company also pays P100,000 legal cost in relation
to the acquisition of the intangible asset. At what amount should the intangible asset be initially recorded by
Baby Company?
A. P10,100,000
B. P15,100,000
C. P17,000,000
D. P17,100,000

3. Emman Company purchases a trademark from an overseas company to manufacture items under the
trademark. Emman Company incurs the following costs in purchasing the trademark:
Amount paid for the trademark P8,000,000
Import duties 80,000
Legal fees (negotiating the deal and enduring the terms of the trademark are fair) 100,000
Training costs (required by overseas company before the trademark can be used) 20,000
Advertising new product 30,000
Cost of registering the trademark (required in terms of the agreement with supplier)90,000

What amount should the trademark be initially recorded?

A. P8,180,000
B. P8,270,000
C. P8,290,000
D. P8,320,000

4. Gandhi Company purchased a patent on January 1, 2019 for P428,400. The patent was being amortized over
its remaining legal life of 15 years expiring on January 1, 2034. On January 1, 2022, Gandhi determined that
the economic benefits of the patent would not last longer than 10 years from the date of acquisition. What
 amount should be reported in the balance sheet as patent, net of accumulated amortization at December 31,
2025?
A. P146,880
B. P195,840
C. P244,800
D. P302,400

5. On January 2, 2019, Hanna Company paid P500,000 to acquire a patent with a remaining economic useful
life of 15 years. Hanna Company expects to use the patent for 5 years and intends to sell it after 5 years.
Inno Company has committed to buy the patent for 40% of the cost to Hanna Company. In its December 31,
2019, what amount of patent amortization should Hanna Company report in its profit or loss?

A. P40,000
B. P60,000
C. P100,000
D. P200,000


6. Javier Company has a broadcasting license that expires in 5 years. As of January 1, 2019, the license has a
carrying amount of P1,800,000. The license is renewable and has already been renewed twice in the past.
During the current year 2019, the broadcasting authority has decided that in the future it will auction the
licenses when they came up for renewal. As a result of this development, the company’s renewal option is
no longer assured. The license has a remaining life of three years as of January 1, 2019. In the December 31,
2019 statement of financial position, how much should be reported as the carrying value of the broadcasting
license?

A. None
B. P1,200,000
C. P1,600,000
D. P2,000,000

7. The R&D division of Lola Company undertakes both research and development activities of the company.
Its current development project on a prototype is near completion. The cost identified in this project consists
of the following:
Cost of materials used P5,000,000
Salaries of consultants for the projects 2,000,000
Fees to register trade design 50,000
Amortization of patent used in the project 100,000
Selling and administrative overheads allocated 1,000,000
Initial operating losses 500,000
Training costs to operate the asset 100,000
Total P8,750,000

The other costs that relate to this project are the salaries of scientists and technicians (P1,200,000) and
depreciation of equipment used in the research and development activities (P900,000). Management
estimates that about one third of these costs relate to the development project. What amount of development
costs that should be capitalized?

A. P7,150,000
B. P7,850,000
C. P8,250,000
D. P8,750,000

8. An intangible asset costs P300,000 on January 1, 2019. On January 1, 2020, the asset was evaluated to
determine if it was impaired. As of January 1, 2020, the asset was expected to generate future cash flows of
P25,000 per year (at the end of each year). The appropriate discount rate is 5%. What total amount should
be charged against income in 2020, assuming that the asset had a total useful life of 10 years from date of
acquisition?

A. P30,000
B. P92,304
C. P112,048
 D. P122,304

9. Quail Company bought Special Products Division in 2019 and appropriately recorded P500,000 of goodwill
related to the purchase. On December 31, 2023, the fair value of Special Products Division is P4,000,000
and it is carried on Quail’s books for a total of P3,400,000, including the goodwill. An analysis of Special
Products Division’s assets indicates that goodwill of P400,000 exists on December 31, 2023. What goodwill
impairment should be recognized by Quail in 2023?

A. None
B. P50,000
C. P200,000
D. P300,000

10. On January 1, 2019, Trent Company signed a 8-year lease for warehouse space. The lease contract contains
a renewal option for an additional 8-year period on January 1, 2022. On January 2, 2021, Trent completed
substantial improvements to the warehouse. The cost of these improvements was P420,000 with an
estimated useful life of 15 years.

Question 1: If the likelihood of renewal is highly probable, what is the carrying amount of the improvement
on December 31, 2023 statement of financial position?

A. P330,000
B. P336,000
C. P360,000
D. P364,000


Question 2: If the likelihood of renewal is uncertain, what is the carrying amount of the improvement on
December 31, 2023 statement of financial position?

A. P210,000
B. P330,000
C. P360,000
D. P364,000

(B) THEORIES

1. An intangible asset is defined as

A. An identifiable asset without physical substance.
B. A nonmonetary asset without physical substance.
C. An identifiable nonmonetary asset without physical substance
D. An identifiable monetary and nonmonetary asset without physical substance.

2. Which of the following would qualify as an intangible asset?

A. Advertising and promotion on the launch of a huge product.
B. College tuition fees paid to employees who decide to enroll in an executive MBA program while
working with the entity.
C. Operating losses during the initial stages of a project.
D. Legal costs paid to intellectual property lawyers to register a patent.

3. Which statement in incorrect concerning "control" in the definition of an intangible asset?

A. An entity controls an asset if the entity has the power to obtain future economic benefits flowing from
the underlying resource and to restrict the access of others to those benefits.
B. The capacity of an entity to control the future economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law.
C. Market and technical knowledge may give rise to future economic benefits which can be controlled by
the entity if the knowledge is protected by legal right, such as a copyright.
D. The skill of employees arising out of the benefits of training costs can be recognized as an intangible
asset.

4. Once recognized, intangible assets can be carried at

 A. Cost less accumulated amortization
B. Cost less accumulated amortization and impairment losses
C. Revalued amount less accumulated amortization
D. Cost plus a notional increase in fair value since the intangible asset is required

5. Directly attributable costs of preparing the intangible asset for its intended use include all of the following,
except
A. Cost of employee benefits arising directly from bringing the asset to its working condition
B. Professional fees arising directly from bringing the asset to its working condition
C. Cost of testing whether the asset is functioning properly
D. Initial operating losses

6. Which is incorrect concerning acquisition of an intangible asset as part of a business combination?

A. The cost of the intangible asset is based on its fair value at the date of acquisition.
B. If there is an active market from the intangible asset, the fair value is equal to the quoted market price
which is usually the current bid price.
C. If there is no active market for the intangible asset, the fair value is equal to the amount that would be
paid by the entity in an arm's length transaction between knowledgeable and willing parties.
D. If an intangible asset acquired in a business combination is separable or arises from contractual or legal
rights, sufficient information does not exist to measure reliably the fair value of the asset.

7. An impairment loss recognized for goodwill

A. Shall not be reversed in a subsequent year.
B. May be reversed fully in a subsequent year.
C. May be reversed partly in a subsequent year.
D. Shall be reversed in a subsequent year.

8. A copyright is an example of which general category of intangible asset?

A. Marketing-related
B. Customer-related
C. Artistic-related
D. Contract-based

9. Which of the following should be expensed as incurred by the franchisee?

A. Amount paid to the franchisor for the franchise
B. Payment to an entity, other than the franchisor, for that entity's franchise.
C. Legal fees paid to the franchisee's lawyers to obtain the franchise.
D. Periodic payments to the franchisor based on the franchisee's revenue.

10. Amortization of an intangible asset with a finite useful life shall commence with
A. It is first recognized as an asset.
B. It is probable that it will generate future economic benefits.
C. It is available for the intended use.
D. The cost can be measured with reasonable certainty.

11. The appropriate method of amortizing intangible asset is best described by which of the following?
A. The straight-line method, unless the pattern in which the asset's economic benefits are consumed by the
entity can be determined reliably.
B. The double declining balance in all circumstances.
C. Management can make a subjective amount of periodic amortization without regard to any particular
method.
D. The straight-line method in all circumstances.

12. Which is not a component of the cost of internally generated intangible asset?
A. Cost of materials and services used or consumed in generating the intangible asset.
B. Cost of employee benefits arising from the generation of the intangible asset.
C. Fees to register a legal right.
 D. Expenditure on training staff to operate the asset.

13. Which statement is incorrect concerning internally generated intangible asset?

A. To assess whether an internally generated intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into a research phase and a development phase.
B. The cost of an internally generated asset comprises all directly attributable costs necessary to create,
produce and prepare the asset for its intended use.
C. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance
shall be recognized as intangible assets.
D. Internally generated goodwill shall not be recognized as an intangible asset.

14. Research activities include all of the following, except

A. Search for application of research finding or other knowledge.
B. Search for product or process alternative
C. Formulation and design of the possible product or process alternative
D. Design, construction and testing of preproduction prototype and model.

15. Which of the following research and development related costs should be capitalized and amortized over
current and future periods?
A. Labor and material costs incurred in building a prototype model.
B. Cost of testing equipment that will also be used in another separate research and development project
scheduled to begin next year.
C. Administrative salaries allocated to research and development,
D. Research findings purchased from another company to aid a particular research project currently in
process.

16. The accounting for the costs incurred in creating computer software products is to
A. Capitalize all costs until the software is sold.
B. Charge research and development expense when incurred until technological feasibility has been
established for the product.
C. Charge research and development expense only if the computer software has alternative future use.
D. Capitalize all costs as incurred until a detailed program design or working model is created.

17. Which of the following statements is incorrect in relation to internal-use software?

A. The application and development costs should be amortized on the straight-line basis unless another
systematic and rational basis is more appropriate.
B. Internal-use software is considered to be software that is marketed as a separate product.
C. The costs of testing and installing computer hardware should be capitalized as incurred.
D. The costs of training and application maintenance should be expensed as incurred.

18. Under SIC 32, "web site development costs" incurred for the purpose of promoting and advertising an
entity's product or service should be
A. Expensed as incurred
B. Capitalized as an intangible asset
C. Either expensed as incurred or capitalized as an intangible asset depending on the recognition criteria.
D. Charged to retained earnings

19. The private concession operator shall recognize the infrastructure asset as
A. Intangible asset
B. Financial asset
C. Either intangible asset or financial asset
D. Neither an intangible asset nor a financial asset.

20. Which of the following statements in relation to the term "development" is true?
I. The product being developed should have already been put into commercial production or use.
II. Development involves the application of research findings.
 A. I only
B. II only
C. Both I and II
D. Neither I nor I

21. Which of the following statements is true in relation to intangible assets?

I. Intangible assets cannot be treated as having an indefinite useful life.
II. Intangible assets with a finite useful life should be measured at cost and tested annually for impairment.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

III. ANALYSIS

Case Study 1
Extracts from the financial records of ABC Inc. for the year ended 2019 are as follows:
Goodwill generated by the company due to an exceptional employee workforce Undeterminable
Advertising expenditure to generate goodwill for the company upon its start-up P30,000
Goodwill acquired in a business combination 200,000
Patent acquired from another business 130,000
Customer lists 40,000
Miscellaneous research expenses 50,000
Development expenses demonstrating 5 out of 6 criteria in PAS 38 par. 57 160,000
Development expenses demonstrating 6 out of 6 criteria in PAS 38 par. 57 270,000
In-process R&D costs acquired in a business combination at fair value 180,000
Intangible asset acquired through a government grant, at fair value 90,000
Equipment acquired for use in various R&D projects 975,000
Depreciation on the above equipment 135,000
Cost of materials used in R&D projects 200,000
Compensation for R&D personnel 500,000
Outside consulting fees 150,000
Indirect costs allocated to the R&D 250,000
Legal costs to file a patent on a certain product; production of which would not have been
undertaken without the patent 100,000
Special equipment to be used solely for the development of the product mentioned above;
the equipment has no other use and has a useful life of 4 years 600,000
Labor and material costs incurred in producing prototypes 2,000,000
Cost of testing the prototype 800,000

Required
Compute for the total amount of intangible assets to be recognized and the amount to be immediately expensed.

Case Study 2
During 2019, ABC Inc. incurred costs to develop and produce a routine, low-risk computer software product as follows:
Completion of detailed program design or working model P1,300,000
Cost incurred for coding and testing to establish technological feasibility 1,000,000
Other coding costs after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and training materials from product master 2,500,000
Packaging product 900,000

Required
Compute for the amount to be capitalized as intangible assets.

Case Study 3
ABC Inc. has the following details for two of its intangible assets:
• On January 1, 2019, ABC Inc. purchased a patent from an original patentee for P2,400,000. The remaining legal life of
the patent is 15 years but the useful life is only 12 years. On January 1, 2020, the entity paid P550,000 in successfully
defending the patent in an infringement suit filed against the entity. On January 1, 2021, the entity acquired a competing
patent for P1,500,000. The competing patent has a remaining legal life of 15 years, but it is not to be used because it was
intended to protect the original patent.

• On January 1, 2019, ABC Inc. purchased a trademark for P7,140,000. The trademark is being amortized over its
remaining legal life of 15 years. During 2022, the entity determined that the economic benefits of the trademark would
not last longer than ten years from the date of acquisition.

Required
Compute for the carrying amount (i.e. cost net of accumulated amortization) of the intangibles on December 31, 2022.
 Case Study 4
On January 1, 2019, ABC Inc. acquired the following intangible assets:
• A trademark for P3,000,000. The trademark has 8 years remaining in its legal life. It is anticipated that the trademark will
be renewed in the future, indefinitely, without problem.
• A patent for P6,000,000. Because of market conditions, it is expected that the patent will have economic life for just 5
years, although the remaining legal life is 10 years.

On December 31, 2019, the intangible assets are assessed for impairment. Because of a decline in the economy, the trademark
is expected to generate cash flows of just P120,000 per year. The useful life of the trademark still extends beyond the
foreseeable horizon. The cash flows expected to be generated by the patent are P1,000,000 annually for each of the next 4
years. The appropriate discount rate for all intangible assets is 6%. The present value of an ordinary annuity of 1 at 6% for
four periods is 3.46. The fair value less cost to sell of the patent is P3,200,000.

Required
Compute for the total amount of impairment loss for the year then ended.

IV. INTEGRATION

Our graduates should possess the following attributes. They should be:
1. MAGIS - generous and committed to excellence;
2. CURA PERSONALIS - caring and respecting to the individual person and God’s other creations;
3. COMPASSIONSHIP - able to live in harmony with others;
4. SOCIALLY INVOLVED - committed to serve, uplift and rehabilitate the lives of those who are
marginalized – the least, the lost and the last
5. DISCERNMENT - discerning and sensitive to self, to others and to God; and
6. ANIMO - passionate toward work.

V. INDEPENDENT LEARNING

Learners are to engage in independent learning (learning at their pace) through reading and comprehending
assigned texts and watching video materials related to the subject matter for the week. Assigned texts can be a
chapter of a book, an article, a topical module, or an activity sheet. Videos can be one which can be sourced
from video streaming sites, lecture videos from other educational institutions, or produced by the instructor
himself/ herself. These materials are to be read or watched prior to the synchronous sessions in order for the
learners to better understand what are to be discussed in the said sessions. These materials will be arranged by
week and shall be uploaded to the class LMS for easy reference by the learners.

Collaborative activities may be required by the instructor where the class may be divided into small groups for
the purpose of group learning and sharing. Such activities will either be incorporated in the activity sheets or
will be separately prepared by the instructor. The documentation of the said collaborative activity shall be
submitted by one of the group members to the instructor on the date provided.

For each week, one assignment material (problem set) shall be required by the instructor for submission by the
learners. Said assignment shall form part of the formative assessment of the learners in determining the degree
of understanding of the learners from both printed/visual lecture materials and synchronous discussions.

PREPARED BY:

Armee Jay Cresmundo/Judean Grace Galvez/ Maria Angelina Bucoy

[FinAcc4] Instructors