826 R. Papa St.

Sampaloc, Manila
Philippine School of Business Administration
CPA REVIEW

THEORY OF ACCOUNTS Gutierrez/Ocampo

HAND OUT NO. 05-45 MAY 2006

PHILIPPINE ACCOUNTING STANDARD (PAS) 38

INTANGIBLE ASSETS

DEFINITIONS:

An intangible asset is an identifiable non-monetary asset without physical substance.

The agreement date for a business combination is the date a substantive agreement
between the combining parties is reached and , in the case of publicly listed entities,

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announced to the public. In the case of a hostile takeover, the earliest date that a

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substantive agreement between the combining parties is reached is the date that a

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sufficient number of the acquiree’s owners have accepted the acquirer’s offer for the
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acquirer to obtain control of the acquiree.

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Development is the application of research findings or other knowledge to a plan or
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d\esign for the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.
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Entity specific value is the present value of the cash flows an entity expects to arise from
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the continuing use of an asset and from its disposal at the end of its useful life or expects
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to incur when settling a liability.

Monetary assets are money held and assets to be received in fixed or determinable
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amounts of money.
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Research is original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.

IDENTIFIABILITY
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The definition of an intangible asset requires an intangible to be identifiable to

distinguish it from goodwill.

Paragraph 12 provides that an asset meets the identifiability criterion in the definition of
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an intangible asset when it:

a. is separable, ie 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; or
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.

RECOGNITION AND MEASUREMENT

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 PSBA CPA REVIEW SCHOOL 2

A. An item meet the definition of an intangible asset.

B. An intangible 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; and
b. the cost of the asset can be measured reliably.

Paragraph 24 provides that an intangible asset shall be measured initially at cost.

Separate Acquisition

The cost of a separately acquired intangible asset comprises:

a. its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates; and
b. any directly attributable cost of preparing the asset for its intended use.

Examples of directly attributable costs are:

a. cost of employee benefits (as defined in IAS 19 Employee benefits) arising

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directly from bringing the asset to its working condition.

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b. Professional fees arising directly from the asset to its working condition; and

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c. Costs of testing whether the asset is functioning properly.
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Acquisition as Part of a Business Combination
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In accordance with IFRS 3 Business Combination, if an intangible asset is acquired in a

business combination, the cost of that intangible asset is its fair value at the acquisition
date. The fair value of an intangible asset reflects market expectations about the
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probability that the future economic benefits embodied in the asset will flow to the entity.
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Acquisition by way of a Government Grant

In some cases, an intangible asset may be acquired free of charge, or for nominal
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consideration, by way a of government grant. This may happen when a government

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transfers or allocates to an entity intangible assets such as airport landing rights, licenses
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to operate radio or television stations, import licenses or quotas or right to access other
restricted resources. In accordance with IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance, an entity may choose to recognize both the
intangible asset and the grant initially at fair value.
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Internally Generated Goodwill

Paragraph 48 provides that internally generated goodwill shall not be recognized as an

asset.
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Paragraph 52 provides that, 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

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 PSBA CPA REVIEW SCHOOL 3

Although the terms ‘research” and “development” are defined, the terms “research
phase” and “development phase” have a broader meaning for the purpose of this PAS
38.

Paragraph 53 provides that , if an entity cannot distinguish the research phase from
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.

Research Phase

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.

Development Phase

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:

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a. the technical feasibility of completing the intangible asset so that it will be

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available for use or sale.

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b. Its intention to complete the intangible asset and use or ell it
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c. Its ability to use or sell the intangible asset

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d. How the intangible asset will generate probable future economic benefits. Among
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other things, the entity can demonstrate the existence of a market for the output of
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the intangible asset or the intangible asset itself or , if it is to be used internally,

the usefulness of the intangible asset.
e. The availability of adequate technical, financial and other resources to complete
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the development and to use or sell the intangible asset.

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f. Its ability to measure reliably the expenditure attributable to the intangible asset
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during its development.

Internally generated brands, mastheads, publishing titles, customer lists and items
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similar in substance shall no be recognized as intangible assets.

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MULTIPLE CHOICE
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1. Costs incurred internally to create intangibles are

a. capitalized.
b. capitalized if they have an indefinite life.
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c. expensed as incurred.
d. expensed only if they have a limited life.
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2. Which of the following methods of amortization is normally used for intangible
assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance

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 PSBA CPA REVIEW SCHOOL 4

3. Which is incorrect concerning the recognition and measurement of an

intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase
price, including import duties and taxes and any directly attributable
expenditure of preparing the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an
acquisition, the cost is based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government
grant, the cost is equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its
cost is equal to the total payments over the credit period.
D
4.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 enterprise 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
A

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5.The best definition of useful life of an intangible asset is

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a. The legal life of the intangible.

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b. The period over which management believes the intangible asset will
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contribute to the revenue-producing process.

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c. Twenty years.
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d. The period over which the cost of the asset can be deducted for income tax
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purposes.
B
6. Which of the following factors should not be considered in estimating the
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useful life of intangible asset?

a. Legal, regulatory or contractual provision
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b. Expected action by competitors or potential competitors

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c. Residual value
d. Typical product life cycle of the asset
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C
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7. It is the systematic allocation of the cost of an intangible asset less any

residual value as an expense over the asset’s useful life?
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a. Depreciation c. Depletion
b. Realization d. Amortization
D
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8. The residual value of an intangible asset should be presumed zero, unless

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I. There is a commitment by a third party to purchase the asset at the end of its
useful life.
II. There is an active market for the asset and residual value can be determined
by reference to that market and it is probable that such market will exist at the
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end of the asset’s useful life.

a. Both I and II b. Neither I nor II c. II only d. I
only
A
9.Which one of the following 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.
D

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 PSBA CPA REVIEW SCHOOL 5

10. Which statement is incorrect concerning internally generated intangible

asset?
a. To assess whether an internally generated intangible asset meets the criteria
for recognition, an enterprise 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 should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.
D
11. The following expenditures should be expensed when incurred, except
a. Advance payment for delivery of goods or rendering of services
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs
A

12. Purchased goodwill should

a. be written off as soon as possible against retained earnings.

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b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the

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period benefited.
d. not be amortized.
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D
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13. The intangible asset goodwill may be
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a. capitalized only when purchased.

b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
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d. written off directly to retained earnings.

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A
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14. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
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c. fair value and the expected future net cash flows.

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d. book value and its fair value.

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B
15. Which of the following research and development related costs should be
capitalized and amortized over current and future periods?
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a. Research and development general laboratory building which can be put to

alternative uses in the future
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b. Inventory used for a specific research project

c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular
research project currently in process
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A
16. Which of the following principles best describes the current method of accounting
for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

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 PSBA CPA REVIEW SCHOOL 6

17. How should research and development costs be accounted for, according to a
Financial Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated
useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the
materiality of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated
that the expenditure will have alternative future uses or unless contractually
reimbursable.
D
18. Which of the following costs should be excluded from research and development
expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the
manufacturing stage
C
19. If a company constructs a laboratory building to be used as a research and

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development facility, the cost of the laboratory building is matched against

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earnings as

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a. research and development expense in the period(s) of construction.
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b. depreciation deducted as part of research and development costs.

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c. depreciation or immediate write-off depending on company policy.
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d. an expense at such time as productive research and development has been
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obtained from the facility.

B
20. Operating losses incurred during the start-up years of a new business should be
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a. accounted for and reported like the operating losses of any other business.
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b. written off directly against retained earnings.

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c. capitalized as a deferred charge and amortized over five years.

d. capitalized as an intangible asset and amortized over a period not to exceed 20
years.
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A
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21. In accordance with the new international accounting standard, which

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statement is correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for
impairment at least annually.
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a. I only b. II only c. Both I and II d. Neither I nor II

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C
22. Which following statements is correct regarding the treatment of start-up
activities related to the opening of the new facility?
I. Cost of raising capital should be expensed as incurred.
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II. Costs of acquiring or constructing long-lived assets and getting them ready
for their intended use should be expensed as incurred.
a. I only b. II only c. Both I and II d. Neither I
nor II
D

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