LECTURE NOTES ON INTANGIBLE ASSETS

Nature of Intangible Assets

Intangible asset is an identifiable nonmonetary asset without physical substance.

Critical attributes of an intangible asset:

• identifiability
• control (power to obtain benefits from the asset)
• future economic benefits (such as revenues or reduced future costs)

Identifiability: An intangible asset is identifiable when it:

• is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged,
either individually or as part of a package) or
• 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.

Types of Intangible Assets

• Marketing-related
• Customer-related
• Artistic-related
• Contract-related
• Technology-related
• Goodwill

Marketing-related intangible assets are those assets primarily used in the marketing or promotion of
products or services.

Examples
• Trademarks or trade names
• Newspaper masthead
• Internet domain names
• Noncompetition agreements

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.

Examples
• Franchise and licensing agreements
• Construction permits
• Broadcast rights
• Service or supply contracts.

Technology-related intangible assets relate to innovations or technological advances.

Examples
• Patented technology
• Trade secrets

Recognition
PAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost)
if, and only if:
• it is probable that the future economic benefits that are attributable to the asset will flow to the
entity; and
• the cost of the asset can be measured reliably.

This requirement applies whether an intangible asset is acquired externally or generated internally. PAS
38 includes additional recognition criteria for internally generated intangible assets.

The probability of future economic benefits must be based on reasonable and supportable assumptions
about conditions that will exist over the life of the asset. The probability recognition criterion is always
considered to be satisfied for intangible assets that are acquired separately or in a business combination.

If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria
for recognition as an intangible asset, PAS 38 requires the expenditure on this item to be recognized as
an expense when it is incurred.
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 Business combinations. There is a rebuttable presumption that the fair value (and therefore the cost) of
an intangible asset acquired in a business combination can be measured reliably. An expenditure
(included in the cost of acquisition) on an intangible item that does not meet both the definition of and
recognition criteria for an intangible asset should form part of the amount attributed to the goodwill
recognized at the acquisition date. PAS 38 notes, however, that non-recognition due to measurement
reliability should be rare.

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.

Research and Development Costs

Research - original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.

Development - application of research findings or other knowledge to a plan or design for the production
of new or substantially improved materials, devices, products, processes, systems or services before
the start of commercial production or use.

Initial Recognition:
• Charge all research cost to expense.
• 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 demonstrate how the asset will generate
future economic benefits.

If an entity cannot distinguish the research phase of an internal project to create an intangible asset
from the development phase, the entity treats the expenditure for that project as if it were incurred in
the research phase only.

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.

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 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.

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.

Disclosure
For each class of intangible asset, disclose:
• useful life or amortisation rate
• amortisation method
• gross carrying amount
• accumulated amortisation and impairment losses
• line items in the income statement in which amortisation is included
• reconciliation of the carrying amount at the beginning and the end of the period showing:
◦ additions (business combinations separately)
◦ assets held for sale
◦ retirements and other disposals
◦ revaluations
◦ impairments
◦ reversals of impairments
◦ amortisation
◦ foreign exchange differences
◦ other changes
• basis for determining that an intangible has an indefinite life
• description and carrying amount of individually material intangible assets
• certain special disclosures about intangible assets acquired by way of government grants
• information about intangible assets whose title is restricted
• contractual commitments to acquire intangible assets

Additional disclosures are required about:

• intangible assets carried at revalued amounts
• the amount of research and development expenditure recognised as an expense in the current
period

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 Accounting for Specific Intangible Assets

Patent
A patent gives the holder exclusive right to use, manufacture, and sell a product or a process without
interference or infringement by others.

Acquired
Same with PPE - (Cost depends on manner of acquisition)

Internally generated
Expensed – R&D costs related to the development of the product, process, or idea that is subsequently
patented
Capitalized – Costs to secure the patent right

Amortization
Over its legal life (20 years) or its useful life, whichever is shorter.

Trademark
A trademark or trade name is a word, phrase, or symbol that distinguishes or identifies a particular
entity or product.

Measurement
Same with patents

Legal life
Legal protection for an indefinite number of renewals for a period of 10 years (Sec. 145 RA 8293) each.

Amortization
Limited life - Amortized over the life of the trademark
Indefinite life - not amortized

Franchise
A franchise is a contractual arrangement under which the franchisor grants the franchisee the right to
sell certain products or services, to use certain trademarks or trade names, or to perform certain
functions, usually within a designated geographical area.

Fees related to franchise

Initial – capitalized; amount depends on the manner of payment
Periodic – expensed when incurred

Amortization
Limited life - Amortized over the life of the franchise
Indefinite life - not amortized

Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognized. (PFRS 3 Appendix)

Determination of Goodwill

Specific attributes approach

The attributes and components of goodwill are identified and valued accordingly.

Indirect valuation approach

Goodwill is the difference between the purchase price and the fair value of identifiable net assets
acquired.

Excess earnings approach

1. Purchase of average earnings.
Average earnings Pxx
Less normal earnings
(FV of NA x Normal rate of return) xx
Excess earnings xx
x number of years x
Goodwill Pxx

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 2. Capitalization of average excess earnings
Average earnings Pxx
Less normal earnings
(FV of NA x Normal rate of return) xx
Excess earnings xx
/ Capitalization rate %
Goodwill Pxx

3. Capitalization of average earnings

Average earnings Pxx
/ Capitalization rate %
Net assets, including goodwill xx
Less net assets, excluding goodwill xx
Goodwill Pxx

4. Present value of average excess earnings

Average earnings Pxx
Less normal earnings
(FV of NA x Normal rate of return) xx
Excess earnings xx
x PVF using an appropriate rate xx
Goodwill Pxx

PROBLEMS
1. Determine the amount to be recognized as intangible assets from the following data:
Deposits with advertising agency which will
be used to promote goodwill P 45,000
Excess of cost over net assets of
purchased subsidiary 400,000
Franchise to operate a local fast food 100,000
Marketing costs of introducing new 150,000
products
Organization costs 50,000
Patents 244,000
Research and development costs expected
to benefit future periods 420,000
Research and development costs not
expected to benefit future periods 300,000
Unamortized bond discount 155,000

2. Joy Corp. is engaged in a research and development project to produce a new product. In the year
ended December 31, 2014, the company spent P1,200,000 on research and concluded that there
were sufficient grounds to carry the project on to its development stage and a further P750,000 had
been spent on development. At that date management had decided that they were not sufficiently
confident in the ultimate profitability of the project and wrote off all the expenditure to date to the
income statement. In 2015 further direct development costs have been incurred of P800,000 and
the development work is now almost complete with only an estimated P100,000 of costs to be
incurred in the future. Production is expected to commence within the next few months.
Unfortunately the total trading profit from sales of the new product is not expected to be as good
as market research data originally forecasted and is estimated at only P1,500,000. Assuming the
other criteria given in PAS 38 are met, how much should be capitalized as of December 31, 2015?

3. Nasugbu Company incurred the following costs during the current year:
Quality control during commercial
production, including routine testing of
products P58,000
Laboratory research aimed at discovery of
new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastic
product 26,000
Engineering follow-through in an early phase
of commercial production 15,000
Adaptation of an existing capability to a
particular requirement or customer's need
as a part of continuing commercial
activity 13,000
Trouble-shooting in connection with
breakdowns during commercial production 29,000
Searching for applications of new research
findings 19,000
What is the total amount Nasugbu should report as research and development expense?

4. Cavinti Company provided the following information relevant to the research and development
expenditures
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 Current period depreciation on the
building housing R and D activities P1,500,000
Cost of market research study 1,000,000
Current period depreciation on a
machine used in R and D activities 500,000
Salary of R and D director 1,200,000
Salary of Vice-President who spends ¼
of his time overseeing R and D
activities 2,400,000
Pension costs for salary of R and D
director 50,000
Pension costs for salary of Vice-President 100,000
The R and D expense for the current period should be

5. Batangas Company purchased a patent from the inventor, who asked P110,000 for it. Batangas
paid for the patent as follows: cash, P40,000; issuance of 1,000 shares of its own ordinary shares,
par P10 (market value, P20 per share); and a note payable due at the end of three years, face
amount, P50,000, noninterest-bearing. The current interest rate for this type of financing is 12
percent. Batangas Company should record the cost of the patent at

6. Gooden Enterprises Inc. developed a new machine for manufacturing baseballs. Because the
machine is considered very valuable, the company had it patented. The following expenditures were
incurred in developing and patenting the machine.
Purchase of special equipment to be
used solely for development of the
new machine P1,820,000
Research salaries and fringe benefits
for engineers and scientists 171,000
Cost of testing prototype 236,000
Legal costs for filing for patent 127,000
Fees paid to government patent office 25,000
Drawings required by patent office to
be filed with patent application 47,000
Gooden elected to amortize the patent over its legal life. At the beginning of the second year,
Gooden Enterprises paid P240,000 to successfully defend the patent in an infringement suit. At the
beginning of the fourth year Gooden determined that the remaining estimated useful life of the
patent was five years.
The carrying amount of the patent at the end of fourth year is

7. An entity purchases a trademark and incurs the following costs in connection with the trademark:
One-time trademark purchase price P100,000
Nonrefundable taxes 5,000
Training sales personnel on the use of the new
trademark 7,000
Research expenditures associated with the
purchase of the new trademark 24,000
Legal costs incurred to register the trademark
10,500
Salaries of the administrative personnel 12,000
Assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity
should recognized an asset in the amount of

8. Calatagan Corp. acquired a fast food franchise for a P50,000 cash down payment and in addition
gave a P150,00, one-year, noninterest-bearing note payable. The implicit interest rate is 12
percent. Calatagan also agreed to pay the franchiser P100,000 per year for the next 10 years for
promotional campaigns, accounting, and related services by the franchiser. Calatagan should record
the cost of the franchise as:

9. On January 1, 2015, Sassou Corp. acquired a copyright on a book of photographs from the estate
of a world renowned photographer who died in late December 2014, for a price of P500,000.
Sassou’s CEO knows that copyrights normally cover the lifetime of the artist plus 50 years, but she
has heard of a recent court case that extended the legal life by an additional 20 years. Other similar
books sold by Sassou for deceased photographers typically remain popular for only 10 years. The
carrying amount of the copyright at December 31, 2015 should be

10. Pagsanjan Company incurred costs to develop and produce a routine, low-risk computer software
product as follows:
Completion of detail program design P1,500,000
Cost incurred for coding and testing to
establish technological feasibility 500,000
Other coding costs after establishment of
technological feasibility 2,500,000
Other testing costs after establishment of
technological feasibility 2,000,000
Costs of producing product masters for
training materials
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 Duplication of computer software and
training materials from product master 4,000,000
Packaging product 1,000,000
What amount should be capitalized as software cost subject to amortization?

11. On January 1, 2015, Pila Company had capitalized cost of P10,000,000 for a new computer software
product with an economic life of 4 years. Sales for 2015 for the software product amounted to
P4,000,000. The total sales of the software over its economic life are expected to be P20,000,000.
However, the pattern of the future sales from the computer software cannot be determined reliably.
Pila should record amortization of computer software in 2015 at

12. Betterword Company is engaged in developing computer software. The following costs were incurred
during the current reporting period:
Salaries of programmers doing research P235,000
Expenses related to projects prior to
establishment of technological
feasibility 78,400
Expenses related to projects after
technological feasibility has been
established but before software is
available for production 49,500
Amortization of capitalized software
development costs 26,750
Costs to produce and prepare software
for sale 56,300
Additional data:
Sales of products for the year P515,000
Beginning inventory 142,000
Portion of goods available for sale sold
during the year 60%
Determine the company’s profit before tax.

13. RGW Industries purchased the net assets of SP Company for P1,300,000. A schedule of the net
assets of SP Company, as recorded on SP Company's books at the time of the acquisition, is as
follows:
Assets
Cash P 31,000
Receivables 250,000
Inventory 302,000
Land, buildings, and equipment (net) 350,000
Total assets P933,000
Liabilities
Current liabilities P 90,000
Long-term debt 185,000
Total liabilities P275,000
Net assets (book value) P658,000
The following schedule shows the differences between the recorded costs and market values of the
assets of SP Company at the date of the acquisition:
Cost Market
Inventory P302,000 P400,000
Land, buildings, &
equipment 350,000 390,000
Patents -0- 40,000
Purchased in-process
research &
development -0- 300,000
Existing work force -0- 90,000
Totals P652,000 P1,220,000
Liabilities P275,000 P 275,000
Determine the amount of goodwill to be recognized on the acquisition.

14. Acquiree Corporation's pretax accounting income for the year 2015 was P850,000 and included the
following items:
Impairment of goodwill P60,000
Amortization of identifiable intangibles 57,000
Depreciation on building 80,000
Extraordinary losses 44,000
Extraordinary gains 150,000
Profit-sharing payments to employees 65,000

Acquirer Corporation is seeking to purchase Acquiree Corporation. In attempting to measure

Acquiree’s normal earnings for 2015, Acquirer determines that the fair value of the building is triple
thedownloaded
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 continue the profit-sharing payments to employees. What is the normal earnings (for purposes of
computing goodwill) of Acquiree Corporation for the year 2015?

15. Liliw Company engaged your services to compute the goodwill in the purchase of Calauan Company
which provided the following:
Net income Net assets
2012 P1,400,000 P 6,000,000
2013 1,600,000 8,000,000
2014 2,000,000 8,800,000
2015 2,200,000 9,200,000
Total P7,200,000 P32,000,000
It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on
average net assets at 15%. How much is the purchase price for Calauan Company?

16. The owners of Majayjay Company are planning to sell the business to new interests. The cumulative
net earnings for the past 5 years was P9,500,000. The current value of net assets of Majayjay
Company was P20,000,000. Goodwill is determined by capitalizing average earnings at 8%. What
is the amount of goodwill?

17. We purchased all the outstanding ordinary shares of Lemery Travel Corporation. Lemery has one
asset whose value exceeds its book value by P10,000. Lemery's Equity is P80,000. We agreed with
Lemery that its excess earnings would last for 10 years and we were granted a 10% return on our
investment. Lemery's average income for negotiation purposes is P40,000 and the industry average
rate of return is 30% on market value of net assets. Using the "present value of excess earnings"
approach to the calculation of goodwill, what is the purchase price paid for Lemery?

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