FINANCIAL ACCOUNTING & REPORTING 1

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Accounting for Intangible Assets Part 1

Module 0
028Accounting
Accounting for Intangible Assets

Accounting for intangible assets is vital in every business Intangible assets,

provide potential competitive advantage and clearly demand specialist
management as well as communication skills. Management’s ability to
deliver its strategy is highly reliant on its customer relationships, brands and
performance of key employees – all of which are typical intangible assets for
accounting purpose
purposes.s. The relevance of these factors is clearly vital to a
company’s profitability and to the sustainability of its future performance.

At the end of this module, you will be able to

to:
1. Demonstrate knowledge of how the Conceptual Framework affects
intangible aasset accounting;
2. Distinguish among the various types of intangible assets;
3. Determine how intangible assets are initially measured and their
accounting treatment; and
4. Determine which costs may be capitalized as intangible assets.

Definition, Nature, and C

Classes

PAS 38
PAS 38 defines intangible assets and also addresses their recognition and initial and
subsequent measurement, including amortization and disposal. PAS 38 also sets the
disclosure requirements. However, impairment of intangible assets is not addressed in this
Standard, but in PAS 36 Impairment of Assets. Also, fair value measurement is addressed in
PFRS 13.

The objective of PAS 38 is to prescribe the acaccounting

counting treatment for intangible assets that
are not dealt with specifically in another PFRS.. The Standard requires an entity to
recognize an intangible asset if, and only if, certain criteria are met. The Standard also
specifies how to measure the carryi
carrying
ng amount of intangible assets and requires certain
disclosures regarding intangible assets.

As well as dealing with a wide range of other intangible assets, PAS 38 prescribes the
treatment of research and development costs.

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Scope
PAS 38 applies to all intangible assets other than:

 financial assets ((PAS 32 Financial Instruments: Presentation)

 exploration and evaluation assets ((PFRS 6 Exploration for and Evaluation of Mineral
Resources)
 expenditure on the development and extraction o off minerals, oil, natural gas, and
similar resources
 intangible assets arising from insurance contracts issued by insurance companies
 intangible assets covered by another PFRS,, such as intangibles held for sale (PFRS
( 5
Non-current
current Assets Held for Sale and Discontinued Operations)
 deferred tax assets ((PAS 12 Income Taxes)
 lease assets (PAS
PAS 17 Leases)
 assets arising from employee benefits ((PAS 19 Employee Benefits (2011)
 goodwill (PFRS 3 Business Combinations).

Intangible Assets
An intangible asset is an identifiable, non
non-monetary
monetary asset without physical substance. An
intangible asset is identifiable if it either:

 Is separable, (i.e., capable of being separated or divided from the entity and sold,
transferred, licen
licensed,
sed, rented, or exchanged either individually or together with a
related contract, identifiable asset or liability, regardless of whether the entity
intends to do so; 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.

Intangibles can be acquired:

 by separate purchase
 as part of a business combination
 by a government grant
 by exchange of assets
 by self-creation
creation (internal generation)

Examples
xamples of intangible assets
assets:
 Computer software

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Computer software needs to be analyzed carefully. As an intangible asset, it is the

intellectual property that is the asset, not the medium (tape, disk, or hard drive) on
which it resides. In this case, the medium does not make the software a tangible
asset. Computer software for a computer
computer-controlled
controlled machine tool that cannot
operate without that specific software is an integral part of the related hardware
and is treated as property, plant and equipment. WheWhenn the software is not an
integral part of the related hardware, computer software is treated as an intangible
asset.
 Mineral Rights
Mineral rights are specifically excluded from PAS 38 because they arise from
activities or transactions which are so special
specialized
ized that they give rise to accounting
issues that need to be dealt with in a different way in the context of the relevant
industries. PAS 38 also excludes from its scope intangible assets covered by another
standard such as exploration and evaluation asse
assets (PFRS 6), goodwill (PFRS
( 3),
financial assets as defined in PAS 39, and non-current
current intangible assets classified as
held for sale (PFRS
PFRS 5).
 Franchise agreements
 Trademarks and patents
 Import quota
 Royalty and standstill agreements
 Customer lists mortgag
mortgage servicing rights licensing
 Internet domains video and audiovisual material
 Databases and trade secrets trademarks
 Trade dress
 Newspaper mastheads

Recognition Criteria
An item shall be recognized as an intangible asset if it meets the definition of an intangible
asset and if it meets the recognition criteria. This requirement applies to costs incurred
initially to acquire or internally generate an intangible asset and those costs incurred
subsequently to add to, replace part of, or service it.

An intangible asset shall be recognized if, and only if:

 It is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity; and
 The cost of the asset can be measured reliably.

When assessing the expected ffuture

uture economic benefits, management should use reasonable
and supportable assumptions and give greater weight to external evidence.

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The nature of intangible assets is such that, in many cases, there are no additions to such an
asset or replacements of par
partt of it. Accordingly, most subsequent expenditures are likely to
maintain the expected future economic benefits embodied in an existing intangible asset
rather than meet the definition of an intangible asset and the recognition criteria in PAS 38.

In addition,
ition, it is often difficult to attribute subsequent expenditures directly to a particular
intangible asset rather than to the business as a whole. Therefore, only rarely will
subsequent expenditures (expenditures incurred after the initial recognition of an acquired
intangible asset or after completion of an internally generated intangible asset) be
recognized in the carrying amount of an intangible asset.

Furthermore, subsequent expenditures on brands, mastheads, publishing titles, customer

lists and items
ems similar in substance (whether externally acquired or internally generated)
are always recognized in profit or loss as incurred. This is because such expenditures
cannot be distinguished from expenditures to develop the business as a whole.

However, iff an intangible asset has been enhanced, for example, when a payment has been
made to extend the period of an existing license, then the cost should be capitalized

Internally generated brands, mastheads, publishing titles, customer lists, and items similar
simila
in substance shall not be recognized as intangible assets. Therefore, subsequent
expenditure on such assets (whether externally acquired or internally generated) is always
recognized as an expense when it is incurred. This is because such expenditures cannot
ca be
distinguished from expenditures to develop the business as a whole.

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.

Initial measurement and accounting for intangibles

Intangible assets are initially measured at cost. [[PAS 38.24]. The standard defines this as
the amount of cash
sh or cash equivalents paid or the fair value of other consideration given to
acquire an asset at the time of its acquisition or construction. When the nature of the
consideration given is governed by other PFRSs, s, the cost of the asset is the amount initially
initia
recognized in accordance with the specific requirements of that standard, e.g. PFRS 2.

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There are five ways by which an entity may obtain an intangible asset. How an intangible
asset is recognized and measured will depend on how it is obtained.
1. For thee separate acquisition of an individual intangible asset (for example, a franchise
agreement), the cost is generally the amount paid for the asset. The cost includes any
directly attributable costs needed to prepare the asset for its intended use.
2. In some cases, an intangible asset may be acquired free of charge, or for a nominal
consideration, by way of a government grant. This may happen when a government
allocates to an entity an intangible asset such as an airport landing right. The entity may
choose to recognize both the intangible asset and the grant initially at fair value or to
recognize the asset at a nominal amount plus any expenditure that is directly
attributable to preparing the asset for its intended use.
3. For an acquisition of an intangible assasset
et that is a part of a business combination, the
cost of an intangible asset is its fair value at the acquisition date. The fair value of an
intangible asset reflects a market participant’s expectations about the probability that
the future economic benefi
benefits
ts embodied in the asset will flow to the entity. Therefore,
the probability recognition criterion is always considered to be satisfied for intangible
assets acquired in a business combination. Further, if an asset acquired in a business
combination is separable
arable or arises from contractual or other legal rights, sufficient
information exists to measure the reliability of the fair value of the asset. Thus, the
reliable measurement criterion is always considered to be satisfied for intangible assets
acquired inn a business combination.
4. In case of an exchange of assets, an intangible asset can be acquired by swapping either
a non-monetary
monetary asset or a mixture of monetary and non non-monetary
monetary assets. The cost is
measured at fair value unless the exchange transaction lac lacks
ks commercial substance or
the fair value of neither the asset received nor the asset given up is reliably measurable.
5. Internally generated goodwill cannot be recognized as an asset. Expenditures incurred
during the research phase of a project are expensed
expensed.. Expenditures incurred during the
development phase are capitalized if they meet certain recognition criteria.

Separate acquisition of intangible assets

The cost of a separately acquired intangible asset comprises its purchase price (including
import duties and non-refundable
refundable purchase taxes, after deducting trade discounts and
rebates) and any directly attributable cost of preparing the asset for its intended use (cost
of employee benefits, professional fees, and costs of testing whether the asset is functioning
properly). Capitalization ceases when the asset is in the condition necessary to be capable
of operating in the manner intended by management.

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The Standard gives examples of costs that might not be included as part of the cost of an
intangible asset including:
 Costs of introducing a new product or service, including costs of advertising and
promotional activities
 Costs of conducting business in a new location or with a new class of customer,
including costs of staff training
 Administration and other general overhead costs
 Costs incurred while an asset capable of operating in the manner intended by
management has yet to be brought into use
 Initial operating losses, such as those incurred while demand for the asset’s output
builds up

Acquisition as part of a business combination

Different considerations apply when the asset has been acquired in the course of a business
combination that is accounted for as an acquisition. PFRS 3 requires that identifiable
intangible assets should
ould be recognized separately from goodwill if the asset meets either
the separable criterion or the contractual
contractual-legal criterion.

PAS 38 emphasizes that, in the context of a business combination, intangible assets should
be recognized whether or not the aacquiree
cquiree had recognized these assets. Thus, an in-process
in
research and development project of the acquiree should be recognized as an asset if it
meets the definition of an intangible asset.

For intangible assets that are acquired as part of a business co

combination,
mbination, the following
applies in determining fair value:
 PFRS 3 assumes that there will be sufficient information to measure reliably the fair
value of an intangible asset acquired in a business combination if it is separable or
arises from contractual or other legal rights. PFRS 13 is used to determine fair
values of the assets.
 Fair value, in PFRS 13, is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date (i.e., an exit price). PFRS 13’s main premise is that fair value is a
market-based
based measurement, not an entity
entity-specific
specific measurement. Please see the
separate WBL on PFRS 13, which provides more information about valuation
techniques and fair value measurement.

Note: As stated previously, the probability criterion is always considered to be satisfied for
intangible assets acquired in business combinations. Also, if an asset acquired in a business
combination is separable or arises from contra
contractual
ctual or other legal rights, sufficient
information exists to measure reliably the fair value of the asset. Thus, the reliable
measurement criterion will be considered to have been satisfied.

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If an intangible asset acquired in a business combination is se separable

parable or arises from
contractual or other legal rights, sufficient information exists to measure reliably the fair
value of the asset. For the estimates used to measure an intangible asset’s fair value, there
is a range of possible outcomes with differen
differentt probabilities and uncertainty enters into the
measurement of the asset’s fair value (as opposed to the ‘reliably measurable’ criterion).
The asset’s fair value is determined in accordance with PFRS 13.

An intangible asset acquired in a business combinat

combination
ion might be separable, but only
together with a related contract, identifiable asset or liability. In such cases, the acquirer
recognizes the intangible asset separately from goodwill, but together with the related
item.

Government grant
An intangible asset, such as an airport landing right or broadcasting rights, is acquired
when an entity is given certain intangible rights free of charge or for a nominal amount.

Treatment of government grants under PAS 38 is consistent with that required by PAS 20
Accounting
counting for Government Grants and Disclosure of Government Assistance.

Exchange of assets
When an intangible asset is exchanged for one or more non
non-monetary
monetary assets (or for a
combination of monetary and nonnon-monetary
monetary assets), the cost of the acquired asset is
measured at fair value unless:
 The exchange transaction lacks commercial substance; or
 The fair value of neither the asset received nor the asset given up is reliably
measurable
In these circumstances, the acquired asset is measured at the carrying value
val of the asset
given up, and no gain or loss on disposal is recognized.

Internally generated intangibles

PAS 38 takes a restrictive view on the capitalization of internally generated intangibles. It
excludes a variety of assets on the basis that expendit
expenditure
ure on their development cannot be
distinguished from expenditure on the development of the business as a whole. It also
states that no intangible arising from research shall be recognized.

The conceptual reason behind the distinction is that it is regard

regarded
ed as impossible to
demonstrate the generation of future benefits with sufficient assurance during the research
phase, but it might be possible during the development phase. The Standard also states that
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if the research phase cannot be distinguished from tthe

he development phase of an internal
project, then the whole project should be treated as the research phase, with the result that
all expenditures have to be expensed.

Capitalizing development costs

During the development stage, an entity may capitalize ccertain costs rather than expense
them.
 Conditions for capitalizing development costs
 Costs that may be capitalized
 Costs that are expensed

Conditions for capitalizing development costs

To capitalize development costs, an entity needs to demonstrate all of the following:
 The technical feasibility of completing the intangible asset so that it can be
used or sold
 Its intention to complete the intangible asset and use or sell it
 Its ability
ty to use or sell the intangible asset
 How the intangible asset will generate probable future economic benefits
 The availability of adequate technical, financial, and other resources to
complete the development and to use or sell the intangible asset
 Itss ability to measure reliably the expenditure attributable to the intangible
asset during its development

The Standard gives these examples of development activities:

 The design, construction, and testing of pre
pre-production
production or pre-use
pre
prototypes and models
 The design of tools, jigs, moulds, and dies involving new technology
 The design, construction, and operation of a pilot plant that is not of a scale
economically fea
feasible for commercial production
 The design, construction, and testing of a chosen alternative for new or
improved materials, devices, products, processes, systems, or services

To demonstrate how an intangible asset will generate probable future economic

benefits, an entity assesses the future economic benefits to be received from the asset
using the principles of PAS 36 Impairment of Assets, which brings in the need to
forecast and discount future cash flows. When demonstrating how the asset will
generate future benefits, the entity has to show that there is a market for its output or,
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if it is to be used internally rather than sold, how it will be useful. When demonstrating
the availability of resources to complete, use and obtain the benefits from an intangible
int
asset, the entity may use a business plan showing the technical, financial and other
resources needed and the entity’s ability to secure those resources. In some cases, an
entity demonstrates the availability of external financing by obtaining a lender’s
le
indication of its willingness to fund the plan. Through its accounting system, the entity
should be able to identify and measure reliably the costs of generating an intangible
asset internally, such as salaries and other expenditures incurred in securing
sec
copyrights or licenses or developing computer software.

Costs that might be capitalized

Only those costs that have been incurred from the date when the recognition criteria
were first met can be capitalized. Earlier expenses cannot be included. Those
Tho costs that
can be directly attributed to creating, producing, and preparing the asset for its
intended use can be capitalized. These include:
 Materials used and services consumed
 Employee benefits arising from the generation of the intangible asset
 Other direct costs, such as fees to register a legal right
 Amortization of patents and licenses used to generate the asset
 Borrowing costs capitalized under PAS 23

Costs that are expensed

The Standard prohibits certain costs from being capitalized
capitalized.. These costs are expensed.
These include:
 Selling, administrative, and other general overhead expenditure, unless it can
be directly attributed to preparing the
asset for use
 Identified inefficiencies and initial operating losses incurred before an asset
ass
achieves planned performance
 Expenditure on staff training to operate the asset
 Legal and secretarial costs of establishing a new entity (start-up
(start costs)
 Expenditure on opening a new facility or business (pre-opening
(pre costs)
 Expenditures on starting new operations or launching new products or
processes (pre
(pre-operating costs)
 Costs written off in earlier periods
 Advertising and promotional costs
 Relocation or reorganization costs
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Glossary

Brand: a distinguishing symbol, mark, logo, name, word, sentence or a combination of

these items that companies use to distinguish their pro
product
duct from others in the market.
Copyrights: refers to the legal right of the owner of intellectual property. In simpler
terms, copyright is the right to copy.
Cost: amount of cash or cash equivalents paid or the fair value of other consideration
given to acquire an asset at the time of its acquis
acquisition
ition or construction, or, when
applicable, the amount attributed to that asset when initially recognized in accordance
with the specific requirements of other IFRSs.
Development: the 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.
Fair value: the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction in the principal (or m
most
ost advantageous) market at the
measurement date under current market conditions (ie an exit price) regardless of
whether that price is directly observable or estimated using another valuation technique.

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Goodwill: an intangible asset that arises as a result of the acquisition of one company by
another for a premium value.
Identifiable assets: an asset of a company that can be assigned a fair value and can be
reasonably expected
ed to provide a benefit in the future.
Impairment loss: the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Intangible assets: an identifiable, non
non-monetary
monetary asset without physical substance.
substance
Monetary assets: money held and assets to be received in fixed or determinable
amounts of money.
Research: original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.
Trademark: recognizable insignia, phrase or other symbol that denotes a specific
product or service and legally differentiates it from all other products.

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References and Supplementary Materials

Books and Journals
1. Cabrera, M. B., & Ocampo, R. R. (n.d.). Financial Accounting & Reporting - Standards &
Application (2014--2015 ed., Vol. 2).Manila, Philippines.
2. Robles, N. S., & Empleo, P. M. (2014). Intermediate Accounting (2014 ed., Vol. 1).
Manila, Philippines.
3. Valix, C. T., Peralta, J. F., & Valix, C. M. (2017). Financial Accounting (2017 ed., Vol.
2).Manila, Philippines.
4. IAS 38 Intangible Asset
Online Supplementary Reading Materials
1. IAS 38 Intangible Asset
Asset; http://www.ifrs.org/issued-standards/list
standards/list-of-standards/ias-
38-intangible-assets/
assets/; October 23, 2017
2. Intangible Asset; https://en.wikipedia.org/wiki/Intangible_asset;
https://en.wikipedia.org/wiki/Intangible_asset October 23, 2017

Online
ine Instructional Videos
Intangible Asset; www.investopedia.com/video/play/what
www.investopedia.com/video/play/what-are-intangible
intangible-assets/;
October 23, 2017
IAS 38 Intangible Asset; https://www.youtube.com/watch?v=gCq33F0nzms;
https://www.youtube.com/watch?v=gCq33F0nzms October 23,
2017

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