CABRIA CPA REVIEW CENTER

INTANGIBLE ASSETS Tel. Nos. (043) 980-6659

ERNIE M. LAT II

LECTURE
Nature of Intangible Assets Contract-related intangible assets represent the value of
Intangible asset is an identifiable nonmonetary asset rights that arise from contractual arrangements.
without physical substance. Examples
Critical attributes of an intangible asset:  Franchise and licensing agreements
 identifiability  Construction permits
 control (power to obtain benefits from the asset)  Broadcast rights
 future economic benefits (such as revenues or  Service or supply contracts
reduced future costs)
Technology-related intangible assets relate to innovations
Identifiability: An intangible asset is identifiable when it: or technological advances.
 is separable (capable of being separated and sold, Examples
transferred, licensed, rented, or exchange, either  Patented technology
individually or as part of a package) or  Trade secrets
 arises from contractual or other legal rights,
regardless of whether those rights are transferable Recognition
or separable from the entity or from other rights PAS 38 requires an entity to recognize an intangible asset,
and obligations. whether purchased or self-created (at cost) if, and only if:
 it is probable that the future economic benefits that
Types of Intangible Assets are attributed to the asset will flow to the entity;
1. Marketing-related and
2. Customer-related  the cost of the asset can be measured reliably.
3. Artistic-related This requirement applies whether an intangible asset is
4. Contract-related acquired externally or generated internally. PAS 38 includes
5. Technology-related additional recognition criteria for internally generated
6. Goodwill intangible assets.

Marketing-related intangible assets are those assets The probability of future economic benefits must be based
primarily used in the marketing or promotion of products or on reasonable and supportable assumptions about condition
services. that will exist over the life asset. The probability recognition
Examples criterion is always considered to be satisfied for intangible
 Trademarks or trade names assets that are acquired separately or in a business
 Newspaper masthead combination.
 Internet domain names
 Noncompetition agreements If recognition criteria not met. If an intangible item does not
meet both the definition of and criteria for recognition as an
Customer-related intangible assets occur as a result of intangible asset, PAS 38 requires the expenditure on this
interaction with outside parties. item to be recognized as an expense when it is incurred.
Examples
 Customer lists Business combination. There is a rebuttable presumption
 Order or production backlogs that the fair value (and therefore the cost) of an intangible
 Both contractual and non-contractual customer asset acquired in a business combination can be measured
relationships reliably. An expenditure (included in the cost of acquisition)
on an intangible item that does not meet both the definition
Artistic-related intangible assets involve ownership rights to of and recognition criteria for an intangible asset should
plays, literary works, musical works, pictures, photographs, form part of the amount attributed to the goodwill
and video and audiovisual material. These ownership rights recognized at the acquisition date. PAS 38 notes, however,
are protected by copyrights. that non-recognition due to measurements reliability should
be rare.

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The only circumstances in which it might not be possible to
measure reliably the fair value of an intangible assets
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 expenditures that was originally charge 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 finding 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 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 costs (expensed except to the extent that the
expenditures satisfies the criteria in PAS 38 for recognizing
such expenditures 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: Costumer Software
 Purchased: capitalize
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 Operating system for hardware: include in
hardware cost
 Internally develop (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-opening costs
 Training cost
 Advertising cost
 Relocation costs
Initial Measurement
Intangible assets are initially measured at cost.
Measurements Subsequent to Acquisition
An entity must choose either the cost model or the
revaluation model for each class of intangible asset.
Cost model. After initial recognition the benchmark
treatment is that intangible assets should be carried at cost
less any amortization and impairment losses.
Revaluation model. Intangible assets may be carried at a
revalued amount (based on fair value) less any subsequent
amortization and impairment losses only if fair value can be
determined by reference to an active market. Such active
markets are expected to be uncommon for intangible
assets.
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 life should be amortized over that life:
 The amortization should reflect the pattern of
benefits.
 If the pattern cannot be determined reliably,
amortized 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.
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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 Expenditures
Subsequent expenditures on an intangible asset after it’s
purchased 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 benefit 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 amortization rate
 amortization method
 gross carrying amount
 accumulated amortization and impairment losses
 line items in the income statement in which
amortization is included
 reconciliation of the carrying amount at the
beginning and the end of the period showing:
o additions (business combination separately)
o assets held for sale
o retirement and other disposals
o revaluations
o impairments
o reversals of impairments
o amortization
o foreign exchange difference
o 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 commitment to acquire intangible
assets
Additional disclosure are required about:
 intangible assets carried at revalued amounts
 the amount of research and development
expenditure recognized 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 Expensed – R&D costs related to the
generated 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, phase, 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
Amortized
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.
Determination of Goodwill
Specific attributes approach
The attributes and component of goodwill or identified and
valued accordingly.
Indirect valuation approach
Goodwill is the difference between the purchase price and
the fair value of identifiable net assets acquired.
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Review Questions
1. Which of the following are the essential
characteristics of an intangible asset?
a. Identifiability, controlled by the enterprise,
expected future economic benefits and
indefinite useful life
b. Identifiability, controlled by the enterprise, and
indefinite useful life
c. Identifiability, owned by the enterprise,
expected future economic benefits and definite
useful life
d. Identifiability, controlled by the enterprise, and
expected future economic benefits
2. Which of the following items shall not be classified
as an intangible asset?
a. Patent
b. Leasehold
c. Franchise
d. Equity investments
3. It is an exclusive right or protection granted to an
author of a literary, musical or artistic work.
a. Franchise
b. Trademark
c. Copyright
d. Royalty
4. An intangible asset shall be recognized if it is
probable that the expected future economic
benefits that are attributable to the asset will flow
to the enterprise and cost of the asst
a. Can be reliably estimated
b. Can be reliably measured
c. Can be controlled by the enterprise
d. Is inseparable from the enterprise
5. Which of the following assets does not have the
characteristics of exchangeability?
a. Patents
b. Goodwill
c. Copyrights
d. Franchise
6. 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 after establishing
technological feasibility
b. Cost of testing equipment that will also be used
solely in the current year research and
development project.
c. Administrative salaries allocated to research
and development
d. Research findings purchased from another
company to add a particular research project
currently in process
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7. Which of the following are considered as research
and development activity?
i. Laboratory research aimed at discovery of
new knowledge
ii. Conceptual formulation and design of
product or process alternatives
iii. Routine design of tools, jigs, molds and dies
iv. Design construction, and testing of pre-
production prototypes and models
a. I, II, III and IV
b. II, III and IV
c. I, II, and IV
d. I and IV only
8. Which of the following items is a component of the
cost of an internally generated intangible asset?
a. Selling, administrative and other general
overhead expenditures that cannot be directly
attributed to preparing the asset for use
b. Identified inefficiencies and initial operating
losses
c. Expenditure on training staff to operate the
asset
d. Fees to register legal right
9. After initial recognition, a class of intangible assets,
whose fair value can be reliably measured, may be
carried in the financial statement
a. At revalued amount, being the fair value at the
date of revaluation less any subsequent
accumulated amortization and any subsequent
accumulated impairment losses.
b. At revalued amount without any subsequent
amortization
c. Using the cost model, or the revaluation model
d. Using the cost model
10. Which of the following is not relevant consideration
in determining the useful life of an intangible asset?
a. Period of control over the asset and legal or
similar limits on the use of the asset
b. Technical, technological, commercial or other
types of obsolescence
c. Expected actions of competitors or potential
competitors
d. Initial cost
11. When the enterprise is unable to determine reliably
the pattern of economic benefits from an intangible
asset, the amortization method that the enterprise
shall use is the
a. Sum-of-years’-digit method
b. Straight line method
c. Composite rate method
d. Double-declining balance method
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12. Legal fees incurred in successfully defending a
patent suit should be capitalized when the patent
has been
a. Internally developed – Yes; Purchased from an
inventor – No
b. Internally developed – Yes; Purchased from an
inventor – Yes
c. Internally developed – No; Purchased from an
inventor – Yes
d. Internally developed – No; Purchased from an
inventor – No
13. Legal fees incurred by a company in defending its
patent rights should be expensed when the
outcome of litigation is
a. Successful – Yes; Unsuccessful – No
b. Successful – Yes; Unsuccessful – Yes
c. Successful – No; Unsuccessful – Yes
d. Successful – No; Unsuccessful – No
14. The cost of purchasing patent rights for a product
that might otherwise have seriously competed with
one of the purchaser’s patented product should be
a. Charged to expense in the period of purchase
b. Amortized over the legal life of the purchased
patent
c. Added to factory overhead and allocated to
production of the purchaser’s product
d. Amortized over the remaining estimated life of
the original patent covering the product whose
market would have been impaired by
competition from the newly patented product
15. Goodwill
a. Generated internally, should not be capitalized
unless it is probable that there is an inflow of
future economic benefits
b. Is measured by assigning a value to the
individual attributes that comprise its existence
c. Is recognized only when resulting from the
acquisition of an existing entity at a price higher
than the fair value of the net identifiable assets
acquired
d. Exists in any company that has earnings higher
than those of the competitors
16. With regard to impaired goodwill the IFRS provides
for the recognition of
a. Impairment loss – Yes; Impairment recovery –
Yes
b. Impairment loss – Yes; Impairment recovery –
No
c. Impairment loss – No; Impairment recovery –
Yes
d. Impairment loss – No; Impairment recovery –
No
17. A Company purchased Kinginamer Company at a
cost that resulted in recognition of goodwill having
an expected 10-year benefit period. However, A
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plans to make additional expenditures to maintain
goodwill for a total of 20 years. What costs should
be capitalized and over how many years should be
amortized?
a. Cost capitalized – Acquisition costs only;
Amortization period – not applicable
b. Cost capitalized – Acquisition costs only;
Amortization period – 10 years
c. Cost capitalized – Acquisition costs and
maintenance cost; Amortization period – 10
years
d. Cost capitalized – Acquisition costs and
maintenance; Amortization period – 20 years
18. Which of the following items should not be
amortized over the periods of estimated benefit?
a. Franchise right
b. Goodwill arising from the purchase of an
existing business
c. Computer software
d. Patent right from an investor
19. All costs incurred to establish the technological
feasibility of a computer software product to be
marketed or leased should be
a. Capitalized as an intangible asset
b. Recognized as part of the cost of inventory
c. Capitalized as PPE
d. Charged to expense when incurred
20. The capitalized software costs should be amortized
a. On a straightline basis over its useful life
b. Using a ratio of current revenue over total
expected revenue from the product
c. Using the greater of the SL or ratio of current
revenue over the total expected revenue from
the product
d. Uniformly over twenty years
21. Data for the computation of total intangible assets
follow:
Deposits with advertising agency which will be used t
goodwill
Organization costs
Unamortized bond discount
Patents
Franchise to operate in Cebu
Marketing costs of introducing new products
Research and development costs expected to benefit fut
What is the correct total cost of the intangible
assets?
a. 744,000
b. 439,000
c. 394,000
d. 344,000
22. T Company was formed towards the end of 2016.
At the time of formation, the company spent
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P50,000 for accounting fees; P150,000 for legal 26. KL Food products, a manufacturer of chocolate
fees, stock certification costs of P500,000; initial drinks acquired a patent on June 28, 2014 for
franchise fee of P1.0 million; initial lease payment P340,000. Management expects the patents to be
of P300,000 and promotional fees of P300,000. useful to the company for its remaining life of 10
years. Legal life of the patent is 20 years. On
How much shall be initially recorded as intangible
January 3, 2015, the company spent P51,000 to
assets?
successfully defend the patent against a
a. P0
competitor.
b. P700,000
c. P1,000,000 During 2016, management determined that the
d. P2,300,000 estimated remaining life of the patent should be
23. The following accounts were found in the general reduced to only five years, including the current
ledger of D Company as of December 31, 2016: year. This was made after a very careful
consideration of the situation the company is in,
Unamortized discount on bonds payable more so with P120,000
respect to its competitors. The
Organization costs company policy is100,000
to amortize the cost of intangible
Losses in early years of company assets using the450,000
SL method to the nearest full
Trademarks month. 750,000
Patents 150,000
How much is the patent amortization for 2014?
Amount set up by board of directors as goodwill 300,000
a. P34,000
b. P20,000
The total intangible assets should be
c. P17,000
a. P1,300,000
d. P10,000
b. P1,000,000
c. P900,000 27. Use same info from 26, What is the patent carrying
d. P0 value at January 1, 2016?
a. P310,000
24. On July 1, 2016, MM Company signed an agreement b. P304,000
to operate as a franchise of JFoods Co. for an initial c. P289,000
franchise fee of P600,000. Of this amount d. P283,000
P200,000 was paid when the agreement was signed
and the balance is payable in four equal annual 28. Use the same info from 26, how much is the revised
payments starting July 1, 2017. The payment is not amortization expense for 2017?
refundable and no future services are required for a. P56,600
the franchise. MM’s credit rating indicates that it b. P57,800
can borrow money at 14% for a loan of this type. c. P60,800
d. P62,000
What is the cost of the franchise acquired on July
1, 2016? 29. LV Company incurred the following costs during
a. P436,000 2016:
b. P491,000 What is the total amount to be reported as research
c. P600,000 and development expense for 2016?
d. P676,000
Quality control during commercial production,
including routine testing of products P58,000
25. On November 1, 2016, a newly established
Laboratory research aimed at discovery of new 68,000
manufacturing outfit paid cash to acquired a patent
knowledge
for P1,200,000, a copy right for P750,000 and a
Testing for evaluation of new products 24,000
franchise for P60,000. The patent expires at the
Modification of the formulation of a plastic 6,000
end of 2020, has a total legal life of 20 years in the
product
Philippines and is expected to produce benefits only
Engineering follow through in an early phase of 15,000
for 5 years. The copyright has a service life of 10
commercial production
years. The franchise allows the company to be the
Adaptation of an existing capability to a particular
exclusive sales agent for two years effective
requirement of customers’ needs as part of the 13,000
November 1, 2016. The amortization amount for
continuing commercial activity
the intangibles in 2016 is
Trouble shooting in connection with breakdowns
a. P57,500
during commercial production 29,000
b. P65,500
Searching for application of new research 19,000
c. P70,500
findings
d. P120,500
a. P92,000
b. P98,000

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c. P117,000
d. P232,000
30. J Co. incurred costs in 2016 as follows:
Equipment acquired for use in various research and development
costs 900,000
Depreciation on the equipment above 210,000
Materials used in R & D 300,000
Compensation costs of personnel in R & D 400,000
Outside consulting fees for R & D work 220,000
Indirect coasts appropriately allocated to R &D 260,000

What is the total amount of R & D to be reported in

SCI?
a. P2,080,000
b. P1,390,000
c. P1,180,000
d. P880,000

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