Chapter 11 Intangible Assets

Introduction
 Intangible Assets are identifiable non-monetary assets without physical
substance. 
Essential elements of an intangible asset
1. Identifiability - an intangible asset is identifiable when it: 
a. is separable, i.e., capable of being separated and divided from the entity and
sold, transferred, licensed, 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
b. arises from binding arrangements including contractual or other legal rights,
regardless of whether those rights are transferable or separable from the entity or
from other rights and obligations. 
2. Control - the entity has the ability to benefit from the intangible asset or prevent
others from benefitting from it. 

Control of an intangible asset normally arises from legal rights that are
enforceable in a court of law. However, legal enforceability of a right is not a necessary
condition for control because an entity may be able to control the future economic
benefits or service potential in some other way. 
3. Future economic benefits or service potential - the future economic benefits or
service potential flowing from an intangible asset may include revenue from the sale of
products or services, cost savings, or other benefits resulting from the use of the asset
by the entity. For example, the use of intellectual property in a production or service
process may reduce future production or service costs or improve service delivery
rather than increase future revenues (e.g., an on-line system that allows citizens to
apply or renew licenses more quickly on-line, resulting in a reduction in office staff
required to perform this function while increasing the speed of processing). 

Common examples of intangible assets are computer software, patents,

copyrights, franchise, motion picture films, trademarks or brand names, licenses;
acquired import quotas, lists of users of a service, and relationships with users of a
service. 

Recognition
An intangible asset is recognized if it meets the definition of an intangible asset and the
recognition criteria for assets. 

Initial Measurement 
An intangible asset is initially measured at cost. 

The measurement of cost depends on the mode of acquisition, which is similar to

those of PPE and investment property. A summary is provided below: 

Mode of Acquisition
a. Purchase 
 Measurement of Initial Cost 
 Purchase price plus Direct costs (including non-refundable taxes but excluding
trade discounts and rebates).
 If payment is deferred, the cost is the cash price equivalent. 
b. Non-exchange transaction
Measurement of Initial Cost 
 fair value at the acquisition date 
c. Exchange 
Measurement of Initial Cost 
 With commercial sustenance (order of priority):
a. FV of asset given up (plus cash paid/minus cash received).
b. FV of asset received.
c. CA of asset given up (plus cash paid/minus cash received). 
 Without commercial substance: CA of asset given up (plus cash paid/minus cash
received). 
d. Entity Combination
Measurement of Initial Cost 
 fair value at the acquisition date 

 Peculiar measurement is made when the intangible asset is internally

generated (self-generated). 
e. Internal Generation – to assess whether an internally generated intangible asset
meets the criteria for recognition, an entity classifies the generation of the asset into:
(a) research phase; and
(b) development phase. 
2 CLASSIFIES THE GENERATION OF THE ASSET
1. Research – is original and planned investigation undertaken with the prospect of
gaining new scientific and technical knowledge and understanding. 
Expenditures during the research phase are recognized as expense. 

Examples of research activities:

i. Activities aimed at obtaining new knowledge;
ii. The search for, evaluation and final selection of, applications of research
findings or other knowledge;
iii. The search for alternatives for materials, devices, products, processes,
systems or services; and 
iv. The formulation, design, evaluation, and final selection of possible
alternatives for new or improved materials, devices, products, processes,
systems, or services. 
2. Development – is 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. 
Expenditures during the development phase are capitalized if the entity can
demonstrate all of the following:
a. Technical feasibility of completing the intangible asset;
 b. Intention to complete the intangible asset;
C. Ability to use or sell the intangible asset;
d. Probable future economic benefits or service potential;
e. Availability of adequate resources needed to complete the development and to
use or sell the intangible asset; and
f. Reliable measurement of the cost of the intangible asset. 

 If it is not clear whether an expenditure is a research or a development cost, it

shall be treated as research cost. 
 Expenditures already charged as expenses cannot be subsequently capitalized,
i.e., reinstatement of expenditure previously recognized as an expense is
prohibited. 
 Internally generated brands, mastheads, publishing titles, customer lists, and
similar items shall not be recognized as intangible assets. 
 Selling, administrative and other general overhead, costs of inefficiencies, initial
operating losses, and training costs are expensed and shall not form part of the
cost of an intangible asset. 
 Subsequent expenditures on recognized intangible asset generally expensed,
unless they meet the definition intangible asset and the asset recognition
criteria. 
 The accounting for replacement of a part of an intangible ase is the same as
those of PPE and investment property. 

Subsequent Measurement
An intangible asset is subsequently measured at cost less any accumulated
amortization and any accumulated impairment losses. 

Amortization
 Amortization is the systematic allocation of the depreciable amount of an
intangible asset over its useful life. 

For purposes of amortization, intangible assets are classified according to their

assessed useful life as follows:
a. Indefinite life – an intangible asset is considered to have an indefinite life if there
is no foreseeable limit to the period over which it is expected to provide economic
benefits or service potential to the entity. 
Intangible assets with indefinite life are not amortized but tested for impairment at
least annually. 
b. Finite life – an intangible asset is considered to have a finite life if it has a limited
period of benefit to the entity. 

Intangible assets with finite useful life are amortized using the straight-line method
over a period of 2 to 10 years. Amortization starts when the intangible asset is available
for use and ceases when the asset is derecognized or classified as held for sale,
whichever comes earlier. Amortization does not cease when the asset is no longer
used, except when it is fully depreciated or classified as held for sale. 
 The residual value is assumed to be zero except when there is a third party
commitment to purchase the asset at end of its useful life or there is an active market
where entity expects to sell the asset at the end of its useful life. 
The amortization period and amortization method shall be reviewed at each reporting
date. Changes in useful life or amortization method shall be accounted for as changes
in accounting estimates. 

Impairment
An entity is required to test for impairment an intangible asset with indefinite
useful life or an intangible asset not yet available for use at least annually or
whenever there is an indication of impairment. 
An entity shall test for impairment an intangible asset with definite useful life
only when an indication of impairment exists. Indications of impairment shall be
assessed at each reporting date. 
The accounting for impairment of intangible assets, and reversal thereof, is the
same as those of investment property and PPE (see discussions in Chapters 9 and 10,
respectively). 

Derecognition
An intangible asset is derecognized when it is disposed or when no future
economic benefits or service potential is expected from the asset. 
On derecognition, the difference between the carrying amount and the net
disposal proceeds, if any, is recognized as gain or loss in surplus or deficit. 

Chapter 11 Summary: 
 Intangible Assets are identifiable non-monetary assets without physical
substance.
 Essential elements: (1) Identifiability (separable or arises from binding
arrangements); (2) Control; and (3) Future economic benefits or service potential.
 Intangible assets are initially measured at cost. The measurement of cost
depends on the mode of acquisition, which is similar to those of PPE and
investment property.
 Internal generation:
1. Research cost – recognized as expense.
2. Development cost – capitalized only if all of the conditions listed in the GAM
for NGAs are met.
 If it is not clear whether an expenditure is a research or a development cost, it is
treated as research cost. 
 Reinstatement of costs already expensed is prohibited. 
 Internally generated brands, mastheads, publishing titles, customer lists, and
similar items are not recognized as intangible assets. Subsequent expenditures
on recognized intangible assets are generally expensed, unless they meet the
definition of an intangible asset and the asset recognition criteria.
 Subsequent measurement:
1. Indefinite life - not amortized but tested for impairment at 
least annually.
2.Finite life - amortized using the straight-line method over a period of 2 to 10
years. The residual value is assumed to be zero except when the entity has the
ability to sell the asset at the end of its useful life.