INTANGIBLE ASSETS

(IAS No. 38)

OBJECTIVE OF IAS No. 38
To prescribe the accounting treatment for intangible assets that are not dealt with
specifically in another standard. This standard requires an entity to recognize an
intangible asset, if and only if, specified criteria are met. The standard also
specifies how to measure the carrying amount of intangible assets and requires
specified disclosures about intangible assets.

SCOPE
This standard shall be applied in accounting for intangible assets, except
1.
2.
3.

Intangibles covered by other PAS

Financial assets (as defined under PAS 32)
Mineral resources and expenditure on exploration, development and extraction of
minerals, oil, natural gas and similar non-regenerative resources

INTANGIBLE ASSETS COVERED BY OTHER PASs

1. Those held for sale in ordinary course of business [Inventories (PAS
2)/Construction Contracts (PAS 11)]
2. Deferred tax assets (PAS 12)
3. Leases (PAS 17)
4. Those arising from employee benefits (PAS 19)
5. Goodwill arising in business combination (PFRS 3)
6. Deferred acquisition cost and intangible assets arising from an insurers
contractual right under insurance contracts within the scope of PFRS 4 (Insurance
Contracts)
7. Non-current intangible assets classified as held for sale under PFRS 5.

DEFINITION OF INTANGIBLE ASSET

Identifiable non-monetary asset without physical substance, controlled by the entity as a
result of past event from which future economic benefits are expected to flow to the
entity.

CHARACTERISTICS OF INTANGIBLE ASSET

1. Lacks physical substance
2. Used in business
3. Provides future economic benefit

CRITERIA IN THE DEFINITION

1. Identifiability
a. Can be distinguished clearly
b. There is a legal right that would make the intangible asset identifiable so
that it is separable from the other assets of the enterprise.
2. Control power of the enterprise to obtain future economic benefits flowing from
the intangible asset and restricts the access of others to those benefits.
3. Future economic benefits include:
a. Revenue from the sale of produces or services
b. Cost savings or other benefits resulting from the use of the asset by the
entity.

INTANGIBLE ASSETS INCLUDE

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.

Scientific or technical knowledge

The design and implementation of new processes or systems;
Licenses;
Intellectual property;
Market knowledge;
Trademarks (including brand names and publishing);
Computer software;
Patents;
Copyrights;
Motion picture films;
Customer lists;
Mortgage servicing rights;
Fishing licenses;
Import quotas;
Franchises;
Customer or supplier relationships;
Customer loyalty;
Market share; and
Marketing rights

Note: Not all the items, (eg. market shares, customer relationships and customer
loyalty) described above meet the definition of an intangible asset, i.e.
identifiability, control over a resource and existence of future economic benefits. If
an item within the scope of this Standard does not meet the definition of an
intangible asset, expenditure to acquire it or generate it internally is recognized as
an expense when it is incurred. However, if the item is acquired in a business
combination, it forms part of the goodwill recognized at the acquisition date. (PAS
38, par. 10)

CATEGORIES OF INTANGIBLE ASSETS

1. Marketing related intangible assets used mainly in the marketing or
promotion of products or services. Examples are trademarks or tradenames,
newspaper mastheads, Internet domain names, and non-competition
agreements.
2. Customer related intangible assets occur as a result of interactions with
outside parties. Examples are customer lists, order or production backlogs, and
both contractual and non-contractual customer relationships.
3. Artistic related intangible assets involve ownership rights to literary works,
musical works, pictures, photographs, and video and audiovisual material.
These ownership rights are protected by copyrights
4. Contract related intangible assets represent the value of rights that arise
from contractual arrangements.
Examples are franchise and licensing
agreements, construction permits, broadcast rights, and service or supply
contracts.
5. Technology related intangible assets relate to innovations or technological
advances. Examples are patented technology and trade secrets.
6. Goodwill relate to future economic benefits arising from the other assets
acquired in a business combination that are not individually identified and
separately recognized. (Kieso, Weygandt, Warfield 2011)

TWO TYPES
Identifiable
1. Acquired through purchase
2. Can be rented or sold separately
3. Examples are:
Patent
Copyright
Franchise
Trademark or brand name
Leasehold or lease rights
Computer software

Fishing rights and other specific rights

Unidentifiable
1. It cannot be purchased, sold or rented separately.
2.
Inherent in a continuing business
3.
Can only be identified with the business as a whole
4.
Example is Goodwill

CRITERIA FOR RECOGNITION

1. Future economic benefits are probable
2. Cost can be reliably measured

INITIAL MEASUREMENT AT COST

MODES OF ACQUISITION
A. Separate Acquisition
1. Cash basis purchase price, import duties and non-refundable purchase
taxes after deducting trade and cash discounts and any directly attributable
cost of preparing the asset for its intended use. Examples of directly
attributable costs are:
cost of employee benefits
professional fees
cost testing whether the asset is functioning properly
2. Deferred use cash price equivalent
3. Lump sum allocate using fair market values
B. Acquisition as Part of Business Combination the cost of the intangible asset is its
fair value (PFRS 3 Business Combination). PAS 38 does not refer to goodwill but to
other intangible asset such as in-process research and development project of the
acquiree if the project meets the definition of an intangible asset and its fair value
can be measured reliably.
If an intangible asset acquired in a business combination has a finite useful life,
there is a rebuttable presumption that its fair value can be measured reliably.
Fair value can be measured on the basis of the following:
Quoted market prices in an active market. An active market is defined as one
which has all the following conditions:
a) The items traded within the market are homogeneous
b) Willing buyers and sellers can normally be found at any time
c) Prices are available to the public

Where there is an active market, the fair value is determined by reference

to quoted market prices. (It is expected that active markets will be rare for
intangible assets).
Recent transactions. Where there is no active market, the fair value of the
intangible asset is equal to the amount which would be paid by the entity in an
arms length transaction between knowledgeable and willing parties.
Valuation techniques. With the increasing importance of intangible assets,
there has been a growing establishment of entities who specialize in
measuring intangible assets, particularly brand names. These valuation firms
measure the worth of intangible assets by using variations of present value
techniques, and multiples of variables such as royalty rates. These methods
should reflect current transactions and practices in the industry.
C. Acquisition by way of Government Grant (PAS 20) Intangible asset may be
acquired free of charge, or for nominal consideration. Examples of this are airport
landing rights, licenses to operate radio or TV stations, import licenses or quotas or
rights to access other restricted resources. The intangible asset may be recorded
initially, at 1. fair value (benchmark treatment)
2. at nominal amount (permitted treatment) plus any expenditure that is directly
attributable to preparing the asset for its intended use.
D. Exchange of assets
1. The intangible asset may be acquired in exchange for a non-monetary asset or
a combination of monetary and non-monetary asset. It is measured at fair
value unless the exchange is without commercial substance.
2. The cost of intangible asset is measured at the carrying amount of the asset
given up if the exchange is without commercial substance.
Note: An exchange transaction has commercial substance when:
a) The cash flows of the asset received differ from the cash flows of the
asset transferred and the difference is significant relative to the fair
value of the assets exchanged.
b) The entity specific value of the portion of the entitys operations
affected by the transaction changes as a result of the exchange and
the amount of change is significant relative to the fair value of the
assets exchanged.

Entity specific value is the present value of the cash flows an entity
expects to arise from the continuing use of an asset and from its
disposal at the end of its useful life.
E. Internally Generated Intangible Assets - the cost of an internally generated intangible
asset comprises all directly attributable costs necessary to create, produce and
prepare the asset to be capable of operating in the manner intended by
management. Examples are 1.
2.
3.
4.

Cost of materials and services used in generating the intangible asset

Cost of employee benefits arising from the generation of the intangible asset
Fees to register a legal right
Amortization of patents and licenses that are used to generate the intangible
asset.

Costs that are not included:

a. selling, administrative and other general overhead, unless this can be directly
attributed to preparing the asset for use.
b. clearly identified inefficiencies and initial operating losses incurred before an
asset achieves planned performance.
c. expenditure on training staff to operate the asset.
d. cost of internally generated brands, mastheads, publishing titles, customer lists
and items similar in substance.
e. cost of internally generated goodwill.
Costs incurred internally to create intangibles are generally expensed as
incurred (such as internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance).
Thus, even though a company may incur substantial research costs to
create an intangible, these costs are expensed
Some people argue that with a purchased intangible, a reliable number for
the cost of the intangible, can be determined; with internally developed
intangibles, it is difficult to associate costs with specific intangible assets.
Others argue that because of the underlying subjectivity relating to
intangibles, a conservative approach should be followed that is, expense
as incurred.

RECOGNITION AS AN EXPENSE

An expenditure on an intangible item that does not meet the recognition criteria
for an intangible asset shall be expensed when incurred.
However, if this item is acquired in purchase business combination, this
expenditure shall form part of the amount attributed to goodwill at the date of
acquisition.

Examples of expenditures that shall be expensed when incurred include:

a. Start up costs
b. Training costs
c. Advertising and promotional costs
d. Business relocation or reorganization costs
An expenditure on an intangible item that was initially recognized as an expense
shall not be included as part of the cost of intangible asset at a later date.
Prepayment can be recognized as an asset when payment for delivery of goods
or services has been made in advance of the delivery of goods or the rendering
of services.

SUBSEQUENT EXPENDITURES
1. As a general rule, subsequent expenditure should be recognized as an expense.
2. Subsequent expenditure may be capitalized if the following conditions are
present.
It will increase or enhance the amount of future economic benefits.
It can be measured reliably.
It can be attributed directly to the intangible asset.
3. An expenditure previously expensed should not be recognized as part of the cost
of an intangible asset subsequently.

MEASUREMENT AFTER INITIAL RECOGNITION

Benchmark (Cost Model)

1. Cost less accumulated amortization and any impairment losses

Allowed alternative (Revaluation Model)

1. Fair value less accumulated amortization and any impairment losses
2. Fair value
Determine by reference to an active market
The fair value is kept to date. Regular revaluation (annually) is made for
intangible assets that have volatile fair values. Frequent revaluations are
unnecessary for intangible assets with only insignificant movements in fair
value.
To be applied to all assets in class (unless no active market)
3. If no active market
Carry at cost less accumulated amortization and impairment losses

USEFUL LIFE
A. Intangible Asset with Finite Useful Life:
1. The entity shall assess the length of, or number of production constituting the
useful life.
2. Cost is amortized over its useful life or production units

3. Amortization method used shall reflect the pattern in which the assets future
economic benefits are expected to be consumed by the entity.
4. If the pattern cannot be determined reliably, the straight-line method is used.
5. Residual value is assumed to be zero unless there is a commitment by a third
party to purchase the asset at the end of its useful life or there is an active
market for the asset.
6. The amortization period, amortization method, and residual value are
reviewed at least at each financial year-end.
7. A change in residual value and amortization method are accounted for as a
change in accounting estimate in accordance with PAS 8.
B. Intangible Asset with Indefinite Useful Life (Goodwill):
1. Useful life is indefinite when there is no foreseeable limit to the period over
which the asset is expected to generate net cash flows.
2. Cost is not amortized
3. Intangible asset is tested for impairment annually and whenever there is an
indication that the intangible asset may be impaired.

DISPOSAL/RETIREMENT
1. Intangible asset is derecognized on disposal or when no future economic
benefits are expected from its use or disposal.
2. Gain or loss on disposal is the difference between the net disposal proceeds
and the carrying amount of the asset.
3. The gain or loss is recorded in the Income Statement
4. Derecognition gains shall not be included in revenue but treated as other
income.
5. Amortization of an intangible with a finite useful life does not cease when the
asset becomes temporarily idle or is retired from active use.

AMORTIZATION
1. The process of allocating the cost of an intangible asset as expense over the
expected useful life of the asset in a systematic and rational matter.
2. Pro-forma Entry
Amortization of intangible asset
Intangible asset

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3. An Accumulated Amortization account may also be maintained.

4. Amortization should start when the asset is ready for use.

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FACTORS TO CONSIDER IN ESTIMATING THE LIFE OF AN

INTANGIBLE ASSET
Many factors are considered in determining the useful life of an intangible asset,
including:
(a) the expected usage of the asset by the entity and whether the asset could be
managed efficiently by another management team;
(b) typical product life cycles for the asset and public information on estimates
of useful lives of similar assets that are used in a similar way;
(c) technical, technological, commercial or other types of obsolescence;
(c) the stability of the industry in which the asset operates and changes in the
market demand for the products or services output from the asset;
(d) expected actions by competitors or potential competitors;
(e) the level of maintenance expenditure required to obtain the expected
future economic benefits from the asset and the entitys ability and
intention to reach such a level;
(g) the period of control over the asset and legal or similar limits on the use of
the asset, such as the expiry dates of related leases; and
(h) whether the useful life of the asset is dependent on the useful life of other
assets of the entity.

DISCLOSURES
PAS 38 contains numerous disclosure requirements. Among them is a requirement for
the financial statements to disclose the following for each class of intangible assets,
distinguishing between internally generated intangible assets and other intangible
assets:
a. Whether the useful lives are indefinite or finite and, if finite, the useful lives or the
amortization rate used;
b. The amortization methods used for intangible assets with finite useful lives;
c. The gross carrying amount and any accumulated amortization (aggregated with
accumulated impairment losses) at the beginning and end of the period;
d. The line item(s) of the income statement in which any amortization of intangible
assets is included;
e. A reconciliation of the carrying amount at the beginning and end of the period
showing:

i. Additions, indicating separately those from internal development, those

ii.
iii.
iv.
v.
vi.

acquired separately, and those acquired through business combinations;

Retirements and disposals;
Increases or decreases during the period resulting from revaluations and
from impairment losses recognized or reversed directly in equity;
Impairment losses recognized in the income statement during the period;
Impairment losses reversed in the income statement during the period;
Any amortization recognized during the period.

The financial statements are also to disclose:

a. If an intangible asset is assessed as having an indefinite useful life; the carrying
amount of that asset and the reasons supporting the assessment of an indefinite
useful life. In giving these reasons, the entity shall describe the factor(s) that
played a significant role in determining that it has an indefinite useful life;

b. A description, the carrying amount and remaining amortization period of any

individual intangible asset that is material to the financial statement as a whole;

c. For intangible assets acquired by way of government grant and initially

recognized at fair value:

i. The fair value initially recognized for these assets;

ii. Their carrying amount;
iii. Whether they are carried under the benchmark or the allowed alternative
treatment for subsequent measurement;
d. The existence and carrying amounts of intangible assets whose title is restricted
and the carrying amounts of intangible assets pledged as security for liabilities;
and
e. The amount of contractual commitments for the acquisition of intangible assets.

An entity shall disclose the aggregate amount of research and development

expenditure recognized as an expense during the period.

PATENT
1. Definition: An exclusive right granted by the government to an inventor
enabling him to control the manufacture, sale or other use of his invention for
a specified period of time.

2. Invention any technical solution of a problem in any field of human activity,

which is new, involves inventive step, and is industrially applicable. Under US
GAAP, patent is a technology based intangible asset.
3. Legal life is 20 years (in accordance with R.A. 8293, or the Intellectual
Property Code of the Philippines, effective January 1, 1998)
4. Cost of patent
If acquired purchase price plus incidental costs
If internally developed - licensing and legal fees and other related fees in
securing the patent. As a rule, Research and development costs should
be expensed as incurred.
Legal fees and other costs of successfully prosecuting or defending a
patent should be expensed.
Cost of unsuccessful litigation and the remaining cost of the patent should
be written off as a loss.
5. Amortization of patent
The original cost is amortized over the legal or useful life whichever is
shorter.
Cost of a competitive patent that was acquired to protect an original patent
should be amortized over the remaining life of the old patent.
Cost of a related patent that extends the life of the old patent should be
amortized over the extended life. The unamortized cost of the old patent
should also be amortized over the extended life.
If there is no extension of life, the new patent should be amortized over its
own life, and the cost of the old patent is amortized over the remainder of
its life.

COPYRIGHTS
1.
2.

3.
4.
5.
6.
7.

A copyright is an exclusive right granted by the government to the author,

composer or artist enabling him to publish, sell or otherwise benefit from
his literary, musical or artistic work.
The cost assigned to copyright consists of all expenses incurred in the
production of the work including those required to establish or obtain the
right.
Under US GAAP, copyright is an artistic-related intangible asset.
If the copyright is purchased the cost includes cash paid, and directly
attributable cost necessary for its intended use.
The term of protection for copyrights is during the life of the author and for
50 years after his death.
It is difficult to estimate the useful life of a copyright
The cost of the copyright is written off against the revenue of the first
printing.

TRADEMARK
1.
2.
3.
4.
5.

6.
7.
8.
9.
10.

A trademark is a symbol, sign, slogan or name used to mark a product to

distinguish it from other products.
Trademark is also known as trade name and brand name.
Under US GAAP< trademark is a market related intangible asset.
When a trademark is purchased, the cost includes the purchase price plus
costs directly attributable to the acquisition.
When a trademark is internally developed, the cost includes expenditures
required to establish it, including filing fees, registry fees, and other
expenses incurred in securing the trademark such as design cost of the
trademark.
The cost of successful litigation is an outright expense.
The legal life of trademark is 10 years and may be renewed for period of
10 years each.
Trademark may be considered as an intangible asset with an indefinite
life.
The cost of a trademark is not amortized
The cost of a trademark is tested for impairment at least annually.

RESEARCH AND DEVELOPMENT COSTS

DEFINITIONS
1. Research original and planned investigation undertaken with the prospect of
gaining scientific or technical knowledge and understanding.
2. Development application of research findings to develop a product, service
or process.

RESEARCH EXPENDITURE
1. Recognize as expense when incurred
Rationale: At the research phase of a project, an entity cannot be certain
that future economic benefits will probably flow to the entity.

DEVELOPMENT EXPENDITURE - capitalize development expenditure if able to

demonstrate all of the following:
1. Technical feasibility (planning, design, coding and testing is established)
2. Intention to complete and use or sell

3. Ability to use or sell

4. Ability to generate probable future economic benefits
5. Availability of adequate technical, financial and other resources to complete
development and to use of sell
6. Ability to measure attributable expenditure reliably during development
Rationale: the probability of success may be more apparent.
Note:
If an entity owns a research facility consisting of buildings, laboratories and
equipment where R&D activities are conducted and that has alternative future
uses (in other R&D projects or other uses), facility would be accounted for as a
capitalized operational asset. The depreciation and other costs related to such
research facilities are accounted for as an expense. (Kieso, Weygandt, Warfield
2011)

EXAMPLES OF ACTIVITIES THAT TYPICALLY WOULD BE INCLUDED

IN RESEARCH
1. Laboratory research aimed at discovery of new knowledge
2.
3.

Searching for applications of new research findings or other knowledge

Conceptual formulation and design of possible product or process
alternatives
4. Testing in search for, or evaluation of, product or process alternative.

EXAMPLES OF ACTIVITIES THAT TYPICALLY WOULD BE INCLUDED

IN DEVELOPMENT
1. Design, construction, and testing of pre-production prototypes and model.
2.
Design of tools, jigs, moulds, and dies involving new technology.
3. Design, construction, and testing of a pilot plant that is not of a scale
economically feasible to the enterprise for commercial production.
4. Design, construction, and testing of a chosen alternative for new or improved
product or process.

EXAMPLES OF ACTIVITIES THAT TYPICALLY WOULD NOT BE

CONSIDERED RESEARCH OR DEVELOPMENT
1. Engineering follow-through in an early phase of commercial production
2. Quality control during commercial production, including routine testing of
products
3. Trouble-shooting in connection with breakdowns during commercial
production
4. Routine or periodic alterations to existing products, production lines to
improve quality.
5. Manufacturing processes and other ongoing operations, even though such
alternations may represent improvements.

6. Adaptation of an existing capability to a particular requirement or customers

need as part of a continuing commercial activity.
7. Routine design of tools, jigs, moulds and dies
8. Activity, including design and construction engineering, related to the
construction, relocation, rearrangement or start-up of facilities or equipment
other than facilities or equipment whose sole use is for a particular research
and development project.

ACQUIRED IN PROCESS RESEARCH AND DEVELOPMENT PROJECT

Arises when acquired separately or in a business combination.

Recognized it as an asset at cost, even if a component is research.

Subsequent expenditure on that project may be capitalized or expensed
depending on the recognition criteria for an intangible asset.
If the subsequent expenditure is research expenditure, recognize it as an
expense.
If the subsequent expenditure is development expenditure and it satisfies the
recognition criteria for an asset, it is added to the carrying amount of the inprocess research and development project. Otherwise, the subsequent
development expenditure is recognized as an expense.

COMPUTER SOFTWARE COSTS

The main rules are:
1. All costs incurred in creating a computer software prior to establishing the
technological feasibility should be expensed when incurred.
2. Technological feasibility is established when an enterprise has produced
either a detailed program design or working model.
3. Cost incurred subsequent to establishing technological feasibility shall be
capitalized. These costs include coding and testing and the cost to produce
the product masters.
4. Cost incurred to actually produce the software from the master copy shall be
charged as inventory.

AMORTIZATION OF CAPITALIZED SOFTWARE COSTS

1. The amortization method shall reflect the pattern in which the assets future
economic benefits are expected to be consumed by the entity.
2. If such pattern cannot be determined reliably, the straight-line method is used.

CLASSIFICATION OF COMPUTER SOFTWARE

1. As a rule, computer software is classified as an intangible asset
2. Computer software purchased for resale should be treated as inventory
3. A computer software purchased as an operating system for the hardware or as
an integral part of a computer-controlled machine tool that cannot operate
without the specific software should be treated as property, plant, and
equipment.
4. However, if the computer software is not an integral part of the related
hardware, it is classified as an intangible asset.

GOODWILL
1. Definition: An intangible asset that is not specifically identifiable, has an
indeterminate life, in inherent in a continuing business and relates to the
enterprise as a whole.
2. Goodwill arises when the earnings of a business exceed normal earnings.
3. Factor leading to goodwill
Good name
Capable staff and personnel
High credit standing
Reputation for fair dealings
Reputation for superior products
Favorable location
List of regular customers
4. Two kinds
Developed goodwill generated internally; not recorded.
Purchased goodwill paid for; arises when a business is sold.

MEASUREMENT
1. Indirect valuation approach or Residual Approach excess of the amount paid
over the fair market value of the net assets acquired.
2. Direct valuation approach based on the future earnings of a company. The
following information are required:
Normal rate of return rate of return which attracts investors in a
particular industry.

Fair value of net assets assets should be reported at current market

value and liabilities at adjusted amounts.
Estimated future earnings 3 to 5 years past earnings; exclude
extraordinary items; should be based only on earnings arising from normal
operations.
Probable duration of excess earnings

DIRECT VALUATION METHODS

1. Purchase of average excess earnings
Average earnings
Less: Normal earnings (Rate x Net assets)
Average excess earnings
No. of years
Goodwill

P
P
P

xxx
xxx
xxx
x
xxx

2. Capitalization of average excess earnings

Average earnings
Less: Normal earnings (Rate x Net Assets)
Average excess earnings
Divide by capitalization rate
Goodwill

P
P
P

xxx
xxx
xxx
x%
xxx

3. Capitalization of average earnings

Average earnings
Divide by capitalization rate
Net assets, including goodwill
Less: Net assets excluding goodwill
Goodwill

P
P
P

xxx
x%
xxx
xxx
xxx

4. Present value method

Average earnings
Less: Normal earnings (Rate x Net Assets)
Average excess earnings
Multiply by present value factor
Goodwill

July 2012

P
P
P

xxx
xxx
xxx
xxx
xxx