INTANGIBLE ASSETS

Chapter 36

Definition:

 PAS 38: Defines an intangible asset as an identifiable nonmonetary asset without

physical substance.

 PAS 38 states further that the intangible asset must be CONTROLLED by the entity as a

RESULT of a PAST EVENT and from which FUTURE ECONOMIC BENEFITS are

expected to flow to the entity.

ESSENTIAL CHARACTERISTICS (PAS 38)

1. Identifiability

2. Control

3. Future Economic Benefits

IDENTIFIABILITY – An asset is IDENTIFIABLE WHEN:

1. It is SEPARABLE – the entity can sell, transfer, have it licensed, rented or exchanged

2. It arises from CONTRACTUAL or OTHER LEGAL RIGHTS

CONTROL

 Is the power of the entity to obtain the future economic benefits flowing from the

intangible asset and restrict the access of others to those benefits.

 The entity must be able to ENJOY THE FUTURE ECONOMIC BENEIFTS from the asset and

prevent others from enjoying the same benefits ---

 Control is an offshoot of legal rights enforceable in a court of law – legal right as a matter of

source of control is more pronounced in TRADEMARK; COPYRIGHT & PATENT

 Another method of control aside from legal right is – keeping something secret through

employee confidentiality

 Benefits of training costs (employee training) cannot be treated as intangible because the
entity cannot control the action of the employees; similarly market share/customer loyalty

cannot also be classified as intangible assets because the entity cannot control customers

FUTURE ECONOMIC BENEFITS

 Include revenue from the sale of products/services, cost savings or other benefits

resulting from the use of the asset by the entity

CONDITIONS IN THE RECOGNITION OF AN INTANGIBLE ASSET

 It is PROBABLE that future economic benefits attributable to the asset will flow to the

entity (exercise judgment in assessing the degree of certainty of future economic

benefits and judgment is based on external evidence)

 COST of the intangible asset can be measured reliable

INITIAL MEASUREMENT OF INTANGIBLE ASSET

 Per PAS 38, intangible asset shall be measured initially at COST

 The COST of an intangible asset depends on the following:

1. Separate acquisition

2. Acquisition as part of a business combination

3. Acquisition by way of government grant

4. Acquisition by exchange

5. Acquisition by self creation or internal generation

Separate Acquisition – include:

 Purchase price

 Import duties and nonrefundable purchase taxes

 Directly attributable costs of preparing the asset for the intended use

1. Costs of employee benefits arising directly from bringing the asset to its working
condition

2. Professional fees arising directly from bringing the asset to its working condition

3. Costs of testing whether the asset is functioning properly

Acquisition as Part of Business Combination

 if intangible asset is acquired in a business combination, the COST of the intangible

asset is based on the FAIR VALUE on acquisition date.

Acquisition by Government Grant

 Happens when a government transfers of allocates to an entity assets such as:

Airport land rights; License to operate radio or television stations; Import license or

quotas or rights to access restricted areas

 May be initially recorded at either FAIR VALUE or NOMINAL AMOUNT or ZERO

plus any expenditure directly attributable to preparing the asset for intended use

Acquisition by Exchange

 The cost of the intangible asset is measured at FAIR VALUE of the ASSET GIVEN UP plus ANY

CASH PAYMENT, unless the exchange transaction lacks commercial substance

 If EXCHANGE lacks commercial substance, the intangible asset is measured at the CARRYING

AMOUNT OF THE ASSET GIVEN UP PLUS CASH PAYMENY

 An Exchange transaction lacks commercial substance when: THE CASH FLOW OF THE ASSET

RECEIVED DO NOT DIFFER SIGNIFICANTLY from the cash flows of the asset transferred.

Internally Generated Intangible Asset

 The COST of an INTERNALLY GENERATED intangible asset comprises ALL DIRECTLY

ATTIBUTABLE COSTS NECESSARY to create, produce and prepare the asset to be capable of

operating it in a manner intended by the management. Costs directly attributable are:

o Cost of materials and services used or consumed in generating the intangible asset

o Costs of employee benefits arising from the generation of the intangible asset

o Fees to register a legal right

o Amortization of patents and licenses that are used to generate intangible asset

 Expenditures on intangible assets that DO NOT meet the recognition criteria for an

intangible asset shall be EXPENSED WHEN INCURRED; ie: Start up Costs; Training costs;

Advertising and promotional costs; Business relocation or reorganization costs

 Subsequent expenditures – shall also be recognized as expense as a general rule

IDENTIFIABLE INTANGIBLE ASSETS

 If the intangible asset can be SOLD; TRANSFERRED; LICENSED; RENTED or SOLD

SEPARATELY, then it is IDENTIFIABLE.

 It is acquired through purchase, there is a transfer of legal right that would it identifiable

 Examples:

1. Patent

2. Copyright

3. Franchise

4. Trademark or brandname

5. Customer list

6. Computer software

7. Broadcasting license, airline right and fishing right

UNIDENTIFIABLE INTANGIBLE ASSET

 Cannot be sold, transferred, licensed, rented, exchanged separately

 It is inherent in a continuing business and can only be identified with the entity as a whole

 Example: GOODWILL

CLASSIFICATION OF INTANGIBLE ASSETS

1. Intangible Assets with DEFINITE LIFE – include: patent; copyright; franchise with fixed term;

computer software; customer list and license

2. Intangible Assets with INDEFINITE LIFE – Goodwill; Trademark and perpetual franchise

MEASUREMENT AFTER RECOGNITION – an entity may either USE:

1. COST MODEL – Cost less any accumulated amortization and any accumulated