Technical Knowledge

To understand the meaning of an intangible asset.

To know the requirements for the recognition of an intangible asset
To know the initial and subsequent measurement of an intangible asset.
To understand the meaning of research and development.
To identify research and development activities.
To know the proper treatment of research cost.
To know the proper treatment of development cost.
INTANGIBLE ASSET
An intangible asset is simply defined as an identifiable
nonmonetary asset without physical substance.

The intangible asset must be controlled by the entity as a result

of past event and from which future economic benefits are
expected to flow to the entity
Three essential criteria
Identifiability
Control
Future economic benefits
Identifiability
It is separable.
This means that the asset is capable of being separated
from the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a related
asset or liability.
It rises from contractual or other legal rights.
This is regardless of whether these rights are
transferable or separable from the entity or from other
rights and obligations.
Control
The entity must be able to enjoy the future economic benefits
from the asset and prevent others from enjoying the same
benefits.

The capacity of an entity to control the future economic benefits

from an intangible asset normally would stem from l​ egal rights
that are enforceable in a court of law.
Future economic benefit

It may include revenue from the sale of products or

services, cost savings or other benefits resulting
from the use of the asset by entity.
Recognition of an intangible asset
It is probable ​that the future economic benefits attributable to
the asset will flow to the entity.

The cost of the intangible asset can be measured reliably.

Initial measurement of intangible
asset
PAS 38, paragraph 24, provides that an intangible asset shall
be measured initially at cost.

If an intangible asset is acquired separately, the cost of the

intangible asset can be measured reliably, particularly so if the
purchase consideration is in the form of cash ​ or other
monetary asset.
 Costs which are not capitalizable
Examples of costs that are ​not included ​ in the cost of an intangible
asset but ​expensed immediately​ are:
Cost of introducing a new product or service, including cost of
advertising and promotional activity.
Cost of conducting business in anew location or with a new class of
customer, including cost of staff training.
Administration and other general overhead cost
Cost incurred while an asset capable of operating in a manner intended
by management has yet to be brought into use.
Initial operating cost
Internally generated intangible
asset

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 it in the manner intended by
management.
PAS 38, paragraph 63, explicitly provides that internally
generated brand, masthead, publishing title, customer list
and other item similar in substance shall not be recognized
as intangible asset.

PAS 38, paragraph 48, provides that internally generated

goodwill shall not be recognized as an asset.
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.
Subsequent expenditure
As a rule, a subsequent expenditure on an intangible asset
shall be recognized as expense.

The reason is that most subsequent expenditures are likely to

maintain only the expected future economic benefits embodied
in the intangible asset.
 Identifiable intangible assets
PAS 38 especially pertains to identifiable intangible
assets.

If the intangible asset is acquired through purchase, there

is a transfer of legal right that would make the asset
identifiable.
 Unidentifiable intangible asset
An intangible asset is unidentifiable if it cannot be sold,
transferred, licensed, rented or exchanged separately.

The intangible asset is inherent in a continuing business and

can only be identified with the entity as a whole.

This is unidentified intangible asset squarely describes a

goodwill.
 Measurement after recognition
An entity shall choose either the cost model or revaluation
model as an accounting policy.
Cost model - An intangible asset shall be carried at cost, less
any accumulate amortization and any accumulated
impairment loss.

Revaluation model - An intangible asset shall be carried at a

revaluation amount, less any subsequent amortization and
any subsequent accumulated impairment loss.
Amortization of intangible asset
PAS 38 provides the following on the amortization of intangible
assets:
Paragraph 97 states that the intangible assets with limited or
finite life are amortized over their useful life.
Paragraphs 107 and 108 state that intangible assets with
indefinite life are not amortized but are tested for impairment
at least annually and whenever there is an indication that the
intangible asset may be impaired.
Impairment of intangible assets
Intangible assets with finite useful life are tested for
impairment whenever there is an indication of impairment at
the end of reporting period.

Intangible assets with indefinite useful life are tested for

impairment at least annually and whenever there is an
indication of impairment.
Amortization
Amortization is the systematic allocation of the amortizable amount of an
intangible asset over the useful life.
The amortizable amount is the cost of the intangible asset less residual
value.
The amortization is recorded by debiting amortization expense and
crediting the intangible asset account.

Normally, the intangible asset account is credited directly for the periodic
amortization but an accumulated amortization account may be
maintained.
Amortization period
The amortizable amount of an intangible asset shall be
amortized on a systematic basis ober the useful life.

Amortization shall begin when the asset is available for use,

meaning, when the asset is in the location and condition for the
intended use.

Amortization shall cease when the intangible asset is

derecognized.
Useful life
The useful life of an intangible asset must be assessed as either indefinite
or finite.
If finite, the useful life may be expressed in terms of years or the number
of units to be produced.
The useful life of an intangible asset is indefinite when there is no
foreseeable limit to the period over which the asset is expected to
generate net cash flows.

In other words, the useful life is indefinite when there are no legal,
contractual, competitive and other factors that would limit the useful life of
the intangible asset.
Factors affecting useful life
Technical, technological, commercial or other type of obsolescence
Expected action by competitors or potential competitors
Expected usage of the asset by the entity
Typical product life cycle for the asset
Stability of the industry in which the asset operates
Level of maintenance expenditure required to obtain the expected future economic
benefits from the asset
The useful life of the asset may be dependent on the useful life of other assets of the
entity
Period of control over the asset, such as expiry dates of related leases
Amortization method
The method of amortization shall reflect the pattern in which the
future economic benefits from the asset are expected to be
consumed by the entity.

However, if such pattern cannot be determined reliably, the

straight line method of amortization shall be used.
Residual value
The residual value of an intangible asset shall be presumed to be zero,
except:
When a third party is committed to buy the intangible asset at the end of
the useful life.
When there is an active market for the intangible asset so that the
expected residual value can be measured and it is probable that there will
be a market for the asset at the end of the useful life.
The residual value is reviewed at each financial year-end.
A change in the residual value is accounted for as a change in accounting
estimate.
 Derecognition of an intangible
asset
An intangible asset shall be derecognized or eliminated from the
statement of financial position:

On disposal of the asset.

When no future economic benefits are expected from its use and
disposal.
Gain and loss arising from the derecognition of an intangible asset shall
be determined as the difference between the net disposal proceeds and
the carrying amount of the asset.
Research and development
PAS 38, paragraph 52,provides that if an asset whether an
internally generated intangible asset meets the criteria for
recognition, an entity classifies the generation of the asset into
a research phase and a development phase.

PAS 38, paragraph 53, provides that if an entity cannot

distinguish the research phase from the development phase,
the entity treats the expenditure as if it were incurred in the
research phase only.
Research
Research is original and planned investigation undertaken with
the prospect of gaining scientific or technical knowledge and
understanding.

Otherwise stated, a research activity is undertaken to discover

new knowledge that will be useful in developing new product.
Definition of development cost

It is the application of research findings or other

knowledge to a plan or design for the production of
new or substantially improved material, device,
product, process, system or service, prior to the
commencement of commercial production.
 Activities not considered research
and development
Research and development activities typically occur prior to
the beginning of commercial production and distribution of a
product or process.

Accordingly, activities that relate to commercial production

do not result to research and development cost.
Accounting fore research cost
PAS 38, paragraph 54, provides that expenditure on research
or on the research phase of an internal project shall be
recognized as expense when incurred.

The reason is that at the research phase of a project, an entity

cannot be certain that future economic benefits would probably
flow to the entity.
 Accounting for developing cost
In contrast with research cost, development cost is incurred at
a later stage in a project and the probability of success may be
more apparent.

Development cost may or may not be recognized as an

intangible asset depending on very strict criteria.
Criteria for recognition
The technical feasibility of completing the intangible asset so that it will
be available for use or sale.
The intention to complete the intangible asset and use or sell it.
The ability to use or sell the intangible asset.
How the intangible asset will generate probable future economic benefits.
Availability of resources or funding to complete development and to use
or sell the asset.
The ability to measure reliably the expenditure attributable to the
intangible asset during its development.
Capitalizable expenditures
Expenditures for research and development which have
alternative future use, either in additional research project or
for productive purposes, can be capitalized.

This means that costs incurred for materials, equipment and

intangible asset related to research and development
activities which have an alternative future use can be
capitalized.
Capitalizable expenditures
Subsequently, the following should be charged to research
and development expense:
Cost ff materials used
Depreciation of equipment used in research and
development
Amortization of intangible asset used in research and
development
1. Define intangible asset.
2. Explain "identifiability" of an intangible asset.
3. Explain "control" of an intangible asset.
4. Explain "future economic benefit" that may be derived from
an intangible asset.
5. What are the two conditions that must be present for the
recognition of an intangible asset
6. Explain the initial measurement of intangible asset.
7. Explain the measurement of cost of an intangble asset
acquired separately.
8. What is the cost of an internally generated intangible asset?
9. What is the treatment of internally generated brand,
masthead, publishing title, customer list and other item similar
in substance?
10. Define the terms "research" and "development"
11. Identify the research activities.
12. Identify the development activities.
13. Explain the accounting for research cost.
14. Explain the accounting for development cost.
15. What are the criteria for the recognition of development
cost as an intangible asset?