Intangible Assets Notes and Illustrations - - INTERMEDIATE ACCOUNTING FOR BSA PDF

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CHAPTER 4INTANGIBLE ASSETSLearning ObjectivesAfter studying this chapter, the students should be able to: Define intangible asset. Enumerate and describe the essential criteria in the definition of an intangible asset. Enumerate the criteria for recognition of an intangible asset. Compute the cost o...

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CHAPTER 4 INTANGIBLE ASSETS

Learning Objectives After studying this chapter, the students should be able to: 1. 2. 3. 4. 5. 6. 7.

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Define Enumerate and describe the in the definition of an intangible asset. Enumerate the criteria for recognition of an intangible asset. Compute the of an intangible asset. Enumerate of intangible assets. Compute the of an intangible asset. the transactions related to intangible assets.

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CHAPTER 4 INTANGIBLE ASSETS defines an intangible asset as identifiable, non-monetary asset without physical substance. It has three (3) essential characteristics: identifiability, controllability, and future economic benefits. An asset is if it either: (a) is separable, i.e., is capable of being separated or 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; (b) arises from contractual or other legal rights, from the entity or other rights and obligations. An entity an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. The 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 process may reduce future production costs rather than increase future revenues. Intangible assets are sections:

into five (5) and some of it is discussed in the succeeding

1.

intangible assets such as

2.

intangible assets such as customer

3. 4. 5.

brand

and Internet domain

order

and customer

intangible assets such as items protected by intangible assets such as , and broadcast intangible assets including both .

RECOGNITION An intangible asset shall be recognized if, and only if: (a) it is that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) the of the asset can be

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CLASSIFICATION AND PRESENTATION Intangible assets are presented as

MEASUREMENT An intangible asset is The cost of intangible assets comprises: (a) Purchase price, including any import duties and nonrefundable purchase taxes, minus discounts and rebates; and (b) Directly attributable costs of preparing the asset for use. The cost of an necessary to (a) (b) (c) (d)

comprises

Examples of directly attributable costs are: costs of materials and services used or consumed in generating the intangible asset; costs of employee benefits arising from the generation of the intangible asset; fees to register a legal right; and amortization of patents and licenses that are used to generate the intangible asset.

To determine whether the cost incurred can be recognized as an intangible asset, it is important to note whether these costs are incurred in the or the

undertaken with the prospect of gaining new scientific or technical knowledge and understanding. The standard provides that no intangible asset arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized as an expense when it is incurred. The following are considered research activities: (a) activities aimed at obtaining knowledge; (b) the for, evaluation and final selection of, applications of research findings or other knowledge; (c) the for alternatives for materials, devices, products, processes, systems or services; and (d) the formulation, design, evaluation and final selection of for new or improved materials, devices, products, processes, systems or services. Expenditures incurred during the development phase be recognized as an intangible asset. The development phase 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

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Examples of development activities are: (a) the of pre-production or pre-use and models; (b) the design of tools, jigs, molds and dies involving new technology; (c) the design, construction and operation of a pilot plant that is of a scale economically feasible for commercial production; and (d) the design, construction, and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

intangible assets are measured using either the

or the

Cost Model After initial recognition, an intangible asset shall be carried at its . Revaluation Model After initial recognition, an intangible asset shall be carried at a revalued amount, being its

The depreciable amount of an intangible asset with a shall be allocated on a systematic basis over its useful life. Amortization shall , i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortization shall cease at the of the! date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) by PFRS 5 and the date that the asset is derecognized. The amortization method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

The amortization charge for each period shall be recognized in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset. An intangible asset with an indefinite useful life shall be amortized but tested for impairment annually or whenever there is an indication that it is impaired. The amortization period and the amortization method for an intangible asset with a finite useful life shall be . If the expected useful life of the asset is

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different from previous estimates, the amortization period shall be changed accordingly as a change in accounting estimate. Residual Value The residual value of an intangible asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an intangible asset with a finite useful life (a) there is a (b) there is an for the asset and: (i) residual value can be determined by (ii) it is probable that such a market will

the asset at the end of its useful life; or ;

Useful life Useful life is: (a) the (b) the entity.

over which an asset is expected to be available for use by an entity; expected to be obtained from the asset by an

PATENT A patent is an exclusive right granted by the government that enables the inventor to control the manufacture, sale, or use of an invention. The Intellectual Property Code of the Philippines provides that the . A patent , but its life can be extended by application of a related patent containing improvements and changes. The

includes the . For an , its cost includes only the Subsequent expenditures to defend the patent are a charge to expense when

incurred. In the amortization of patent, the following rules shall be observed: a) The original cost shall be amortized over the b) If a competitive patent is acquired to protect an original patent, the c) If a related patent is acquired to extend the life of the old patent, the cost of the related patent and unamortized cost of the old patent shall be amortized over the extended life. If no extension, the life of the new patent shall be amortized over its life and the cost of the old patent is to be amortized over the remainder of its life.

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Illustrative Problem: On January 3, 2015, Merry Company spent P89, 000 to apply for and obtain a patent on a newly developed product. The patent had an estimated useful life of 10 years. At the beginning of 2017, the company spent P16, 000 in successfully prosecuting an attempted infringement of the patent. At the beginning of 2018, the company purchased for P37, 000 a patent that was expected to prolong the life of its original patent by five years. Required: 1. Journal entries to record the transactions above. 2. Presentation in the financial statements in 2015. Solution: 1. Journal entries: 2015 Jan 1 Patent Cash To record the patent acquisition. Dec

31

2016 Dec 31

2017 Jan 1

Dec

31

2018 Dec 31

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89,000 89,000

Amortization- patent (P89,000/10) 8,900 Patent To record the patent amortization in 2015.

8,900

Amortization- patent 8,900 Patent To record the patent amortization in 2016.

8,900

Legal fees 16,000 Cash To record the patent infringement expenditures.

16,000

Amortization- patent 8,900 Patent To record the patent amortization in 2017.

8,900

Patent 37,000 Cash 37,000 To record the patent infringement expenditures.

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Dec

31

Amortization- patent* 8,275 Patent 8,275 To record the patent amortization in 2017.

* Cost of original patent Amortization for 2015-2017 (P8,900 x 3yrs) Carrying value 1/1/2018 Related patent Total remaining life Amortization in 2018 2. Presentation in the financial statements in

P89,000 26,700 62,300 37,000 99,300/ 121

1

(10 yrs -3 yrs + 5 yrs)

P8,275 : 2015__

Income statement General and administrative expenses*: Amortization- patent Statement of Financial Position Non-current assets: Patent, net (P89, 000 – P8,900)

P8, 900

P80,100

* Amortization is included in the income statement unless it is included in the valuation of other assets such as inventory, etc. COPYRIGHT An exclusive right granted by the government that permits an author to sell, license, or control his or her work. Legal life of copyright is during the The cost of copyright includes all expenses incurred in the production of the work includes those required to establish or obtain the right. If acquired, its costs include the purchase price plus any directly attributable cost. Theoretically, copyright is amortized over its useful life. . Illustrative Problem: SINE Industries acquired two copyrights during 2015. One copyright related to a textbook that was developed internally at the cost of P9, 900. This textbook is estimated to have a useful life of 3 years from September 1, 2015, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2015, for P24, 000. This textbook has an indefinite useful life.

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Required: 1. Journal entries to record the transactions above. 2. Presentation in the financial statements in 2015. Solution: 1. Journal entries: 2015 Sept 1 Copyright Cash To record the copyright acquisition. Dec

1

1

9,900 9,900

Copyright 24,000 Cash To record the copyright acquisition.

24,000

Amortization- copyright (P9, 900/3 x 4/12)* 1,100 Copyright To record the copyright amortization in 2015.

1,100

* The second copyright is not amortized but tested for impairment at least annually. The amortization of the first copyright is based on the theoretical approach. 2. Presentation in the financial statements in 2015: Income statement General and administrative expenses*: Amortization- copyright

P1, 100

Statement of Financial Position Non-current assets: Copyright, net (P9, 900 + P24, 000 – P1, 100) P32,800 * Amortization is included in the income statement unless it is included in the valuation of other assets such as inventory, etc.

An exclusive right or privilege received by a business or individual to or sell certain products or services. The cost of franchise includes the lump sum payment for the acquisition of the franchise plus directly attributable costs necessary for its intended use, such as legal fees and expenses incurred

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in connection with the acquisition of the right.

If the franchise is granted for a definite period, it is If the franchise is granted indefinitely, it is not amortized but tested for impairment at least annually. Illustrative Problem: On January 1, 2015, DOR Company purchased a franchise from McDonald Company to sell for 20 years McDonald products for P5, 000,000. The initial franchise fee is payable in cash P500, 000, when the contract is signed and the balance in five equal installments every December 31, evidenced by a note bearing an interest of 12%. The agreement provides that the franchisor shall provide the necessary initial services required under a franchise contract. On January 31, 2015, McDonald Company has substantially performed all the initial services. Required: 1. Journal entries to record the transactions above. 2. Presentation in the financial statements in 2015. Solution: 1. Journal entries: 2015 Jan 1

Dec

31

Franchise 5,000,000 Cash Note payable To record the franchise acquisition. Note payable (P4, 500,000/5) 900,000 Interest expense (P4, 500,000 x 12%) 540,000 Cash To record the payment of the first installment. Amortization- franchise (P5, 000,000/20) 250,000 Franchise To record the franchise amortization in 2015.

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500,000 4,500,000

1,440,000

250,000

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2. Presentation in the financial statements in 2015: 2015__ Income statement General and administrative expenses Amortization- franchise Statement of Financial Position Non-current assets: Franchise, net (P5, 000,000 – P250, 000)

P250, 000

P4, 750,000

LEASEHOLD Leasehold is a right acquired by the lessee by contract of lease to use the specific property owned by the lessor for a definite period in consideration for a certain sum of money. The cost of the leasehold is amortized over the life of the lease. If the cost is not substantial, it is charged to outright expense. TRADEMARK A trademark is a distinctive name, symbol, or slogan that distinguishes a product or service from similar products or services. The cost of trademark includes its costs include the

. If

Trademark is amortized over its . Considering the almost life and as such, it is not amortized but tested for impairment annually or whenever there is an indication that it was impaired. COMPUTER SOFTWARE Companies can either purchase computer software or create it. They may purchase or create software for or use. The cost incurred in creating a computer software product shall be charged to . The amortization method for computer software shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If such pattern cannot be determined reliably, the straight line method is used.

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