Intangible Assets Review for A PDF

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FINANCIAL ACCOUNTING REVIEW: Intangible AssetsINTANGIBLE ASSETS An intangible asset is an identifiable non-monetary asset without physical substance.MEASUREMENT Initial measurement ➢ An intangible asset shall be measured initially at cost. The cost of an intangible asset generally consists of: 1. Pu...

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FINANCIAL ACCOUNTING REVIEW: Intangible Assets INTANGIBLE ASSETS An intangible asset is an identifiable non-monetary asset without physical substance. MEASUREMENT

Initial measurement ➢

An intangible asset shall be measured initially at cost. The cost of an intangible asset generally consists of: 1. Purchase price (or fair value), and 2. Any directly attributable cost of preparing the asset for its intended use.

Modes of Acquisition: 1. Separate acquisition ➢ The cost of a separately-acquired intangible comprises: (a) Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and (b) any directly attributable cost of preparing the asset for its intended use 2.

Deferred basis ➢ If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent. The difference between this amount and the total payments is recognized as interest expense over the credit period.

3.

Acquisition as part of business combination ➢ The cost of the intangible asset acquired in a business combination is equal to its fair value on the date of acquisition.

4.

Exchange ➢ With commercial substance Fair value of asset given up XX Cash payment XX Cash received (XX) Cost XX ➢ Without commercial substance Carrying value of asset given up Cash payment Cash received Cost

XX XX (XX) XX

Note: The initial measurement principles of intangible assets is very similar as that of the property, plant and equipment. 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 the management. To assess whether an internally generated intangible asset meets the criteria for recognition, an entity shall classify the generation of the asset into: (a) Research phase; and (b) Development phase

Accounting for research costs ➢

All research costs or costs incurred in the research phase shall be recognized as expense.

Accounting for development costs ➢

An intangible asset arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following: (a) The technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) Its intention to complete the intangible asset and use or sell it. (c) Its ability to use or sell the intangible asset. (d) How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. (f) Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Otherwise, the development costs shall be recognized as an expense. Note: Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets (IAS 38 par. 63) Useful life An intangible asset can either have: a. Finite useful life; or b. Indefinite useful life Only intangible assets with finite useful life are amortized. Intangible asset with indefinite useful life are not amortized but tested for impairment at least annually. Amortization method Generally, the straight-line method of amortization is used to amortize intangible assets unless the expected pattern of consumption of the future economic benefits can be determined reliably. IAS 38 prohibits the use of an amortization method that is based on revenue. Residual value An intangible asset’s residual value is assumed to be zero unless the entity can demonstrate its ability to sell the intangible asset before the end of its economic life, as evidenced by existence of: a. A third party commitment to purchase the asset at the end of its useful life; or b. An active market where the asset can be sold at the end of its useful life. IDENTIFIABLE INTANGIBLE ASSETS PATENT Cost of Patent

1. Acquired by purchase Purchase price Import duties Nonrefundable purchase taxes Directly attributable cost of preparing the asset for the intended use Cost of patent

2.

XX XX XX XX XX

Internally developed patent ➢

➢

The cost normally includes: (1) Licensing (2) Other related legal fees in securing the patent rights All research and development costs are expensed immediately. ❖ Exception: all development costs incurred from the time the technology feasibility is established are capitalized as cost of the patent.

Amortization of Patent (a) Patent acquired by purchase. The cost shall be amortized over the remaining legal life or useful life, whichever is shorter. (b) Internally developed patent. The original cost shall be amortized over the legal life or useful life, whichever is shorter . Impairment of Patent ➢ Legal life: The legal life of patent is 20 years. ➢ Classification of patent: Intangible asset with a definite life. ➢ Impairment method: Tested for impairment whenever there is an indication of impairment at the end of reporting period. Cost of Litigation ➢ Whether the litigation is successful or not, the cost of litigation is expensed.  However, if the litigation is unsuccessful, the patent is also written off as a loss. TRADEMARK Cost of Trademark

1. Acquired by purchase Purchase price Directly attributable costs related to acquisition Cost of trademark

XX XX XX

2. Internally developed trademark ➢

The cost includes expenditures required to establish it such as: (1) Filing fees

(2) Registry fees (3) Other expenses incurred in securing the trademark such as design cost of the trademark Amortization and Impairment of Trademark ➢ Legal life: The legal life of trademark is 10 years and may be renewed for periods of 10 years each. ➢ Classification of trademark: 1. Intangible asset with an indefinite useful life. 2. Intangible asset with a definite life. ➢ Amortization: The trademark may or may not be amortized depending on its classification.  If the trademark is classified as having a definite life, it is amortized at the shorter between its useful life and legal life.  If the trademark is classified as having an indefinite life, it is not amortized. ➢ Impairment method:  Trademark with indefinite life: Tested for impairment (1) at least annually and (2) whenever there is an indication of impairment.  Trademark with definite life: Tested for impairment whenever there is an indication of impairment at the end of reporting period. Cost of Litigation ➢ Whether the litigation is successful or not, the cost of litigation is expensed.  However, if the litigation is unsuccessful, the trademark is also written off as a loss. COPYRIGHT Cost of Copyright ➢ The cost of copyright consists of all expenditures in the production of the work including those expenditures required to establish or obtain the right.

Copyright acquired by purchase Cash paid to acquire the copyright Directly attributable costs necessary for the intended use Cost of copyright

XX XX XX

Amortization and Impairment of Copyright ➢ Legal life: The term of protection is during the life of the author and for 50 years after death. ➢ Classification of copyright: 3. Intangible asset with an indefinite useful life. 4. Intangible asset with a definite life. ➢ Amortization: The copyright may or may not be amortized depending on its classification.  If the copyright is classified as having a definite life, it is amortized at the shorter between its useful life and legal life.  If the copyright is classified as having an indefinite life, it is not amortized. ➢ Impairment method:  Copyright with indefinite life: Tested for impairment (1) at least annually and (2) whenever there is an indication of impairment.  Copyright with definite life: Tested for impairment whenever there is an indication of impairment at the end of reporting period. FRANCHISE Cost of Franchise Initial franchise fee Directly attributable costs necessary for its intended use (e.g., legal fees and other expenses incurred in connection with the acquisition of the right) Cost of franchise

XX XX XX

Continuing franchise fee or periodic payment is considered outright expense. Amortization and Impairment of Franchise ➢ Classification of franchise: Intangible asset with a definite useful life. ➢ Amortization: The franchise is amortized over the period stated in the agreement. ➢ Impairment method: Tested for impairment whenever there is an indication of impairment at the end of reporting period.

CUSTOMER LIST Cost of Customer list

1. Acquired by purchase Purchase price Directly attributable costs Cost of Customer list

XX XX XX

2. Internally-generated ➢

All costs incurred in generating the customer list shall be expensed and not capitalized. UNIDENTIFIABLE INTANGIBLE ASSET

GOODWILL Consideration transferred Fair value of identifiable net assets Goodwill (Gain on bargain purchase)

Purchased goodwill Internally-developed goodwill

XX (XX) XX(XX)

Recognized? ✓ 

Amortization and Impairment of Goodwill ➢ Classification of goodwill: Intangible asset with an indefinite useful life. ➢ Amortization: The goodwill is not amortized. ➢ Impairment method: Tested for impairment (1) at least annually and (2) whenever there is an indication of impairment. -nothing follows-...