M6 - Intangible Assets and Goodwill PDF

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INTANGIBLE ASSETS AND GOODWILL1. Define intangible assets. Intangible assets – is an identifiable nonmonetary asset without physical substance.2. What are the two conditions for the recognition of an intangible asset? Intangible asset must be controlled by the entity as a result of past event; Fr...

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INTERMEDIATE ACCOUNTING 1 & 2

M6: INTANGIBLE ASSETS AND GOODWILL

INTANGIBLE ASSETS AND GOODWILL 1. Define intangible assets.  Intangible assets – is an identifiable nonmonetary asset without physical substance. 2. What are the two conditions for the recognition of an intangible asset?  Intangible asset must be controlled by the entity as a result of past event;  From which future economic benefits are expected to flow to the entity. 3. What are the three essential criteria in the definition of an intangible asset?  Identifiability  Control  Future Economic Benefits 4. Explain the meaning of “identifiability”?  An intangible asset must be identifiable in order to distinguish it clearly from goodwill.  An asset is identifiable when: o

It is separable – 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.

o

It arises 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.

5. Explain the element of “control” of an intangible asset?  The intangible asset must be in control of the entity as a result of a past event.  Control – power of the entity to obtain the future economic benefits flowing from the intangible asset and restrict the access of others to those benefits. In other words, the entity must be able to enjoy the future economic benefits from the asset and prevent others from enjoying the same benefit.  The capacity of an entity to control the future economic benefits from an intangible asset normally would stem from legal rights that are enforceable in a court of law. The capacity to control future economic benefits is much pronounced in the case of trademark, copyright and patent.  In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not always a necessary condition for control since an entity may be able to control the future economic benefits in some other way. 6. Explain the meaning of “future economic benefits”.  Future economic benefits embodied in an asset is the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity and are also used to provide goods and services in accordance with the entities' objectives.

 Future economic benefits may include revenue from sale of the products or services, cost savings or other benefits resulting from the use of the asset by the entity.

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7. What is the cost of intangible asset that is “acquired separately”? The cost of the intangible asset that is acquired separately can be measured reliably, particularly so if the purchase consideration is in the form of cash or other monetary assets. The cost of a separately acquired intangible asset comprises:  Purchase price  Import duties and non-refundable purchase taxes  Directly attributable costs of preparing the asset for the intended use. Directly attributable costs includes:  Costs of employee benefits arising directly from bringing the asset to its working condition.  Professional fees arising directly from bringing the asset to its working condition.  Costs of testing whether the asset is functioning properly. 8. Give examples of costs that are not included in the cost of an intangible asset.  Cost of introducing a new product or service, including the cost of advertising and promotional activities.  Costs of conducting business in a new location or with a new class of customer, including costs of staf training.  Administration and other general overhead costs.  Costs incurred while an asset capable of operating in a manner intended by management has yet to be brought into use.  Initial operating loss. 9. What is the cost of an intangible asset that is acquired as part of a business combination? The cost of an intangible asset that is acquired as part of a business combination is based on the fair value on the date of acquisition. 10. What is the cost of an intangible asset that is acquired by “government grant”? An intangible asset may be acquired by way of a government grant, free or charge or for nominal consideration. This may occur when a government transfers or allocates to an entity intangible assets such as:  Airport land rights  Licenses to operate radio or television stations  Import licences or quotas or rights to access restricted resources The intangible asset acquired by way of government grant may be initially recorded at either:  Fair value  Nominal amount or zero, plus any expenditure that is directly attributable to preparing the asset for its intended use. 11. What is the cost of an "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. Examples of directly attributable costs are:  Cost 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.  Amortization of patents and licenses that are used to generate intangible asset. The following are not components of an internally generated intangible asset:  Selling, administrative and other general overhead, unless this expenditure can be directly attributed to preparing the asset for use.  Clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned performance.  Expenditure on training staf to operate the asset. 12. Give examples of expenditures that are expensed as incurred.  Start-up costs o Organization costs such as legal and secretarial costs incurred in establishing a legal entity. o Pre-opening costs or expenditures to open a new facility or business. o Pre-operating costs or expenditures for commencing new operation or launching new product.  Training costs  Advertising and promotional costs

 Business relocation or reorganization costs 13. What is the treatment of a subsequent expenditure on an intangible asset?

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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. However, the subsequent expenditure may be capitalized or added to the cost of an intangible asset if the following recognition criteria for an intangible asset are met:  It is probable that future economic benefits that are attributable specifically to the subsequent expenditure will flow to the entity.  The subsequent expenditure can be measured reliably. The nature of an intangible asset is such that, in many cases, it is not possible to determine whether subsequent expenditure is likely to enhance the economic benefits that will flow to the entity from the intangible asset. Therefore, only rarely will a subsequent expenditure on an intangible asset result to an addition to the cost of the intangible asset. 14. What is the meaning of identifiable intangible asset? An intangible asset is identifiable if it is acquired through purchase because there is a transfer of legal right. Moreover, if the asset could be sold, transferred, licensed, rented or sold separately, the intangible asset is identifiable. Examples of identifiable intangible assets are:  Patent  Copyright  Franchise  Trademark or Brand name  Customer list  Computer Software  Broadcasting licence, airline and fishing right 15. What is the meaning of unidentifiable intangible asset? An intangible asset is unidentifiable if it cannot be sold, transferred, licensed, rented, or exchanged separately. It is inherent in a continuing business and can only be identified with the entity as a whole. The unidentifiable intangible asset is also known as “goodwill”. 16. Explain the measurement of an intangible asset after initial 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 accumulated amortization and any accumulated impairment loss.  Revaluation Model – An intangible asset shall be carried at a revalued amount, less any subsequent amortization and any subsequent accumulated impairment loss. The revalued amount is the fair value at the date of revaluation and is determined by reference to an active market. Thus, an intangible asset can only be carried at revalued amount if there is an active market for the asset. 17. Explain the amortization of an intangible asset. 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. PAS 38, paragraph 97, states that intangible assets with limited or finite life are amortized over their useful life. PAS 107 and 108, states that intangible assets with indefinite life are not amortized. 18. What is the amortization period of an intangible asset? The amortizable amount of an intangible asset shall be amortized on a systematic basic over the useful life. Amortization shall begin when the asset is available for use/asset is in the location and condition for intended use. Amortization shall cease when the intangible asset is derecognized or when the asset is classified as “held for sale”. 19. Explain the useful life of an intangible asset. The useful life of an intangible asset must be assessed as either indefinite or finite. Finite useful life – may be expressed in terms of years or the number of units to be produced. Indefinite useful life – no foreseeable limit to the period which the asset is expected to generate net cash flows.

In other words, there are no legal, contractual, competitive and other factors that would limit the useful life of the intangible asset. 20. What is the method of amortizing the cost of an intangible asset? BSA 2102-FS2021-INTANGIBLEASSETSANDGOODWILL-DA003

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The method or 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. 21. Explain the residual value of an intangible asset. 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. The residual value of an intangible asset may increase to amount equal to or greater than the carrying amount. 22. What are the factors that are considered in determining the useful life of an intangible asset?  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 and legal or similar limits on the use of the asset, such as expiry dates or related leases. 23. Explain the 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 use and disposal of the asset. Gain and loss arising from the derecognition of an intangible asset shall be determined as the diference between the net disposal proceeds and the carrying amount of the asset. 24. Explain the impairment of intangible assets. PAS 38, paragraph 97, states that intangible assets with limited or finite life are tested for impairment whenever there is an indication of impairment at the end of reporting period. PAS 107 and 108, states that intangible assets with indefinite life are tested for impairment at least annually and whenever there is an indication that the intangible asset may be impaired. 25. What are the disclosures required in relation to intangible assets?  Whether useful lives are indefinite or finite, and if finite, the useful lives of the amortization rate.  The amortization method.  The gross carrying amount and any accumulated amortization at the beginning and end of the period.  The line item in the income statement in which any amortization of intangible asset is included.  Additions, separately showing those internally generated, acquired separately and acquired through business combination.  Intangible assets classified as held for sale.  Increases and decreases in intangible assets resulting from revaluations.  Impairment losses and reversal of impairment losses.  Net exchange diferences on translation.  The carrying amount of intangible asset with indefinite life and the reason for the indefinite life.  The carrying amount and the remaining amortization period of the intangible assets that are material.  The carrying amount of intangible asset whose title is restricted or pledged as collateral security.  Contractual commitments for intangible assets.  Intangible assets acquired by way of government grant and initially recognized at fair value.  The amount of research and development expenditure recognized as expense during the period. 26. What is a patent? Patent – is an exclusive right granted by the government to an inventor enabling him to control the manufacture,

sale or other use of invention for a specified period of time.

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The legal life of patent is 20 years. This is in accordance with R.A. No. 8293, or the Intellectual Property Code of the Philippines, which took efect on January 1, 1998. A patent cannot be renewed but the life can be extended beyond the legal life by a new patent for improvements and changes. Under US GAAP, a patent is classified as technology-based intangible asset. 27. What expenditures are capitalized as cost of patent? If the patent is purchase, the cost comprises:  Purchase price  Import duties  Non-refundable purchase taxes  Any directly attributable cost of preparing the asset for the intended use. If the patent is internally developed, the cost normally includes:  Licensing  Other related legal fees in securing the patent rights. As a rule, all related research and development costs shall be expensed as incurred. However, from the time technological feasibility, any additional development cost to develop the patent to full manufacturing stage may be capitalized as patent cost or separately accounted for as development cost. The capitalized development cost is recognized as intangible asset and amortized over the useful life of the patent. The reason for the capitalization is that at this point in time, the patent is now technically and commercially feasible. 28. Explain the amortization and impairment of patent? Amortization of Patent With regard to the amortization of patent, the following rules shall be observed:  If a patent is internally developed, the original cost shall be amortized over the legal life or useful, whichever is shorter.  If the patent is acquired by an entity from an original patentee, the cost shall be amortized over the remaining legal life of useful life, whichever is shorter.  If a competitive patent is acquired to protect an original patent, the cost of the competitive patent shall be amortized over the remaining useful life of the old patent.  If a related patent is acquired in order to extend the life of the old patent, the cost of the related patent and any unamortized cost of the old patent shall be amortized over the extended life.  If a related patent is acquired but it is not intended to extend the life of the old patent, the new patent shall be amortized over its own life, and the cost of the old patent is to be amortized over the remainder of its life. Impairment of patent Since a patent is an intangible asset with finite useful life, the cost is amortized. However, the patent should be tested for impairment whenever there is an indication of impairment at the end of reporting period. 29. What is a trademark? Trademark – this is a symbol, sign, slogan or name used to mark a product to distinguish it from other products. R.A. No. 8293 or the Intellectual Property Code of the Philippines provides legal protection for a trademark. The legal life of trademark is 10 years and may be renewed for periods of 10 years each. Under US GAAP, a trademark is a market-related intangible asset. When a trademark is purchased, the cost includes:  The purchase price  Costs directly attributable to the acquisition. When a trademark is internally developed, the cost includes:  Expenditures required in establishing it. It includes filing fees, registry fees and other expenses incurred in securing the trademark such as design cost of the trademark. If the trademark is successfully prosecuted or defended, the litigation cost is an outright expense. The reason is that such cost is simply intended to maintain, rather than enhance or increase, the future economic benefits from the asset. 30. Explain the amortization and impairment of trademark.

Considering the almost automatic renewal of a trademark, an entity may properly classify a trademark as an intangible asset with an indefinite useful life. Therefore, the cost of trademark is not amortized but subject to test for impairment at least annually and whenever there is an indication that it may be impaired. 31. What is goodwill? BSA 2102-FS2021-INTANGIBLEASSETSANDGOODWILL-DA003

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Goodwill is undeniably a unique asset presented in the financial statements. It is unique in the sense that goodwill standing alone cannot be bought and sold. Goodwill often referred to as the most intangible of all intangible assets. The goodwill can only be identified with the entity as a whole. Goodwill is an intangible asset that is not specifically identifiable, has an indeterminate life, is inherent in a continuing business and relates to the entity as a whole. Goodwill arises when earnings exceed normal earnings by reason of good name, capable staf and personnel, high credit standing, reputation for fair dealings, reputation for superior products, favourable location and a list of regular customers. In other words, goodwill is created by a good relationship between entity and its customers:  By building up a reputation by word of mouth for high quality products or high standard of service.  By responding promptly and helpfully to queries and complaints of customers.  Through personality of the staf and their attitude to the customers. Goodwill changes day to day. It is continually changing. One act of bad customer relation might damage goodwill and one act of good relations might improve goodwill. 32. What are the two kinds of goodwill? Developed Go...