Intangible Assets (IAS 38)

Definition: identifiable (capable of being separated or arises from contractual or other legal rights)
non-monetary asset without physical substance

Examples:
1. Patents
2. Copyrights
3. Trademarks
4. Licenses
5. Customer lists
6. Brands, mastheads

Initial measurement:
1. Separate acquisition – at cost (purchase price, including import duties and non-refundable
purchases taxes, after deducting trade discounts and rebates plus directly attributable costs
of preparing the asset for its intended use)
2. Acquisition as part of business combination – at fair value on date of acquisition
3. Acquisition as part of government grant – accounting policy between fair value or
nominal amount
4. Exchange of assets – fair value unless the exchange transaction lacks commercial substance
or fair value cannot be determined reliably
5. Internally generated intangible assets
a. Research phase – expensed immediately (no intangible asset is recognized)
b. Development phase – intangible asset is recognized if all of the requirements are met
(PARRTI)
P – probable future economic benefits
A – ability to use or sell the intangible asset
R – reliably measurable costs
R – resource availability (economic feasibility)/adequate technical, financial and
other resources to complete the development
T – technical feasibility of completing the asset
I – intention to complete, and use or sell

Special scenarios for internally generated intangible assets:

1. The following intangible assets are not recognized if internally generated
a. Mastheads
b. Publication titles
c. Brands
d. Customer lists
e. Secret recipes/formulas
2. Internally generated patents – we do not capitalize the development costs, we only capitalize
legal and registration costs
Subsequent measurement:
Accounting policy choice:
1. Cost model
2. Revaluation model

Amortization of intangible assets over useful life or legal life (based on law or contract), whichever is
shorter
If indefinite life, no amortization

Common legal life in problems:

1. Patent – 20 years
2. Trademark – 10 years, renewable indefinitely (may be considered as indefinite life)

Impairment of intangible assets – same as PPE except for intangible assets that are not amortized
(development costs capitalized but not yet ready for use, intangible assets with indefinite life)
For intangible assets that are not subject to amortization – tested for impairment at least annually,
even without indicator of impairment

Problem 1:
The following costs are generally incurred by a newly established entity:
Pre-opening of a business facility (pre-incorporation costs/costs to 250,000 Expensed
incorporate)
Purchased recipes and secret formulas 150,000 Intangible
asset
Training (employees), customer loyalty and market share (not 140,000 Expensed
controlled by the company)
Licensing and stand-still agreement 300,000 Intangible
asset
Operating and broadcasting rights 112,000 Intangible
asset
Goodwill purchased in a business combination 500,000 Goodwill
A license to manufacture a steroid by means of a government grant 150,000 Intangible
asset
Cost of courses taken by management in quality engineering 450,000 Expensed
management (management personnel not controlled by entity)
A television advertisement that will stimulate the sales in technology 100,000 Expensed
industry
Investment in associate 500,000 Investment
in Associate
6-month lease payment in advance 300,000 ROU or
Prepaid Rent
Cost of equipment acquired through a lease 100,500 ROU
Internally developed customer list 120,500 Expensed
 Cost incurred in the corporation's formation and organization 230,000 Expensed
Operating losses incurred in the start-up of the business 130,000 Expensed
Initial franchise fees paid 175,000 Intangible
Asset
Continuing franchise fees (royalties) 50,000 Expensed
Internally generated goodwill (under IFRS 3, goodwill can only be 800,000 Expensed
recognized if from a business combination)
Cost of testing in search for a product alternative (research phase) 125,000 Expensed
Cost of purchasing a patent from an inventor 137,000 Intangible
Asset
Legal cost in securing a patent 70,000 Intangible
Asset
Legal cost incurred in successfully defending a patent (maintenance 55,500 Expensed
of the benefits of the patent; subsequent costs – capitalize if
improvement in productivity or extension of life)
Cost of developing brands, mastheads and publishing title 200,000 Expensed
Cost of purchasing a trademark 250,000 Intangible
Asset
Computer software for a computer-controlled machine that cannot PPE
operate without that specific software (integral software to the PPE 325,500
– part of the PPE)
An operating system of a computer 125,000 PPE
Amount paid to a lessor for the exclusive right to rent a facility Intangible
under an operating lease agreement for a period of 10 years 100,000 Asset
Cost of improvements on a leased facility 250,000 Leasehold
improvement
How much from the above items can be recognized as intangible assets?

Case 1 - On January 2, 2022, ABC Inc. acquired copyrights to the original recordings of a famous singer. The
agreement with the singer allows the company to record and rerecord the songs of the singer for a period of
five years. During the initial six-month period of the agreement, the singer was very sick and consequently
cannot record. The studio time that was blocked by the company had to be paid even during the period the
singer could not sing. The following costs were incurred by the company:
Legal cost of acquiring the copyrights P10,000,000 Capitalized
Documentation expenses related to the copyright acquisition 1,000,000 Capitalized
Operational loss (studio time lost, etc.) 2,000,000 Expensed
Massive advertising campaign to launch the artist 1,000,000 Expensed

Required:
1. How much should the copyright be initially recognized? 11,000,000
2. How much is the carrying value of the copyright as of December 31, 2022? 11,000,000 – 2,200,000 = 8,800,000
 Cost 11,000,000
Salvage value (0)
Amortizable cost 11,000,000
Divide: Useful life 5 years
Amortization per year 2,200,000

3. How much is the carrying value of the copyright as of December 31, 2022 assuming that the company expects to generate
P50M in revenue from sales of the artist’s work and that the company’s revenue as of December 31, 2022 from the artist’s
work is at P15M? 8,800,000 (revenue-based depreciation or amortization is not allowed)

Case 2 - Papa Inc. acquired the net assets of Fafa Inc. on June 30, 2022 in a business combination. The cost of
acquisition is P2,000,000 (goodwill) more than the total fair market value of the company’s identifiable net
assets. Among the identifiable assets are the following intangibles:
Book value Fair market value Estimated
remaining life
Trademark 250,000 400,000 4
Customer lists 500,000 750,000 3
Franchise 200,000 350,000 5

Required:
1. How much is the total intangibles including goodwill to be initially recognized?
GW = 2,000,000
TM = 400,000
CL = 750,000
Franchise = 350,000
Total = 3,500,000

2. What is the total carrying value of the various intangibles including goodwill on December 31, 2022?

GW = 0
Trademark = 400,000 divided by 4 years = 100,000 per year x 6/12 = 50,000
Customer lists = 750,000 divided by 3 years = 250,000 per year x 6/12 = 125,000
Franchise = 350,000 divided by 5 years = 70,000 per year x 6/12 = 35,000

GW = 2,000,000
TM = 400,000 – 50,000 = 350,000
CL = 750,000 – 125,000 = 625,000
Franchise = 350,000 – 35,000 = 315,000
Total = 3,290,000

Case 3 - On December 30, 2017, Albany Corp. was granted by the government licences to operate radio and
television stations over a 10-year period. The fair market value of similar licenses is at P1,500,000. The company
paid professional and other processing fees totalling P50,000.
Required:
1. How much should the license be initially recognized? 1,550,000

Fair Value Nominal

Fair value 1,500,000 0
Transaction costs 50,000 50,000
Initial cost of license 1,550,000 50,000

2. What is the carrying value of the license on December 31, 2022? 775,000

Fair Value Nominal

Initial cost 1,550,000 50,000
Amortization for 5 years
(Cost divided by 10 x 5) (775,000) (25,000)
Carrying value 775,000 25,000

Case 4 - On December 30, 2021, Wow Co. obtained a franchise from Yey Corp. to sell for 20 years mango
products. The initial franchise fee as agreed upon shall be P10,000,000 and shall be payable in cash, P1,000,000,
when the contract is signed and the balance in five equal annual instalments every December 31 thereafter, as
evidenced by a noninterest bearing note. The agreement provides the franchisor shall provide the necessary
initial services required under a franchise contract. By the end of the year, the company has performed all the
initial services which cost Yey Corp. P1,497,728.
Required:
Assuming that the franchisee could borrow money at 12%, determine the following:
1. How much should the franchise be initially recognized?
Cash down payment 1,000,000
PV of balance (1,800,000 per year x 3.6048 PVFOA) 6,488,640
Initial cost of franchise 7,488,640

2. How much is the carrying value of the franchise on December 31, 2022?

Cost 7,488,640
Amortization (7,488,640 divided by 20 years) (374,432)
Carrying value 12/31/2022 7,114,208
 1. 300,000 legal and other registration costs
2. 300,000 divided by legal life of 20 years = 15,000

Average net earnings 1,650,000

Multiply: 5 years
Cumulative earnings for the past 5 years 8,250,000
Add back: Loss due to fire 750,000
Cumulative recurring/normal earnings for the past 5 years 9,000,000
Divide: 5 years
Recurring average earnings 1,800,000

Average net assets 5,000,000

Normal rate of return x20%
Normal earnings for the industry 1,000,000

The company is earning, on the average, more than the industry average. The reason is because the company
has goodwill, that is why it is able to generate more profit.

#1: Goodwill = present value of the excess earnings (PV of infinite number of periods = PV of
perpetuity)
Excess earnings per year due to goodwill 800,000
PVF of perpetuity (1 divided by 25%) x1/25%
Goodwill 3,200,000

PP 8,200,000
FVNIA (5,000,000)
GW 3,200,000

Average recurring earnings (with GW) 1,800,000 8,200,000 PP

Normal earnings of industry (1,000,000) (5,000,000) FVNIA
Excess earnings 800,000 x1/25% 3,200,000 GW

#2:
Average recurring earnings (with GW) 1,800,000 x1/25% 7,200,000 PP
Normal earnings of industry (1,000,000) (5,000,000) FVNIA
Excess earnings 800,000 2,200,000 GW
Formula for PV of ordinary annuity:
[1 − (1 + 𝑖 ) ]
𝑃𝑉𝐹𝑂𝐴 =
𝑖

𝑃𝑉𝐹 𝑜𝑓 1 = (1 + 𝑖)

[1 − 𝑃𝑉𝐹]
𝑃𝑉𝐹𝑂𝐴 =
𝑖

Let’s compute PVF of 1 at 10% using:

(1) 5 years = 0.6209
(2) 10 years = 0.3855
(3) 20 years = 0.1486
(4) 50 years = 0.0085
(5) 500 years = 0.0000 (2.0121 x 10^-21)
(6) 1000 years = 0.0000 (4.0487 x 10^-42)

Observation:
1. As n goes up, PVF goes down
2. The PVF is not negative, despite having a very large n (asymptotic to zero)
3. If n is a ridiculously large number (such as infinity), the PVF is very close to zero, we can assume
that PVF is zero.

[1 − 𝑃𝑉𝐹]
𝑃𝑉𝐹𝑂𝐴 =
𝑖

If n is infinity, PVF is assumed to be zero.

[1 − 0]
𝑃𝑉𝐹𝑂𝐴 =
𝑖
1
𝑃𝑉𝐹 𝑜𝑓 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 =
𝑖
 Carrying value as of 12/31/2016 before impairment 1,500,000
Recoverable amount (FVCTS or VIU, whichever is higher)
Since FVCTS is not given, we will use VIU
Projected annual cash flow 60,000
PVF of perpetuity x1/6%
VIU (1,000,000)
Impairment loss 500,000

Maximum gain on reversal of impairment loss = 500,000.

Note: there is only one asset wherein reversal of impairment is not allowed – goodwill

PPE related to research and development

• If the PPE has no alternative use or exclusive to one R&D project – entire cost of PPE is
considered as R&D expenditure (expensed or capitalized depending whether there is technological
feasibility)
• If the PPE has alternative use (may be used for several R&D projects or may be used for other
purposes) – only the related depreciation (portion related to R&D) is considered as R&D
expenditure; cost of PPE is recognized as PPE

Depreciation of PPE 270,000

Materials used 400,000
Salaries of researchers 1,000,000
Outside consulting fees 300,000
Allocated indirect costs 500,000
Total R&D expense 2,470,000
1st stage: research stage – end product is the detailed program design (expensed as R&D)
2nd stage: development – developing the program design and improving it until the 1st version for sale called
the product master (before technological feasibility = expensed as R&D); after technological feasibility =
capitalized)
3rd stage: commercial production – duplication of product master into copies for sale (expensed as operating
expense or capitalized as inventory if considered as product cost)