U

SPECIFIC INTANGIBLE CHAPTER

BLUE NOTES
ASSETS 23 S
L

Intellectual Patent Copyright Trademark

Properties
Definition The exclusive right given by the The exclusive legal right A symbol, sign, slogan or
government to the inventor to make, granted by the name used to
use, or sell his invention for a term of government to the author, distinguish a certain
years. composer or artist to product from the
reproduce, publish, sell or others.
distribute his literary,
musical or artistic work.

Under US GAAP, it is classified as Under US GAAP, it is Under US GAAP, it is

technology-based intangible asset. classified as artistic- classified as market-
related intangible asset. related intangible asset.
Legal Life 20 years and nonrenewable Lifetime of the author and 10 years and renewable
50 years after his death for periods of 10 years
each
Capitalized Cost

Purchased Purchase price plus any directly Purchase price plus any Purchase price plus any
attributable cost necessary in directly attributable cost directly attributable cost
preparing the asset for its intended necessary in preparing the necessary in preparing
use. asset for its intended use. the asset for its
intended use.

Internally Licensing and other related legal fees All expenses incurred in Expenditures required in
developed in securing the patent rights. When the production of the establishing the
the patent is already registered, work plus any cost trademark, including
capitalized cost includes any required to establish or filing fees, registry fees
engineering and consulting costs to obtain the right. and other expenses
develop the patent and cost of design incurred in securing the
changes required by the patent. trademark.
Costs that are All research and development costs Legal fees and other
expensed outright incurred; costs of successfully
Legal fees and other costs of prosecuting or
successfully prosecuting or defending defending a patent.
a patent. If the litigation is
unsuccessful, the legal costs and the
remaining cost of the patent shall be
written off as a loss.
 Patent Copyright Trademark
Cost of the With finite life:
Original cost copyright
a. Original Legal life or Useful life
=
cost useful life,
whichever is
shorter
b. If a Cost of
competitive = competitive
patent is patent Cost of
acquired to Remaining life of trademark
protect an the old patent Useful life
original patent
c. If related Cost of the
patent is related patent
With indefinite life:
acquired in = and any
The cost is not
order to unamortized cost
amortized but tested
extend the life of the old patent
Amortization for impairment at
of the old Extended life
least annually and
patent and
whenever there is an
there is an
indication that it may
extension of
be impaired.
life of the
patent
d. If related Cost of the
patent is related patent
acquired in = Life of the
order to related patent
extend the life Cost of the old
of the old patent
patent and = Remainder of its
there is no life
extension of
life of the
patent

Franchise Lease right

Definition A franchise agreement is a contract Right acquired by the lessee by virtue
whereby one party called franchisor of a contract of lease to use the
grants certain rights to another party specific property owned by the lessor
called the franchisee. for a definite period of time in
Under US GAAP, it is a contract-based consideration for a certain sum of
intangible asset. It may be: money in the form of rent.
a. Between the government
and a private entity or
individual.
 b. Between private entities or
individuals.
Capitalized cost Lump sum payment for the a. Required lump sum payment at
acquisition of the franchise plus the first negotiation representing
directly attributable costs necessary the lease bonus in consideration
for its intended use. for a favorable lease terms.
However, this payment may
simply be charged to prepaid rent
to be allocated as rent expense
over the lease term.
b. Amount paid in obtaining an
assignment of lease from the
original lessee.
Costs that are expensed outright Periodic payments of the franchisee The cost of the leasehold if it is not
to the franchisor. It is known as the very substantial.
periodic franchise fee.


Amortization If granted for a definite Cost of the leasehold shall be
period, the cost of franchise amortized over the life of the lease.
shall be amortized over the
useful life or definite period
whichever is shorter.

If granted indefinitely or
perpetually, the cost of the
franchise shall not be
amortized but tested for
impairment at least
annually.

Leasehold improvements

Alterations or modifications on the leased property made by the lessee.

Classified as property, plant, and equipment of the lessee.

Legally, leasehold improvements revert to the lessor upon termination of the lease contract. Hence, the
residual value of the leasehold improvements shall be ignored in computing depreciation.

Depreciation: cost of leasehold improvements shall be depreciated over the life of the lease or life of the
improvements, whichever is shorter.

If the lease is terminated prior to the agreed term, the carrying amount is considered as a loss.

Renewal option:
a. If the likelihood of renewal is too uncertain, the leasehold improvements are depreciated over the
original life of the lease or the life of the improvements, whichever is shorter.
b. If the likelihood of renewal is highly probable or certain, the cost of leasehold improvements are spread
over the extended lease term or the life of the improvements, whichever is shorter.
Goodwill

An intangible asset that is not specifically identifiable, has an indeterminate life, is inherent in a continuing
 business and relate to the entity as a whole. Thus, standing alone, goodwill cannot be bought and sold.

Arises when earnings exceed normal earnings by reason of good name, capable staff and personnel, high credit

standing, reputation for fair dealings, reputation for superior products, favorable location and a list of regular
customers.
Developed goodwill or internal goodwill is not recorded. PAS 38, paragraph 48, states that internally generated
goodwill shall not be recognized as an asset.
Purchased goodwill is the goodwill that has been paid for. It arises when a business is purchased. It is recognized as an
asset because it has been paid for.
Measurement of goodwill
1. Residual approach – goodwill is measured by comparing the purchase price for the entity with the net
tangible and identifiable assets (total assets excluding goodwill minus liabilities assumed). Net assets
acquired must be measured at fair value.
2. Direct approach – goodwill is measured on the basis of the future earnings of the entity. Requires the
following information:
a. A normal rate of return for representative entities in the industry.
b. The fair value of tangible assets and any identifiable intangible assets.
c. The estimated future normal earnings of the entity.
d. The probable duration of any excess earnings attributable to goodwill.
Illustration:
Net assets, excluding goodwill 7,500,000
Normal rate if return in the industry 12%
Past earnings for 5 years preceding the sale:
2008 950,000
2009 975,000
2010 950,000
2011 1,075,000
2012 1,050,000
5,000,000

Average earnings of the 5-year period (5,000,000/5) 1,000,000

Method 1 (purchase of average excess earnings

The goodwill is measured at average excess earnings for 5 years.
Average earnings 1,000,000
Normal earnings (12% x 7,500,000) 900,000
Average excess earnings 100,000

Goodwill (100,000 x 5) 500,000

Method 2 (Capitalization of average excess earnings)

The goodwill is measured at the average excess earnings capitalized at 25%.
Average excess earnings 100,000
Divide by capitalization rate 25%
Goodwill 400,000
Method 3 (Capitalization of average earnings)
The goodwill is measured at the average earnings capitalized at 10%.
Average earnings 1,000,000
Divide by capitalization rate 10%
Net assets, including goodwill/purchase price 10,000,000
Less: Net assets, excluding goodwill 7,500,000
Goodwill 2,500,000

Method 4 (Present value method)

Under this method, goodwill is the discounted value or present value of the average excess earnings that are
expected to become available in the future periods.
Average excess earnings (expected to be received annually in 5 years) 100,000
Discount rate 12%

The goodwill is computed as follows:

Average excess earnings 100,000
Multiply by the PV of an ordinary annuity of 1 for 5 years at 12% 3.605
Goodwill 360,500
Goodwill in a business combination

Formula:
Consideration transferred xx
Amount of noncontrolling interest in the acquire xx
Fair value of previously held interest in the acquire xx
Total xx
Net amount of identifiable assets and liabilities assumed at fair value (xx)
Goodwill xx

NOTE: If the purchase price or consideration transferred for the entity is less than the net fair value of the identifiable assets acquired and
liabilities assumed, the difference is negative goodwill. PFRS 3, paragraph 34, states that such negative goodwill is recognized in the profit or
loss as gain on bargain purchase.

Broadcasting license

If the entity intends to renew the license indefinitely and evidence supports its ability to do so, the license shall not be amortized
but tested for impairment annually and whenever there is an indication of impairment.

If the entity does not intend to renew the license, it should be amortized over the remaining life and
immediately tested for impairment.
Airline right

Route authority renewals are routinely granted at a minimal cost and historically, route authority has
been renewed when the airlines has complied with the applicable rules and regulations. Hence, the
airline right should be regarded as having an indefinite useful life and should not be amortized but
tested for impairment annually and whenever there is an indication for impairment.
Customer list
 
a customer database containing
 the name, contact information, order history and other vital and social statistics, such as birth,
 death and even sickness.
  
Internally generated customer list shall not be recognized as an asset.

Acquired customer list may be recognized as an intangible asset and amortized
 over its useful life. It should be also reviewed for
impairment annually and whenever there is an indication for impairment.

Organization cost
  Costs incurred in forming or organizing a corporation.


 shall be debited to share premium arising there from. If
Expensed immediately. However, direct costs incurred to sell shares
share premium is not sufficient, the excess shall be expensed.

Service concession

Arrangement between a private sector entity and public sector entity whereby the private sector entity shall
 provide services in order that the public could access to major economic and social facilities, for example,
expressway, airport, bridge and telecommunication network.
  
It is equivalent of build, operate and transfer.
  
Two parties involved:
a. Concession operator – a private sector entity.
b. Grantor – a public sector entity which is the party that grants the service concession arrangement.

At the end of arrangement, the residual interest
in any infrastructure asset constructed as part of the arrangement is controlled
 by the grantor not by the concession operator.

The infrastructure asset is not an item of property, plant and equipment of the concession operator. Instead,
the concession operator shall recognize the fair value of the consideration as either a financial asset or an
intangible 
asset or both. When both a financial asset and intangible asset exist, the consideration should be
 separated.
 A financial asset is recognized when the operator has a guaranteed contractual right to receive a
specified amount of cash over the life of the arrangement. The amount due from the grantor is
 accounted for as any of the following:
a. Loan receivable
b. An available for sale financial asset
c. A financial asset at fair value through profit or loss if so designated upon initial recognition.
 An intangible asset is recognized when the operator has received a right, not a license, to charge users
for the public service and the revenue receivable is not agreed in advance but id dependent on the
use of the asset by the public.
Impairment of intangible asset

An intangible asset is impaired when its carrying
 amount exceeded the present value of future cash flows that will be generated
by the intangible asset or the value in use.

Computation of Present Value of cash flows of an intangible asset

a. With finite life = expected cash flows of the intangible asset over its remaining life x PV factor
b. With indefinite life = expected annual cash flow divided by the discount rate
Research and Development Cost
Definition of terms:

Research – original and plannedinvestigation undertaken with the prospect of gaining scientific or technical
 knowledge and understanding.
Examples:
a. Laboratory research aimed at obtaining or discovering new knowledge
b. Searching for application of research finding and other knowledge
 c. Conceptual formulation and design of possible product or process
alternative d. Testing in search for product or process alternative

Development – 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.
Examples:
a. Design, construction, and testing of preproduction prototype and model.
b. Design of tools, jigs, molds and dies involving new technology
c. Design, construction and operation of a pilot plant that is not of a scale economically feasible to the entity
for commercial production
d. Design, construction and testing of a chosen alternative for new or improved products or process

PAS 38, paragraph 52, provides that to assess whether an internally generated intangible asset meets the
criteria
for recognition, an entity classifies the generation of the asset into a research phase and 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.

Activities not considered research and development

These are the activities that relate to commercial production and do not result to research and development cost.
Examples:
a. Engineering follow through in an early phase of commercial production
b. Quality control during commercial production including routine testing
c. Trouble shooting breakdown during production
d. Routine on-going effort to refine, enrich or improve quality of an existing product
e. Adaptation of an existing capability to a particular requirement or customer need
f. Periodic design changes to existing products
g. Routine design of tools, jigs, molds and dies

Activity, including design and construction engineering related to construction, relocation, rearrangement or start-up
of facilities and equipment

Accounting for Research Cost Accounting for Development Cost

Probability of success of the project Very UNCERTAIN More APPARENT

Recognition of an Intangible Asset PAS 38, paragraph 54, states that no PAS 38, paragraph 57, states that an
intangible asset arising from research intangible asset arising from
or from the research phase of an development or from development
internal project shall be recognized. phase of an internal project shall be
Expenditures on research or on the recognized if and only if the entity
research phase of an internal project can demonstrate all of the following:
shall be recognized as expense when a. The technical feasibility of
it is incurred. completing the intangible
asset so that it will be
available for use or sale. This
is achieved when a prototype
 or model is produced.
b. The intention to complete the
intangible asset and use or
sell it.
c. The ability to use or sell the
intangible asset.
d. How the intangible asset will
generate probable future
economic benefits. Among
other things, the entity shall
demonstrate the existence of
a market for the output of
the intangible asset or the
intangible asset itself.
e. Availability of resources or
funding to complete
development and to use or
sell the asset.
f. The ability to measure
reliably the expenditure
attributable to the intangible
asset during its development.
In-process research and development project acquired separately or in a business combination is recognized as an
asset at cost, even if a component is research.

Subsequent expenditure on that project is accounted for as any other research and development cost which may be
expensed or capitalized depending on the recognition criteria for an intangible asset.

Research Expenditure Development Expenditure

 
Recognized as an expense Added to the carrying amount of the in-process
research and development project if the
recognition criteria for an intangible asset were
satisfied.

Otherwise, it is recognized as an expense.
American standard

The AICPA Financial Accounting Standards Board stipulated that 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. The cost of materials
 and amortization of the intangible asset would then be
subsequently used, the depreciation of the equipment
charged to research and development expense.
Internally developed computer software

Costs incurred in creating a computer software product
 shall be charged to expense when incurred until a technical
 feasibility has been established for the product.

 
When the technical feasibility has been established, capitalized software costs include the cost of coding and
testing, and the cost to produce the product maters.

The amortization method 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.

The carrying amount of the computer
 software shall not be more than its fair value less cost to sell. Otherwise, an
impairment loss is recognized.

Web site development costs

Under SIC 32, a web site that has been developed for the purpose of promoting and advertising an entity’s products
and services does not meet the requirement of PAS 38 to be recognized as an intangible asset. Therefore, web site
development costs shall be expensed outright.