CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS (AE 14)
LEARNING MATERIAL
UNIT NUMBER / HEADING: UNIT 2 - MODULE 8 / IAS 38 INTANGIBLE
ASSETS
INTRODUCTION
An intangible asset is simple defined as an identifiable nonmonetary asset
without physical substance. In this chapter you will learn all the pertinent
accounting provisions to account for this kind of asset.
LEARNING OUTCOMES
At the end of the unit, students will be able to



Identify the criteria for when an intangible asset may be recognized
Specify how intangible assets should be measured
Enumerate the disclosure requirements of assets
ACTIVATING PRIOR LEARNING
1. What are the two criteria that needs to be considered in recognizing
items of asset in the statement of financial position?
2. What are the features that are distinct only to tangible asset?
PRESENTATION OF CONTENTS
Recognition of intangible asset
There are 3 essential criteria in the definition of an intangible asset, namely:
a. Identifiability
b. Control
c. Future economic benefits
Identifiability
An asset is identifiable when:


It is separable. This means that the asset can be separated from an
entity thru sale, exchange and other form of transfer.
It arises from contractual or other legal rights.
Control
Control is the power of the entity to obtain the future economic benefits
flowing from intangible asset and restrict the access of others to those
benefits.
Future economic benefits
This includes revenue from sale of products and services, cost savings or
other benefits resulting from the use of the asset of the entity.
Recognition and measurement
An intangible asset shall be recognized if the following conditions are
present:
a. It is probable that future economic benefits attributable to the asset
will flow to the entity.
b. The cost of the intangible asset can be measured reliably.
Intangible assets that are acquired separately are initially measured a cost.
Cost within this context comprises:

Purchase price

Import duties and nonrefundable purchase tax

Directly attributable costs of preparing the asset for the intended use
 Cost of employee benefit arising directly from bringing the asset
to its working condition.
 Professional fee arising directly from bringing the asset to its
working condition.
 Cost of testing whether the asset is functioning properly.
Internally generated intangible asset comprises of all directly attributable
costs necessary to create, produce and bring the asset into the desired
condition by management.
These costs include:
a. Cost of materials and services used of consumed in generating the
intangible asset.
b. Cost of employee benefit arising from the generation of the intangible
asset.
c. Fee to register a legal right.
d. Amortization of patent used to generate the intangible asset.
Recognition as an expense
An expenditure on an intangible item that does not meet the recognition
criteria for an intangible asset shall be expensed when incurred. Examples
of expenditures include:
-
Start-up costs
Training costs
Advertising and promotional cost
Business relocation or reorganization costs
Subsequent expenditure
The general rule for subsequent expenditure on an intangible asset is for it
to be recognized as outright expenses. The logic behind this is that most
expenditures merely maintain the condition of the intangible asset thus
contributing no additional future economic benefits.
However, subsequent expenditures may be capitalized if they meet the
following criteria:
a. It is probable that future economic benefits that are attributable
specifically to the subsequent expenditure will flow to the entity.
b. The subsequent expenditure can be measured reliably.
Identifiable intangible assets
a. Patent
b. Copyright
c. Franchise
d.
e.
f.
g.
Trademark or brandname
Customer list
Computer software
Broadcasting license, airline right and fishing right
Unidentifiable intangible asset
An intangible asset is said to be unidentifiable if it cannot be sold,
transferred, licensed, rented or exchanged separately.
The intangible asset is inherent in a continuing business (meaning it will
cease to exist if the business will close) and can only be identified with the
entity as a whole (meaning the only way for it to be sold or transferred is by
selling the whole entity).
This unidentifiable intangible asset squarely describes a goodwill.
Measurement of intangible asset after initial recognition
An entity shall choose either the cost model or revaluation model as an
accounting policy.
1. Cost model – an intangible asset shall be carried at cost, less any
accumulated amortization and any accumulated impairment loss.
2. Revaluation model – an intangible asset shall be carried at a
revaluation 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.
Amortization of intangible assets
IAS 38 provides the following on the amortization of intangible assets:
1. Par. 97 states that intangible assets with limited or finite life are
amortized over their useful life.
2. Par. 107 and 108 state that intangible assets with indefinite life are
not amortized but are tested for impairment at least annually and
whenever there is an indication that the intangible asset may be
impaired.
Impairment of intangible assets
Intangible assets with finite useful life are tested for impairment whenever
there is an indication of impairment at the end of reporting period.
Intangible assets with indefinite useful life are tested for impairment at least
annually and whenever there is an indication of impairment.
An impairment loss on an intangible asset is recognized if the recoverable
amount is less than the carrying amount.
Research and development
IAS 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 research phase and development
phase.
Par. 53 provides that if an entity cannot distinguish the research from
development phase. The entity treats the expenditure as if it were incurred
in the research phase only.
Research is an activity undertaken to discover new knowledge that will be
useful in developing new product while development is the application of
research findings.
Accounting for research and development cost
All expenditure that are incurred for research purposes or has been incurred
during the research phase are all charged to expense. Development cost on
the other hand may or may not be capitalized depending on very strict
criteria. These includes:
a.
b.
c.
d.
e.
f.
Technical feasibility of completing the intangible asset
Intention to complete the asset
Ability to use the asset
Generate future economic benefits
Availability of resources to complete the project
Ability to measure reliably the expenditure related to the asset
Capitalization of expenditures
Expenditures for research and development which have alternative future
use, either in additional research project or for productive purposes, can be
capitalized. Otherwise, they are charged as outright expense.
APPLICATION
1. Discuss the amortization process for intangible asset.
2. How do we account for development cost?
FEEDBACK
Choose the best answer for each question:
1. Which does not qualify as an intangible asset?
a. Compute software
b. Register patent
c. Copyright
d. Notebook computer
2. The recognition criteria for an intangible asset include which of the
following conditions?
a. The intangible asset must be measured at cost
b. The cost can be measured reliably
c. It is probable that future economic benefit will arise from use
d. It is probable that future economic benefit will arise from use and
the cost can be measured reliably.
3. Which is not a consideration in determining the useful life of an
intangible asset?
a. Legal, regulatory or contractual
b. Provision for renewal or extension
c. Initial cost
d. Obsolescence
4. Amortization of an intangible asset with a finite useful life shall
commence when
a. It is recognized as an asset
b. It is probable that it will generate economic benefit
c. It is available for the intended use
d. The cost can be identified with reasonable certainty
5. Intangible assets are classified as
a. Amortizable and unamortizable
b. Limited life and indefinite life
c. Specifically identifiable and goodwill type
d. Legally restricted and goodwill type
6. How should research and development costs be accounted for?
a. Capitalized when incurred and amortized over the useful life
b. Expensed in the period incurred
c. Either capitalized or expensed when incurred depending upon
materiality
d. Expensed in the period incurred unless it can be clearly
demonstrated that the expenditure will have alternative future use
or unless contractually reimbursable
7. Which of the following costs should not be capitalized?
a. Acquisition cost of equipment to be used on current and future
project
b. Engineering cost incurred to advance the product to the full
production stage
c. Cost incurred to file for patent
d. Cost of testing prototype before economic feasibility has been
demonstrated
8. Which of the following costs should be excluded from research and
development expense?
a. Modification of the design of a product
b. Acquisition of research and development equipment for use on a
current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a new
product to the manufacturing stage
9. Intangible assets with indefinite useful life are tested for impairment
a. Quarterly
b. Annually
c. Biannually
d. There is no definite guideline for impairment
10.
Intangible assets are reported
a. With an accumulated amortization account
b. Under property, plant and equipment
c. As a separate line item
d. All of these are allowed
References:




Valix, C. T., Peralta, J.F & Valix C. A. M. (2020). Conceptual Framework
and Accounting Standards. Manila, Philippines: GIC Enterprises & Co..
Inc.
Ballada, W., &
Ballada S. (2020). Conceptual Framework and
Accounting Standards. Manila, Philippines: DomDane Publishers.
https://www.ifrsbox.com