INTANGIBLES
Initial Valuations: *Initially should be recognized at cost.
Cost = cash acquisition price/PV (Present Value) of your future payment + TC (Transaction
Cost) cost to acquire (commission, non-refundable taxes & legal fees).
Subsequent: (choices in balance sheet)
* Cost model – You present the intangibles at carrying amount.
CA (Carrying Amount) = Cost – Amortization (amortization or any impairment )
* FV model (Fair Value) – Whatever is the Fair Value on the FS Date it should be
the amount or value to be presented in the balance sheet.
- Normally FV Model can’t be seen in the balance sheet when dealing with intangibles,
because it (Intangibles) has no existing market unlike stocks it has existing market, PPE has
existing market. So, most of the cases we see Cost model where in the carrying amount is
presented.
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Charges to the income statement (Profit or Loss) related to intangibles.
 Amortization – equivalent to depreciation of PPE’s , we amortized the cost of our
intangibles so we are slowly charging it to expense.
 Legal Fees to defend intangibles – (example: we file a case or a case was file against
us) any legal expense incurred in defense of intangibles, successful or not shall be
charged to expense.
 Royalty – When you are operating under the name of “Jollibee or McDonalds” aside
from the franchise fee you’ll also be charged of royalty.
Royalty – are period cost, normally on the basis of sales. (example: Charged of
additional royalty of 1% of the sales. So, the royalty should be charged to expenses
incurred.
 Research and Development – it is the undertaking to discover something new.
(example: you have something to invent), in most cases the research and
development should be charged to expense, expense in the income statement
because, you are not certain about the outcome of your research. (expense in the
income statement because of the uncertainty of the outcome)
You only capitalized research once you’ll be able to establish technical feasibility
that you’ll be able to complete and benefit out of your invention. Meaning to say you
have made a prototype and the prototype works according to how you wanted it to
work, you’re just polishing it, that is when we establish technical feasibility, in that
case it should be capitalized already.
 Impairment Loss – When a recoverable amount is lower than the carrying amount
that will be impairment loss. It is also chargeable to the income statement.

If you acquired the intangibles on a deferred payment basis there are interests and
acquisitions could also be charged as expense in to the income statement (Profit or
Loss).
To determine the carrying amount of the intangibles;
CA = Cost – Amortization
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How to amortized Intangibles?
Intangibles with limited life – shall be amortized over the life or benefits
whichever is shorter.
Indefinite life – no amortization, test for impairment. You don’t know when it will
last. (example: Good Will, Trademark)
Amortization is just like ‘straight line’
Amortization = Cost – SV
Life/benefits
SV/RV (Salvage Value / Residual Value) – is presume to be zero for intangibles, unless
there is an existing market, or offer to acquire the intangibles after using it.
Legal fees – to defend the intangible successful or not, should be charged to expense.
– to register shall be capitalized to the said intangibles (any registration with
connection to intangibles)
Self-develop intangibles – charged to expense, capitalized only the cost to register the
intangibles.