AUDIT OF INTANGIBLE
ASSETS
INTANGIBLE ASSET
An IDENTIFIABLE nonmonetary asset without physical substance. The standard further
states that the intangible asset must be CONTROLLED by the enterprise as a result of past
event and from which FUTURE ECONOMIC BENEFITS are expected to flow to the
enterprise.
RECOGNITION
An intangible asset shall be recognized if the following conditions are met:
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
INITIAL MEASUREMENT
Initially measured at COST
Cost is the amount of cash or cash equivalents to acquire as asset at the
time of its acquisition or construction, or, when applicable, the amount
attributed to that asset when initially recognized in accordance with the
specific requirements of other PFRS.
INITIAL MEASUREMENT
Intangible Assets can be acquired by
a. By separate purchase
b. As part of a Business Combination
c.
By a Government Grant
d. By Exchange of Assets
e. By self-creation
INITIAL MEASUREMENT
Separate Purchase
Purchase price including import duties and nonrefundable purchase
taxes, and any directly attributable expenditure on preparing the asset
for its intended use, such as legal fees.
As part of a Business
Combination
Fair value at the acquisition date.
By a Govt. Grant
Fair value or nominal amount plus directly attributable expenditures.
By Exchange of Asset a. With Commercial Substance = FV of Asset Given up or the asset
received
b. No Commercial Substance = CV of Asset Given Up
INITIAL MEASUREMENT
By self - creation
1. Research Phase – expensed
2. Development Phase
Capitalized only if an entity needs to demonstrate all of the following:
(TIAPAR)
a. The Technical Feasibility of completing the asset so that it can be
used or sold
b. Its Intention to complete the asset and use or sell it
c. Its Ability to use or sell the Intangible Asset
d. How the asset will generate Probable future economic benefits
e. The availability of Adequate Technical, financial and other resources
to complete the development and to use or sell the asset
f. Its ability to measure Reliably the expenditures to the asset during
its development.
INTERNALLY GENERATED
INTANGIBLE ASSET
Internally Generated IA are capitalized as IA except;
1. Internally generated BRANDS
2. MASTHEAD
3. CUSTOMER LISTS and items similar in substance
4. PUBLISHING TITLES
SUBSEQUENT MEASUREMENT
A. Cost Model – cost less any amortization and impairment losses
B. Revaluation Model – revalued amount (based on fair value) less any
subsequent amortization and impairment losses. This model is
applicable only if Fair Value can be determined by reference to active
market.
RESEARCH AND DEVELOPMENT
ACTIVITIES
RESEARCH ACTIVITIES
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
RESEARCH AND DEVELOPMENT
ACTIVITIES
DEVELOPMENT ACTIVITIES
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 enterprise for commercial production
d. Design, construction and testing of a chosen alternative for new or
improved product or process
RESEARCH AND DEVELOPMENT
ACTIVITIES
NOT A RESEARCH AND DEVELOPMENT COST
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 tolls, jigs, molds and dies
h.
Activity, including design and construction engineering related to construction,
relocation, rearrangement or start-up facilities and equipment
PATENT
Legal Life = 20 years
Cost of Patent
a.
When purchased – Purchase Price + Directly Attributable Cost
b.
Internally Developed – Licensing + Other Legal Fees
Cost that are expensed as incurred
a.
Research and Development Cost
b.
Legal Fees for defending a patent, whether successful or not.
PATENT
Amortization of Patent
1. The original cost should be amortized over the legal life or useful life
whichever is SHORTER.
2. Competitive Patent was acquired. Amortized using remaining life of the
Old Patent.
3. Related Patent was acquired.
a) Extension of Life – related and old patent amortize over extended life
b) No Extension – related patent amortize over its own life, while Old
Patent amortize over its own remaining life.
COPYRIGHT
Legal Life = Lifetime of the author + 50 years from death
Cost of Copyright
1. Developed Copyright – all expenses incurred including those required to
establish or obtain right.
2. Purchased – Cash Paid + Other Expense incidental to the acquisition
FRANCHISE
Franchise Cost
1. Initial Franchise Fee – capitalized
2. Continuing Franchise Fee – expensed
Amortization of Franchise
1. Granted for Definite Period – useful life or definite period, SHORTER
2. Granted Definitely – tested for impairment ANNUALLY
TRIVIA
Impairment is made only when there is indication that an asset may be
impaired. But there is three exceptions.
Impairment is tested ANNUALLY, even no indication of impairment loss
under the following:
1. Intangible Assets with an indefinite useful life
2. Intangible Assets not yet available for use
3. Goodwill acquired in a business combination
LEASEHOLD OR LEASERIGHT
Depreciation of Leasehold Improvement
It Depends on the Renewal Option
a. Too uncertain – Lease Term or Life of Improvement, SHORTER
b. Highly probable – Extended Lease Period or Life of Improvement,
SHORTER
TRADEMARK
Legal Life = 10 years
Cost of Trademark
a. When Purchased = Purchase Price + Directly Attributable Costs
b. If Internally Developed = Cost to Establish and other expense to secure
the Trademark
CUSTOMER LISTS
Cost of Customer Lists
1. When Purchased = Purchase Price + Directly Attributable Costs
2. If Internally Developed = expensed and not capitalized
INTERNALLY DEVELOPED
COMPUTER SOFTWARE
After Technological Feasibility has been established, capitalizable
software costs include the:
a. Cost of Coding and Testing
b. Cost to Produce the Product Masters
Capitalized as Inventory:
a. Cost incurred to actually produce the software from masters
b. Packages the software for sale
WEBSITE COST
Stage of Website Development (PAGCO)
1. Planning
2. Application and Infrastructure Development
3. Graphical Design Development
4. Content Development
5. Operating
WEBSITE COST
If website is developed solely or primarily for promoting and advertising an
entity’s own products and services – expense outright
WEBSITE COST
PLANNING
Undertaking Feasibility Studies
Defining hardware and software
specifications
Evaluating alternative products
and suppliers
Selecting Preferences
Recognized as an expense when incurred
WEBSITE COST
Application and Infrastructure
Development
Purchasing or developing a hardware
PPE (PAS 16)
Obtaining a domain name
Capitalized as Intangible Asset.
Developing operating software (e.g.
operating system and server software
Developing code for the application
Installing Developed Applications on the
Web Server
Stress Testing
WEBSITE COST
Graphical Design Development
Designing the appearance (e.g. layout
and color) of webpages
Capitalize as Intangible Asset.
Content Development
Creating, purchasing, preparing (e.g.
creating links and identifying tags), and
uploading information, either textual or
graphical in nature, on the website before
the completion of the website’s
development. Examples of content
include information about an entity,
products or services access.
Capitalize as Intangible Asset.
WEBSITE COST
Operating Stage
Updating graphics and revising content
Capitalize as Intangible Asset
Adding new functions, features and content
Registering the website with search engines
Backing up data
Reviewing security access
Analyzing usage of the website
Selling, Admin, and other general overhead expenditure
unless it can be directly attributed to preparing the
website in the manner intended by management.
Expense
Clearly identified inefficiencies and initial operating losses
Expense
Training Employees to operate the Website
Expense
GOODWILL
Internally Developed Goodwill is not amortized. Only those arise from
business combination are recognized.
Direct Valuation or Excess Earnings Approach
1. Purchase of average excess earnings
2. Capitalization of average excess earnings
3. Capitalization of average earnings
4. Present Value or Discounted Value Average Excess Earnings
PFRS FOR SMEs
INITIAL RECOGNITION
a.
No recognition of internally generated Intangible Asset.
b.
All Research and Development Cost – Expensed Immediately
INITIAL MEASUREMENT = cost + directly attributable costs
SUBSEQUENT MEASUREMENT
a.
Cost Model Only
b.
All Intangible Assets are amortizable, no indefinite life. (If silent = 10 yrs.)
Marketing Related Intangibles
1. Brand names
2. Internet Domain Names
3. Trade Mark
4. Newspaper mastheads
5. Noncompetition agreement
Customer Related Intangibles
1. Customer Lists
2. Order or Production Backlogs
3. Customer Relationship
Artistic Related Intangibles
1. Copyright
Contract Based Intangibles
1. Franchise
2. Licensing agreement
3. Construction permits
4. Broadcasting rights
Technology Based Intangibles
1. Patents
2. Trade Secret