CONCEPTUAL FRAMEWORK
&
ACCOUNTING STANDARDS
Lecture Aid
PAS 38
INTANGIBLE ASSETS
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PAS 38 Intangible Assets
Learning Objectives
•
•
Define an intangible asset.
State the initial measurement of intangible assets
that are (a) externally acquired and (b) internally
generated.
•
State the subsequent measurement of intangible
assets that (a) have finite useful life and (b)
indefinite useful life.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Intangible assets
•
An intangible asset is an identifiable non-monetary asset
without physical substance.
•
Goodwill acquired in a business combination is outside
the scope of PAS 38 because it is unidentifiable.
Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Essential criteria in the definition of intangible
assets
1.
Identifiability – separable or arises from contractual
rights
2. Control – power to obtain (or restrict others from
obtaining) the economic benefits from an asset.
3. Future economic benefits – may include revenue
from the sale of products or services, cost savings, or
other benefits resulting from the use of the asset by the
entity.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Recognition
An intangible asset shall be recognized if management can
demonstrate that:
1.
2.
The item meets the definition of intangible asset;
It is probable that the expected future economic
benefits will flow to the entity; and
3.
The cost of the asset can be measured reliably.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible asset is
acquired. Intangible assets may be acquired through:
1.
2.
3.
4.
5.
Separate acquisition
Acquisition as part of a business combination
Acquisition by way of a government grant
Exchanges of assets
Internal generation
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Separate acquisition
The cost of a separately acquired intangible asset
comprises:
1.
Its purchase price, including import duties and nonrefundable purchase taxes, after deducting trade
discounts and rebates; and
2.
Any directly attributable cost of preparing the asset for
its intended use.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Acquisition as part of a business combination
•
The cost of intangible asset acquired in a business
combination is its fair value at the acquisition date.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Acquisition by way of a government grant
Intangible assets acquired by way of government grant may
be recorded at either:
1.
2.
fair value
alternatively, at nominal amount or zero, plus direct
costs incurred in preparing the asset for its intended use
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Exchanges of assets
•
If the exchange has commercial substance, the intangible asset is initially
recognized using the following order of priority:
a.
Fair value of the asset Given up (Plus cash Paid or minus cash received)
b.
Fair value of the asset Received
c.
Carrying amount of the asset Given up (Plus cash Paid or minus cash
received)
•
If the exchange has lacks commercial substance, the intangible asset is initially
recognized using (c) above.
•
An exchange transaction has a commercial substance if the expected
future cash flows from the asset received significantly differ from those of the
asset given up.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
10
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:
a.
Research costs – include costs of searching new knowledge
and identifying and selecting possible alternatives.
b.
Development costs – include costs of designing from selected
alternative and using knowledge gained from research.
•
If an entity cannot identify in which phase a cost is incurred, the cost
is regarded as incurred in research phase.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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R&D Costs
1.
2.
Costs incurred in research phase are expensed immediately.
Costs incurred in development phase are expensed
immediately, unless they meet all of the following conditions for
capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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R&D Costs (continuation)
The following are not R&D expenses but rather regular expenses.
a.
Costs incurred during commercial production:
i. Trouble-shooting during commercial production
ii. Periodic or routine design changes to existing products
iii. Modification of design for a specific customer
iv. Design, construction and operation of plant that is feasible for
commercial production
v. Engineering follow through in an early phase of commercial production
vi. Quality control during commercial production
b.
c.
Advertising and other marketing expenses
Training costs
(HINT: R&D expense relates to something that is still in the process of being invented. It
does not relate to periodic changes to an existing product . The following terms generally
indicate that a cost is not an R&D expense: ‘commercial,’ ‘customer,’ ‘advertising’ and
‘market’.)
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Items of PPE used in R&D activities
•
If the item of PPE can be used in various R&D activities or other
purposes, the cost of the PPE is capitalized and depreciated. The
amount of depreciation is included as R&D expense.
•
If the item of PPE is can only be used on one specific R&D
project, the cost of the PPE is expensed immediately in its
entirety as R&D expense.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Items not recognized as intangible assets
•
The cost of internally generated brands, mastheads,
publishing titles, customer lists, goodwill and items
similar in substance are expensed when incurred.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Subsequent expenditure
•
Subsequent expenditures on an intangible asset are
generally recognized as expense.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Reinstatement of costs in subsequent period
•
Expenditure on an intangible item that was initially
recognized as an expense shall not be recognized as part
of the cost of an intangible asset at a later date.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Measurement after recognition
•
After initial recognition, an entity shall choose as its
accounting policy either the
a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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Amortization
•
Intangible assets with finite useful life are amortized
over the shorter of the asset’s useful life and legal life.
•
Intangible assets with indefinite useful life are not
amortized but tested for impairment at least annually.
•
The default method of amortization is the straight line
method.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)
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} QUESTIONS????
} REACTIONS!!!!!
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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END
Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan)
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