Intangible Assets

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Prepared by Prof Dante F. Falsado

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 Intangible Assets – IAS 38

International Accounting Standard 38 – Intangible Assets

The objective of this Standard is to prescribe the accounting treatment for

intangible assets that are not dealt with specifically in another Standard. This
Standard requires an entity to recognize an intangible asset if, and only if,
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specified criteria are met. The Standard also specifies how to measure the
carrying amount of intangible assets and required specified disclosures about
intangible assets.

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 Intangible Assets – IAS 38

Scope of IAS 38 – This Standard shall be applied in accounting for intangible

assets, except
• Intangible assets held by an entity for sale in the ordinary course of business (IAS 2 Inventories)
• Deferred tax assets (IAS 12 Income Taxes)
• Leases of Intangible Assets (IFRS 16 Leases)
• Assets arising from employee benefits (IAS 19 Employee Benefits)
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• Financial assets (IAS 32 Financial Instrument – Presentation)
• Goodwill acquired in business combination (IFRS 3 Business Combination)
• Deferred acquisition cost and intangible assets arising from an insurer’s contractual rights under
insurance contracts (IFRS 4 Insurance Contracts)
• Non-current intangible assets classified as held for sale (IFRS 5 Non-current Assets Held for
Sales and Discontinued Operations)
• Assets arising from contracts with customers (IFRS 15 Revenue from Contracts with Customers)

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 Intangible Assets – Definition of Terms
• Amortization – is the systematic allocation of the depreciable amount of an intangible asset
over its useful life.
• Carrying amount – is the amount at which an asset is recognized in the statement of
financial position after deducting any accumulated amortization and accumulated
impairment losses thereon.
• Cost – is the amount of cash or cash equivalent paid or the fair value of other consideration
given to acquire an asset at the time of its acquisition or construction.
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• Depreciable amount – is the cost of an asset, or other substituted for cost, less its residual
value.
• Development – is the application of research findings or other knowledge to a plan or design
for the production of new or substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use.
• Entity-specific value – is the present value of the cash flows an entity expects to arise from
continuing use of an asset and from its disposal at the end of its useful life or expects to
incur when settling a liability.
• Fair value – is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
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 Intangible Assets – Definition of Terms
• Impairment loss – is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
• Intangible asset – is an identifiable non-monetary asset without physical substance.
• Monetary assets – are money held and assets to be received in fixed or determinable
amounts of money.
• Research – is original and planned investigation undertaken with the prospect of gaining
new scientific or technical knowledge and understanding.
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• Residual value – is the estimated amount of an entity would currently from disposal of the
asset, after deducting the estimated costs of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.
• Useful life – the period over which an assets is expected to be available for use by an entity
or the number production or similar units expected to be obtained from the asset by an
entity.

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 Intangible Assets - Classification
• GOODWILL - It is a type of intangible asset that is recognized when one business acquires another business.
Goodwill equals the cost of purchase of the business by the purchasing company minus the value of net assets of
the purchased company. It represents the business reputation of a company.

• FRANCHISE AGREEMENTS - are another type of intangible asset that grants the legal right to a business to
operate using the name of another company or sell a product or service developed by another company. These
are classified as assets because the business owners reap monetary gains with the help of these intangible assets.
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• PATENTS - is a type of intangible asset that grants a business the exclusive right to manufacture, sell or use a
specific invention. A company can purchase the patent from another company or it can invent a new product and
receive a patent for it.

• COPYRIGHTS - grants an extensive right to the business to reproduce and sell a software, book, journal,
magazine, etc. It is an intangible asset used to secure legal protection by preventing others from reproducing or
publishing a work of authorship.

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 Intangible Assets - Classifications
 
• TRADEMARKS - is an intangible asset which legally prevents others from using a business’s name, logo or
other branding items. It is a design, symbol or a logo used in connection with a particular product or a business.

• LICENSES - A licensor can permit a licensee to use a trademark, patent, or copyright through a license in
exchange for a fee or a charge. Such licenses usually have fixed time validity, and may even set geographical
validity or restrictions. Intellectual property licensing, such as transfer of technology, franchising, and
publication rights, are very important in present-day business. Violation of the license terms by the licensee or a
third-party is also a punishable offense under the law. ‘-

• BROADCAST RIGHTS - enable a broadcasting organization to display or relay products or activities of a trade
body on media such as television or the internet. The broadcaster pays a fixed fee for these rights over a fixed
period. Such agreements are subject to renewal after expiry.

• GOVERNMENT GRANTS - are an essential form of the intangible asset. To promote particular business
activity, or to promote business activity in a specific region, the government provides various grants
and financial assistance to companies to encourage them to engage in that activity or region.

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 Intangible Assets - Classifications
• NON-COMPETITION AGREEMENT - is an agreement between two parties that prohibit one party to work or
become a competitor in a certain field. Such agreements are usually for a fixed interval of time. Such agreements may
be entered to protect one’s market or a product and are legally binding.

• INTERNET DOMAIN NAMES - help to identify different resources like a computer, network or a service. They
convert complex numbers of resources into easily identifiable names that are easy to memorize. They indicate
ownership or control of a useful resource and hence, are treated as an intangible asset for a company.

• CUSTOMER LISTS AND RELATIONSHIPS - A business takes a long time ‘- to identify, build and create a customer
base that is loyal to it and its products. Also, it usually spends a lot to maintain customer relationships to avoid any
deflection of customers to rival brands and products. Therefore, companies treat their customer lists and relationships
as intangible assets with a lot of value for sustaining and growing their business.

• BACKLOG OF ORDERS - The main goal of any business is to generate orders for its products and services which in
turn will generate revenue for it. A business may have a huge backlog of orders that can be treated as intangible assets.
These becomes a boon especially at the time of sale or takeover of business.

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 Intangible Assets - Classifications
• WORKS OF ARTISTIC IMPORTANCE - There are many intangibles of artistic importance that are very
valuable from an owner’s point of view. Such intangibles are primarily related to the entertainment
sector and include musical or dramatic stage works, audio-visual works, graphic novels and comics
and works of pictorial art, and photographic works. Such assets may also include geographical and
other maps, plans and sketches, etc. that are useful in sectors other than entertainment industry too.

• SERVICE CONTRACTS AND LEASE AGREEMENTS - treated as intangible assets for a company. It is
so because they have a lot of value as they assist in smooth functioning of an organization. For
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example, at the time of sale of a company, its service contracts with its existing employees can prove
to be a valuable asset. The buyer need not worry about finding new personnel immediately and hence
save a lot of money. Also, subscription contracts of a cable company, magazines, etc. also have
monetary value. Lease agreements at rates lower than the current market rates can be very beneficial
for the buying company as it will help in saving a lot of money.

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 Intangible Assets - Classifications
• TRADE SECRETS AND KNOW-HOW - are intangible assets of high importance. In fact, they can be the
sole reason for takeover of a company too, even if it is a very small company. Some examples of trade secrets
and know-how are Coca-cola’s recipe for its highest selling beverage across the world, or search algorithm of
Google, or recipe of burgers of McDonald’s. As we can see, these trade secrets can make or break a company
and hence, are of very high value.

• RESEARCH AND DEVELOPMENT - is a planned and detailed investigation into a product or service for
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gaining scientific or technical know-how. Development is the application
and better products and service than the current portfolio a company has. R&D is a part of internally
generated intangible assets of a company. Companies spend millions of pesos on R&D and hence, it is a
valuable intangible asset capable of taking a company to new heights.

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Intangible Assets - Classification

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 Intangible Assets
Identifiability – An asset is identifiable if it either
a. Is separable, it is capable of being separated or divided from the entity and sold,
transferred, licensed , rented or exchanged, either individually or togetherness with a
related contract, identifiable asset or liability. Or
b. Arises from contractual or other legal rights regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.

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Control – An entity controls an asset if the entity has the power to obtain the future economic
benefits flowing from the underlying resource or to restrict the access of others to those
benefits. The capacity of an entity to control the future benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law.

Future Economic Benefits – flowing from an intangible assets 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.
 
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 Intangible Assets - Recognition

Recognition - An intangible asset shall be recognized if, and only if:

a. it is probable that the expected future benefits that are attributable to the asset will flow to the entity.
b. the cost of the asset can be measured reliably.

Separate acquisition – normally, the price an entity pays to acquire separately an intangible asset will reflect expectations
about the probability that the expected future economic benefits embodied in the asset will flow to the entity.
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Acquisition as part of business combination – In accordance with IFRS 3 Business Combinations, if an intangible is
acquired in a business combination, the cost of that asset is its fair value at the acquisition.

Intangible asset acquired in a business combination – if an intangible asset acquired in a business combination is
separable or arises from contractual or other legal rights, sufficient information exists to measure reliably the fair value
of the asset.

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 Intangible Asset - Recognition
Subsequent expenditure on an acquired in-process research and development project – research or
development expenditure that relates to an in-process research or development project acquired
separately or in a business combination and recognized as an intangible asset.

Acquisition by way of a government grant - an intangible asset may be acquired free of charge, or for
nominal consideration, by way of a government grant.

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Exchange of assets – one or more intangible assets may be acquired for non-monetary assets or monetary
assets, or a combination of monetary and non-monetary assets.

Internally generated goodwill shall not be recognized as an asset.

Research phase – no intangible asset arising from research shall be recognized. Expenditure on research
shall be recognized as an expense when it is incurred.
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 Intangible Assets - Recognition
Development phase – an intangible asset arising from development shall be recognized, if and only if,
an entity can demonstrate all the following:
a. the technical feasibility of completing the intangible asset so that it will be available for use or sale.
b. its intention to complete the intangible asset and use or sell it
c. its ability to use or sell the intangible asset
d. how the intangible asset will generate probable future economic benefits
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e. the availability of adequate technical, financial and other resources to complete the development and
to use or sell the intangible asset
f. its ability to measure reliably the expenditure attributable to the intangible asset during its
development
Recognition of an expense – expenditure on an intangible item shall be recognized as expense when it
is incurred unless
g. it forms part of the cost of an intangible asset that meets the recognition criteria
h. the item is acquired in a business combination and cannot be recognized as an intangible asset 
Past expenses not be recognized as an asset – expenditure of an intangible item that was initially 15
recognized as an expense shall not be recognized as part of the cost of an intangible asset as a later date.
 Intangible Assets - Measurement

Cost model – an intangible asset shall be carried at its cost less

any accumulated amortization and any accumulated impairment
losses.

Revaluation model – an intangible asset‘- shall be carried at

revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated amortization and
any subsequent accumulated impairment losses.

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 Intangible Assets - Amortization

Useful life – an entity shall assess whether the useful life of an

intangible asset is finite or infinite and, if finite, the length of, or
number of production or similar units constituting that useful
life. An intangible asset shall be regarded‘-by an entity as having
an indefinite useful life when based on an analysis of all of the
relevant factors, there is no foreseeable limit to the period over
which the asset is expected to generate net cash inflows for the
entity.

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Amortization period and amortization method with intangible asset with
finite useful life – The depreciable amount of an intangible asset shall be
allocated in a systematic basis over its useful life. Amortization shall
begin when the asset is available for use, when it is in the location and
condition necessary for it to be capable of operating in the manner
intended by management. Amortization shall‘-cease at the earlier of the
date that the asset is classified as held for sale and the date that the asset is
derecognized. The amortization method shall reflect the patters in which
the asset’s future economic benefits are expected to be consumed by the
entity. If that pattern cannot be determined reliably, the straight-line
method shall be used.

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Residual value – an intangible asset with finite useful life shall assumed
to be zero unless
a. there is a commitment by a third party to purchase the asset at the end
of its useful life
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b. there is an active market (as defined in IFRS 13) for the asset and
1. residual value can be determined with reference to that market
2. it is probable that such market will exists at the end of the asset’s
useful life

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Intangible assets with indefinite useful lives shall not be amortized.

Retirement and disposal – an intangible asset shall be derecognized

a. on disposal
b. when no future economic benefits are expected from its use or disposal
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The gain or loss arising from the derecognition of an intangible asset shall be
determined as difference between the net disposal proceeds, if any, and the carrying
amount of the asset. It shall be recognized in profit or loss when the asset is
derecognized (unless IFRS 16 requires otherwise on a sale or leaseback) Gains shall
not be classified as revenue.

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Disclosure
An entity shall disclose the following for each class of intangible assets, distinguishing
between internally generated intangible assets and other intangible assets
a. whether the useful lives are indefinite or finite, if finite, the useful lives or the
amortization rates used
b. the amortization methods used for the intangible assets ‘- with finite useful lives
c. the gross carrying amount and any accumulated amortization (aggregated with
accumulated impairment losses) at the beginning and the end of the period
d. the line item(s) of the statement of comprehensive income in which any
amortization of intangible assets is included
e. a reconciliation of the carry amount at the beginning and the end of the period

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