INTANGIBLE ASSETS

Question 1

What is an intangible asset?

Answer 1

An intangible asset is an identifiable nonmonetary asset without physical substance.

An intangible asset must be controlled by the entity as a result of a past event and from which future economic benefits are expected to flow to the entity.

Question 2

What PAS governs intangible assets?

Answer 2

PAS 38

Question 3

What are the essential criteria in the definition of an intangible asset?

Answer 3

1. Identifiability - distinguishable from goodwill
2. Control - power to obtain future economic benefits and restrict access of others to those benefits
3. Future economic benefits - access to revenue, cost-savings, or other forms of benefits.

Question 4

T or F

Judgment based on internal evidence is exercised in assessing the degree of certainty of future economic benefits.

Answer 4

False. Judgment is based on EXTERNAL EVIDENCE.

Question 5

What are the different methods of acquiring an intangible asset?

Answer 5

1. Separate acquisition
2. Acquisition as part of a business combination
3. Acquisition by way of government grant
4. Acquisition by exchange
5. Acquisition by self-creation or internal generation

Question 6

How is an intangible asset measured in a separate acquisition?

Answer 6

If an intangible asset is acquired by separate acquisition, its cost include:

1. Purchase price
2. Import duties and nonrefundable taxes
3. Less trade discounts and rebates
4. Cost of employee benefits arising directly from bringing the asset to its working condition
5. Professional fees arising directly from bringing the asset to working condition
6. Cost of testing the asset

If the intangible is DEFERRED beyond normal credit terms, it is MEASURED AT CASH PRICE EQUIVALENT, similar to installment method of acquiring PPE.

Question 7

How is an intangible asset measured if it is acquired as part of a business combination?

Answer 7

If an intangible asset is acquired as part of business combination, it is measured in the following order of priority:

1. Fair Value at date of acquisition - the FV of the intangible must be measured with sufficient reliability to be recognized separately from goodwill.
2. If there is an ACTIVE MARKET, the asset is measured at the QUOTED PRICE OF AN IDENTICAL ASSET
3. If there is no active market, the asset is measured at a PRICE OF A SIMILAR ASSET.
4. FV of the asset is measured based on unobservable input developed by the entity using the best available information.

Question 8

How is an intangible asset measured if it is acquired by government grant?

Answer 8

If an intangible asset is acquired as by government grant, it may be measured and recorded at EITHER:

1. FAIR VALUE
2. NOMINAL AMOUNT OR ZERO, plus any expenditures directly attributable to preparing the asset for intended use.

Question 9

How is an intangible asset measured if it is acquired by exchange?

Answer 9

If an intangible asset is acquired by exchange, the measurement DEPENDS ON WHETHER THE EXCHANGE HAS COMMERCIAL SUBSTANCE OR NOT.

1. If with commercial substance - Measured at FV
2. If w/o commercial substance - Measured at the CARRYING AMOUNT OF THE ASSET GIVEN UP.

Question 10

How is an intangible asset measured if it is internally generated?

Answer 10

The cost of an internally generated intangible asset comprises ALL DIRECTLY ATTRIBUTABLE COSTS NECESSARY TO CREATE, PRODUCE AND PREPARE THE ASSET for it to be capable of operating in the manner intended by management.

Question 11

What is the treatment of internally generated goodwill?

Answer 11

Internally generated goodwill is not recognized as an intangible asset. It is EXPENSED WHEN INCURRED. Examples of internally generated goodwill are:

1. Customer lists
2. Internally generated brands
3. Publishing titles

Question 12

What is the treatment of subsequent expenditures relating to intangible assets?

Answer 12

Generally, subsequent expenditures relating to intangible assets ARE EXPENSED.

However, it may be capitalized if:
a. it is probable the future economic benefits attributable specifically to the subsequent expenditure will flow to the entity

b. The subsequent expenditure can be measured reliably

Question 13

How are intangible asset measured after its recognition?

Answer 13

1. Cost model - At cost less accumulated amortization
   It is amortized over its useful life.
2. Revaluation model - at revalued amount less accumulated amortization and subsequent accumulated impairment losses.

Question 14

T or F

An intangible asset can only be carried at revalued amount if there is an active market for the asset.

Answer 14

True.

Question 15

If an intangible asset has an indefinite useful life, how is it measured?

Answer 15

An intangible asset with an indefinite useful life is not amortized, but is TESTED FOR IMPAIRMENT AT LEAST ANNUALLY.

Question 16

What are the rules when an intangible asset has a residual value?

Answer 16

The residual value of an intangible asset is PRESUMED TO BE ZERO, EXCEPT WHEN:

a. A 3rd party has committed to buy the intangible at the end of its useful life
b. When there is an ACTIVE MARKET for the asset

The residual value is reviewed at the end of each year, and a change in RV is accounted for as a change in accounting estimate.

Question 17

What are the necessary disclosures related to intangible assets?

Answer 17

1. Whether useful lives are indefinite or finite, the useful lives and amortization rates
2. Amortization method
3. Gross carrying amount and accumulated amortization at the beginning and end of the period
4. Amortization line item in income statement
5. Additions, separately showing those internally generated and those acquired separately
6. Intangible assets classified as held for sale
7. Increases and decreases as a result of revaluation
8. Impairment losses and reversals of impairment losses
9. Net exchange differences on translation
10. Carrying amount of intangible asset with indefinite life and the reason supporting the assessment of indefinite life
11. Carrying amount and remaining amortization period of intangible assets that are material to the entity’s FS
12. Carrying amount of intangible assets whose title is restricted or pledged as collateral security
13. Contractual commitments for the acquisition of intangible assets
14. Intangible assets acquired by way of government grant
15. The amount of research and development expenditure recognized as expense during the period.

Question 18

What is a patent?

Answer 18

A patent is an exclusive right granted by the government to an inventor enabling the grantee to control the manufacture/sale/use of the invention for a period of time.

Under US GAAP, it is a TECHNOLOGY-BASED intangible asset.

Question 19

What is the default useful life of a patent?

Answer 19

20 years, in accordance with RA 8293 or the Intellectual Property Code of the Philippines.

Question 20

T or F

A patent CANNOT BE RENEWED.

Answer 20

True. It cannot be renewed but its life can be extended beyond the legal life by a new patent for improvements and changes.

Question 21

What costs related to a patent are capitalized?

Answer 21

1. Purchase price
2. Import duties and nonrefundable taxes
3. Other directly attributable costs to prepare the asset for intended use
4. If internally developed, costs include LICENSING AND OTHER RELATED LEGAL FEES
5. Engineering/consulting/other costs incurred to develop the patent AFTER A PATENT APPLICATION HAS BEEN FILED, since the patent is now technically and commercially feasible.

Question 22

How is a patent amortized?

Answer 22

The following rules shall be observed:
1. Original cost is amortized over the LEGAL LIFE (20 YEARS) OR USEFUL LIFE WHICHEVER IS SHORTER

2. If a COMPETITIVE PATENT is acquired to PROTECT the life of the original patent, it is amortized over the remaining life of the old patent
3. If a RELATED PATENT is acquired in order to EXTEND the life of the original patent, both shall be amortized over the EXTENDED LIFE.

Question 23

What is a trademark?

Answer 23

A trademark is a symbol/sign/slogan/name used to mark a product to distinguish it from other products.

Under US GAAP, trademark is a MARKET-RELATED intangible asset.

Question 24

What is the default or legal life of a trademark?

Answer 24

Under RA 8293, the legal life of a trademark is 10 years.

Question 25

T or F

The life of a trademark is 10 years and may be renewed for periods of 10 years each

Answer 25

True

Question 26

T or F
Since trademarks are almost always renewed every 10 years and therefore has indefinite useful life, trademarks are not amortized but rather tested for impairment at least annually AND when there is an indication of impairment.

Answer 26

True.

Question 27

What instance will there be an amortization of a trademark?

Answer 27

When a trademarked product line will be DISCONTINUED.

Question 28

What is Goodwill? When is it recognized?

Answer 28

Goodwill is often referred to as THE MOST INTANGIBLE of all intangible assets.

Goodwill arises when earnings exceed normal earnings by reason of good name/ good credit standing and reputation.

A distinction should be made between “developed goodwill” and “purchased goodwill”.

Developed or internal goodwill IS NOT RECORDED.

Purchased goodwill is the goodwill that has been paid for when a business is purchased, and is RECOGNIZED AS AN ASSET.

Question 29

How is purchased goodwill measured?

Answer 29

There are 2 approaches, namely:
a. RESIDUAL APPROACH - GW is measured by comparing the purchase price for the entity with the net tangible and identifiable assets. Simply, it is the excess when total assets AT FAIR VALUE (excluding goodwill) is deducted by total liabilities assumed.

b. DIRECT APPROACH - GW is measured based on the future earnings of the entity. This is subdivided into 4 different methods:

1. Purchase of Average Excess Earnings
   (Average earnings for the past years - Normal earnings) * number of years)

Normal earnings is computed as the product of normal rate of return and the Net assets excluding goodwill.

2. Capitalization of Average Excess Earnings
   (Average earnings for the past years - Normal earnings) / Capitalization rate
3. Capitalization of Average Earnings
   (Average earnings / capitalization rate) - Net assets excluding GW
4. Present Value Method
   (Average earnings for the past years - Normal earnings) * PV

Question 30

What is a copyright?

Answer 30

A copyright is an exclusive right granted by the government to an author/composer/artist enabling the grantee to publish/sell/use/benefit from the work.

Under US GAAP, copyright is an ARTISTIC-RELATED intangible asset.

Question 31

What is the default/legal life of a copyright?

Answer 31

Under RA 8293, the legal life of a copyright is during the entire life of the author and for 50 YEARS AFTER HIS DEATH.

Question 32

Discuss the cost assigned to a copyright.

Answer 32

The cost of a copyright consists of all expenses incurred to produce the work, plus the cost required to establish such right.

If a copyright is purchased, the cost includes the cash paid plus directly attributable cost necessary for intended use.

Question 33

Discuss the amortization of a copyright.

Answer 33

Theoretically, the cost of the copyright should be amortized over its useful life, but the useful life is oftentimes difficult to estimate. IN PRACTICE, THE COST OF THE COPYRIGHT IS WRITTEN OFF AGAINST THE FIRST REVENUE OF PRINTING.

An internally generated copyright is amortized over its useful life, and must be tested for impairment at least annually or where there is an indication that there may be impairment.

Question 34

What is a franchise?

Answer 34

A franchise is a contract-based intangible asset that grants certain rights to a franchisee.

Question 35

What cost is assigned to an acquired franchise?

Answer 35

The lump sum payments for the acquisition plus directly attributable costs necessary for the intended use such as legal fees.

Question 36

How is franchise amortized?

Answer 36

If a franchise has indefinite life, it is tested for impairment at least annually.

If not, a franchise is amortized between the franchise life and the useful life whichever is shorter.

Question 37

What is a leasehold?

Answer 37

A leasehold is the right acquired by the lessee by virtue of a contract of lease to use the specific property for a period of time in consideration for a sum of money in the form of rent.

The leasehold is AMORTIZED OVER THE LIFE OF THE LEASE.

Question 38

What are leasehold improvements?

Answer 38

Leasehold improvements are alterations to the leased property. These improvements are depreciated over its useful life or life of the lease whichever is shorter. However, if there is a renewal option and the certainty of exercising such option is great, then the extended period will be put into consideration when amortizing.

If the lease is pre-terminated, the carrying amount of the improvements are written off as a loss.

Question 39

T or F

An internally generated customer list is recognized as an intangible asset.

Answer 39

False. A customer list is only recognized IF IT WAS ACQUIRED.

Question 40

Which research and development costs are capitalized and are subsequently capitalized? Which ones are expensed?

Answer 40

R&D costs that are capitalized are those that establish TECHNICAL FEASIBILITY of completing the intangible asset so that it will be available for use/sale such as the cost of making a prototype.

Also, when an IN-PROCESS RESEARCH is acquired, it is recognized as an asset at cost.