ACYFARP: Intangible Assets

Intangible Asset

Is an identifiable non-monetary asset without physical substance.

Identifiability, Control, and Future Economic Benefits

These are the three essential criteria of an intangible asset.

Intangible Asset

Is an identifiable non-monetary asset without physical substance.

Identifiability, Control, and Future Economic Benefits

These are the three essential criteria of an intangible asset.

Identifiability

One of the essential criteria of an intangible asset. An asset must be separable and it should arise from contractual or other legal rights.

Control

Happens when the entity has the power to obtain future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.

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.

True

(True or False) An intangible asset shall only be recognized if and only if:

a. It is probable that future economic future benefits attributable to the asset will flow to the entity.

b. The cost of the intangible asset can be measured reliably.

Cost

The initial measurement of an intangible asset.

Cost of an Intangible Asset

a. Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

Cost of an Intangible Asset

b. Any directly attributable cost of preparing the asset for its intended use.

Non-Capitalizable Cost of an Intangible Asset

a. Costs of introducing new product or service, including costs of advertising and promotional activities.

Non-Capitalizable Cost of an Intangible Asset

b. Costs of conducting business in a new location or with a new class of customer, including costs of staff training.

Non-Capitalizable Cost of an Intangible Asset

c. Administration and other general overhead costs.

Non-Capitalizable Cost of an Intangible Asset

d. Costs incurred while an asset is already capable of operating in a manner intended by management has yet to be brought into use.

Non-Capitalizable Cost of an Intangible Asset

d. Initial Operating Loss

True

(True or False) The recognition of costs in the carrying amount of an intangible asset ceases when the asset is in the condition necessary for it to be capable of operating in the manner intended by management.

Deferred Basis Cost

The cost is the cash price equivalent. The difference between the amount and the total payments is recognized as interest expense over the credit period.

Acquisition as Part of Business Combination Cost Basis

The cost of the intangible asset acquired in a business combination is equal to its fair value on the date of acquisition.

Government Grant Cost Basis

The entity may choose to recognize both the intangible asset and the grant initially at:

a. Fair Value.

b. Nominal amount plus any expenditures that is directly attributable to preparing the asset for its intended use.

Exchange (With Commercial Substance) Cost Basis

Fair Value of Asset Given-Up + Cash Payment - Cash Received

Exchange (Without Commercial Substance) Cost Basis

Carrying Value of Asset Given-Up + Cash Payment - Cash Received

Internally Generated Intangible Asset

It is an intangible asset that comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating it in the manner intended by management.

Example of Directly Attributable Cost of an Internally Generated Intangible Asset

a. Costs of materials and services used or consumed in generating the intangible asset.

b. Costs of employee benefits arising from the generation of the intangible asset.

c. Fees to register a legal right.

d. Amortization of patents and licenses that are used to generate the intangible asset.

Examples of Non-Capitalizable Costs of Internally Generated Assets

a. Selling, administrative and other general overhead, unless these expenditures can be directly attributed to preparing the asset for use.

b. Inefficiencies and initial operating losses incurred before an asset achieves planned performance.

c. Expenditure on training staff to operate the asset.

Not Recognized as Intangible Asset

Internally generated brands.

Not Recognized as Intangible Asset

Mastheads.

Not Recognized as Intangible Asset

Publishing Titles.

Not Recognized as Intangible Asset

Customer lists.

Research Phase

In this phase of research and development, all costs incurred shall be recognized as expense.

Examples of Research Activities

a. Activities aimed at obtaining new knowledge.

Examples of Research Activities

b. The search for, evaluation, and final selection of, applications of research findings or other knowledge.

Examples of Research Activities

c. The search for alternatives for materials, devices, products, processes, systems or services.

Examples of Research Activities

d. The formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

Development Phase

In this phase of research, an intangible asset shall be recognized.

Criteria for Capitalizing a Development Cost

a. Technical feasibility of completing the intangible asset so that it will be available for use or sale.

Criteria for Capitalizing a Development Cost

b. Its intention to complete the intangible asset and use or sell it.

Criteria for Capitalizing a Development Cost

c. Its ability to use or sell the intangible asset.

Criteria for Capitalizing a Development Cost

d. How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, it is to be used internally, the usefulness of the intangible asset.

Criteria for Capitalizing a Development Cost

e. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

Criteria for Capitalizing a Development Cost

f. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Example of Development Activities

a. The design, construction and testing of pre-production or pre-use prototypes and models.

Example of Development Activities

b. The design of tools, jigs, molds and dies involving new technology.

Example of Development Activities

c. The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production.

Example of Development Activities

d. The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

True

(True or False) If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase.

True

(True or False) Expenditures for research and development (R&D) which have alternative future use can be capitalized.

True

(True or False) Research and development activities that typically occur prior to the beginning of commercial production and distribution is not considered research and development cost.

Activities that Relate to Commercial Production that are not Considered R&D Activities

a. Engineering follow through in an early phase of commercial production

Activities that Relate to Commercial Production that are not Considered R&D Activities

b. Quality control during commercial production including routine testing.

Activities that Relate to Commercial Production that are not Considered R&D Activities

c. Trouble shooting breakdown production.

Activities that Relate to Commercial Production that are not Considered R&D Activities

d. Routine on-going effort to refine, enrich or improve quality of an existing product.

Activities that Relate to Commercial Production that are not Considered R&D Activities

e. Adaptation of an existing capability to a particular requirement or customer need.

Activities that Relate to Commercial Production that are not Considered R&D Activities

f. Periodic design changes to existing products.

Activities that Relate to Commercial Production that are not Considered R&D Activities

g. Routine design of tools, jigs, molds and dies.

Cost Model or Revaluation Model

The subsequent cost for intangible assets.

True

(True or False) Revaluation model can only be used only if there is an active market for the intangible asset.

Intangible Assets with Definite Life

Are intangible assets subject to amortization.

Intangible Assets with Indefinite Useful Life

Are intangible assets not subject to amortization.

True

(True or False) The method of amortization shall reflect the pattern in which future economic benefits from the assets are expected to be consumed by the entity. However, if such pattern cannot be determined reliably, the straight-line method of amortization shall be used.

Intangible Assets with Definite Useful Life

Are tested for impairment whenever there is an indication of impairment at the end of the reporting period.

Intangible Assets with Indefinite Useful Life

Are tested for impairment:

a. At least annually.

b. Whenever there is an indication of impairment.

Value in Use for an Intangible Asset with Definite Useful Life

Future Cash Flows x PV Factor(s)

Value in Use for an Intangible Asset with Indefinite Useful Life

Annual Cash Flow / Discount Rate

Residual Value

Shall be assumed zero unless:

a. There is a commitment by a third party to purchase the asset at the end of its useful life.

b. There is an active market for the asset and: The residual value can be determined by reference to that market. It is probable that such market will exist at the end of the asset's useful life.

True

(True or False) Expenditures of an intangible item incurred subsequently, shall be recognized as expense.

Patent

A government-granted license conferring the sole right to an inventor to exclude others from making, using or selling an invention.

Cost of Patent

Purchase Price + Import Duties + Nonrefundable Purchase Taxes + DACs of Preparing the Asset for the Intended Use

Cost of Internally Developed Patent

The cost normally includes:

a. Licensing

b. Other related legal fees in securing the patent rights.

True

(True or False) All research and development costs in relation to acquiring a patent are expensed immediately. Except for all development costs incurred from the time the technological feasibility has been established.

Amortization of a Patent Acquired by Purchase

The cost shall be amortized over the remaining legal life or useful life, whichever is shorter.

Amortization of Internally Developed Patent

The original cost shall be amortized over the legal life or useful life, whichever is shorter.

Amortization of Competitive Patent to Protect the Original Patent

The cost shall be amortized over the remaining life of the old patent.

Amortization of Related Patent - Extension of Life of Old Patent

The cost of new patent and any unamortized cost of the old patent shall be amortized over the extended life.

Amortization of Related Patent - No Extension of Life of Old Patent (New Patent)

Shall be amortized over its own useful life.

Amortization of Related Patent - No Extension of Life of Old Patent (Old Patent)

Shall be amortized over its remaining useful life.

20 Years

The legal life of a patent.

Cost of Litigation

Whether successful or not, it shall be expensed. However, if unsuccessful, shall be written off as a loss.

Trademark

A distinctive design, symbol, or name that uniquely identifies a product.

Cost of a Trademark

Purchase Price + Directly Attributable Costs Related to Acquisition

Cost of an Internally Developed Trademark

The cost includes expenditures required to establish it such as:

a. Filing fees.

b. Registry fees.

c. Other expenses incurred in securing the trademark such as design cost of the trademark.

10 Years and May be Renewed for Periods of 10 Years Each

The legal life of a trademark.

Trademark with Definite Life

Is amortized at the shorter between its useful life and legal life.

Copyright

A government-granted license or right to an author, composer or artist enabling them to publish, sell or otherwise benefit from the library, musical or artistic work.

Cost of Copyright

Consists of all expenditures in the production of the work including those expenditures required to establish or obtain the right.

Cost of Copyright

Cash Paid to Acquire the Copyright + Directly Attributable Costs Necessary for the Intended Use

Life of the Author + 50 Years After Death

The legal life of a copyright.

Franchise

A right granted by a party called the franchisor to another party called the franchisee to sell its products using its name.

Cost of Franchise

Initial Franchise Fee + Directly Attributable Costs Necessary for its Intended Use (Legal Fees and Other Expenses Incurred in Connection with the Acquisition of the Right)

True

(True or False) Continuing franchise fee or periodic payment is considered outright expense.

Customer List

A database containing the names, contact information, order history and other relevant information for a list of customers.

Cost of Customer List

Purchase Price + Directly Attributable Costs in Relation to Customer List

Internally-Generated Customer List

All cost incurred shall be expensed and not capitalized.

Internally-Generated Computer Software

Cost incurred in creating a software. It shall be expensed when incurred until technological feasibility is established.

True

(True or False) Technological feasibility is established when an entity has produced a detailed program design of a software.

True

(True or False) The costs incurred to produce software from product masters and product packages are recognized as part of inventory.

Intangible Asset

The normal classification of a computer software or if the computer software is not an integral part of the related software.

Property, Plant, and Equipment

The classification of a computer software if the same appears to be an integral part of a machine that cannot operate without the former.

Inventory

The classification of a computer software that is purchased for resale purposes.

Website Designed for External Access

A website that may be used for various purposes such as:

a. To promote and advertise an entity's own products and services.

b. To provide electronic services.

c. To sell products and services.

Website Designed for Internal Access

A website that may be used to store company policies and customer details, and search relevant information.

Planning

The first stage of a website development. It includes undertaking feasibility studies. Defining objectives and specifications. Evaluating alternatives and selecting preferences.