INTANGIBLE ASSETS

Audit of Intangible Assets a.) PATENT

• Inquiry
• Inspection Purchase xx
• Recalculation Price (net)
• More on Analytical Procedures DACs xx
Total Cost xx

ASSERTIONS
1.) Existence (Occurrence) *General Rule: If incase the company
developed the patent/IA internally. It will not
a.) Additions be capitalized. The cost of development is
b.) Disposals expensed.

Inspection of documents to support the Legal Cost of xx

existence. acquiring the
patent
• Invoices (additions) Fees Required xx
• Inspection of contacts and
agreements (that give rise to IA) Drawing and xx
• Review of the minutes of board Blueprints
meetings (outflow of resources)
Total Cost xx
2.) Completeness

• Test of Additions *Legal Life = 20 years (if silent)

• Test of Disposals
If both the Legal Life and the Estimated
*Trace in the records for completeness Useful Life (EUL) were given, then whichever
is shorter.

3.) Valuation and Allocation Amortization xx

Expense

Impairment Loss xx
Generally, the same for recognition principle
(CV > RA)
in PPE.
Subsequent Legal xx
Cost of defending
Initial Recognition – COST the patent

Total Expenses xx
b.) FRANCHISE (LICENSE) c.) COPYRIGHT

Initial Recognition – Initial Franchise Fee Purchase Price xx

(net)
PV of Consideration Given up
DACs xx

Total Cost xx
Down payment xx

PV of notes xx
payable *Royalties – Expense

PV of Installment xx *Indefinite Life = No Amortization; but tested

for Impairment Annually.
DACs xx
Recoverable Amount = Perpetuity
Total Cost xx Perpetuity = Net Cash Flow/Discount Rate
Even if it has a definite but can be renewed
then in can be regarded as Indefinite Life.
*Continuing Franchise Fee- considered as
contingent and as an Expense
Amortization xx
*Contract Year = EUL
Expense

Impairment Loss xx
Amortization xx (CV > RA)
Expense
Royalties xx
Impairment Loss xx
(CV > RA) Total Expense xx

Interest Expense xx
(Effective Interest) d.) TRADEMARK; TRADE NAME; BRAND
NAME
Continuing xx
Franchise Fee

Total Expense xx Purchase Price xx

(net)

DACs xx

Total Cost xx
 If it requires to hire professionals then the Investment at X (PAS 28)
professional fees can be recorded as DACs Equity
Property, Plant, and (PAS 36)
Equipment (PPE)
e.) GOODWILL Intangible Asset (PAS 36)
Investment (PAS 36)
Property at Cost
Investment X (PAS 40)
• Allowed only if from business Property at FV
combination (PFRS 3) Deferred Tax (DTA) X (PAS 12)
• Non-Identifiable

Indirect Method *impairment will be allocated based on

their CV; incase of subsequent increase
Consideration xx recovery is allocated to the three.
Given up

*Contingent xx Direct Method

Consideration
1.) Average Annual Earnings (AAE)
FVNA (xx) Normal Operations
If silent for the 5 years
Goodwill xx
2.) Normal Earnings
Average Net Assets x %Normal Rate
Return
• Not Amortized
• No Recovery 3.) Excess Annual Earnings (EAE)
• Other Identifiable IA as a result of Business
Combination at FV Average Annual xx
Earnings (AAE)

Normal Earnings (xx)

*If associated with a CGU
CV of CGU vs. RA of CGU Excess Annual xx
Earnings (EAE)
CV > RA = Impairment Loss
Impairment loss is :
a.) EAE is capitalized at __ %
1.) Charged to Goodwill *Goodwill = indefinite period =
2.) Allocated to other assets subject to perpetuity
Impairment loss under PAS 36
*it will be allocated using the CV Goodwill= EAE/Capitalized Rate

Cash X b.) PV Method = definite (certain period)

Receivables X (PFRS 9 )
Inventory X (PAS 2) Goodwill = EAE x PV Factor
Investment at FV X (PFRS 9 )
ordinary Annuity.
 c.) AAE is capitalized at __% 1.) Design, construction and testing
prototype
AAE/Capitalized rate= consideration 2.) Design of tools, mold etc.
given up 3.) Design and construction of a pilot…
4.) Design of testing of chosen alternative
Consideration xx
given up
(AAE/Capitalized b.) Operating Expense (clue word =
Rate) “routine”)

FV of Net Assets (xx) 1.) Engineering follow through commercial

acquired production.

Goodwill xx 2.) Quality Control during commercial

production routine.
3.) Troubleshooting
4.) Routine on….
5.) Adaptation of existing capability
RESEARCH AND DEVELOPMENT
6.) Periodic design
7.) Routine design of tools, molds, etc
Research Phase
8.) Activity including on design, engineering
*Shall be expensed when Incurred “start up faciltiies”.

Stated in SCI as Research and Development

Expense.
SHALL BE CAPITALIZED WHEN?
“There is a technical feasibility/commercial
Research and Development Expense viability”

1.) Activities aiming in obtaining new Note: if the above statement was
knowledge. stated/existed then if there’s no contradicting
2.) Search of evaluation and application statement then all other requirements are
of new knowledge. demonstrated.
3.) Search for alternative activities related
Requirements to be demonstrated (if all
to new knowledge.
present then it should be capitalized.
4.) Formulation, designing and search for
alternatives. 1.) There is a technical feasibility
2.) There is an intention to complete
3.) There is an ability to use or sell
Development Phase 4.) Generate proposal
5.) There is available adequate financial
*shall be expensed when incurred resource.
a.) Research and Development Expense 6.) Measured reliably.

(note: before technical feasibility)

Example: Computer Software The cost of development is expensed when
incurred.
*capable of being separated (can produce
revenue alone) = Intangible Asset
*Not capable of being separated (mainframe SIC 31
computer cannot be operated without the
a.) External Purpose = Expense
software which is an integral part of the
computer) = PPE b.) Internal Purpose = “Maybe”
Capitalized.
*For Sale = Inventory *intended use for management.

Depreciable Asset (Acquired for Stages of Website Development

developing IA)
1.) Planning- expense
*if it has an alternative use 2.) Application and Infrastructure
Development – capitalized as long as
Record initially as Asset
not for marketing, promotion, and
Equipment (Dr) advertisement.
3.) Graphical Design Stage – capitalized
Cash (Cr) as long as not for marketing,
Depreciation Expense promotion, and advertisement.
4.) Content Development – capitalized
R&D Expense (Dr) as long as not for marketing,
promotion, and advertisement.
Accu. Dep (Cr)
5.) Operating Stage – Expense.
*no alternative use
Expensed R&D when purchased
Subsequent:
R&D expense (Dr)
Amortization expense
Cash (Cr)
a.) Straight line
No depreciation since the whole amount was b.) SYD
expensed in R&D. c.) Declining – 100%,150%,200%

Beginning Balance xx
– Accumulated
Materials Amortization
Current xx
*once consumed – R&D expense
Amortization
*not yet consumed = prepaid Expense
expense/inventory. Accumulated (xx)
Amortization –
disposal
Ending Balance of xx
Website Development Cost Accumulated
If it is for marketing, promotion and Amortization
advertisement.
4.) Presentation

1.) Cost Model

CV= Cost- Accumulated Amortization –
Amortization Impairment Loss
2.) Revaluation Model
Recoverable amount which ever is higher
between FV-CTS (NRV) and Value in
Use