Lesson 4: Intangible Assets - an intangible asset is an identifiable, non-monetary asset without physical substance. - an asset is a resource that is controlled by the entity as a result of past events and from which future economic benefits are expected. - thus, the three critical attributes of an intangible asset are: = Indentifiability = Control (power to obtain benefits from the asset) = Future Economic Benefits (such as revenues or reduced future costs) a Identifiability - an intangible asset is identifiable when it: a SOMNODOS a. separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) 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. Examples of Intangible Assets: 1. patented technology, computer software, databases, and trade secrets 2. trademarks, trade dress, newspaper mastheads, internet domains 3. video and audiovisual material (e.g. motion pictures, television programmes) . customer lists . mortgage servicing rights . licensing, royalty, and standstill agreements import quotas . franchise agreements . customer and supplier relationships (including customer lists) . marketing rights= Modes of Acquisition - by separate purchase - as part of a business combination - by a government grant - by exchange of assets - by self-creation (internal generation) = Recognition Criteria - IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost) if, and only if: a. It is probable that the future economic benefits that are attributable to the asset will flow to the entity. b. The cost of the asset can be measured reliably. - if an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense when it is incurred. uw Initial and Subsequent Measurement - initially, intangible assets are measured at cost. - subsequently, an entity must choose either the cost model or the revaluation model for each class of intangible asset. * Cost Model - after initial recognition, intangible assets should be carried at cost lestt accumulated amortization and impairment losses. + Revaluation Model - intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortization and impairment losses only if fair value can be determined by reference to an active market. = Classification of Intangible Assets - indefinite life - finite life- intangible assets are classified as: a. Indefinite Life - no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. b. Finite Life - a limited period of benefit to the entity. © Intangible Assets with Finite Lives - the cost less residual value of an intangibld asset with a finite useful life should be amortized on a systematic basis over the life. - the asset should also be assessed for impairment in accordance with IAS 36. 1. The amortization method should reflect the pattern of benefits. 2. If the pattern cannot be determined reliably, amortize by the straight-line method. 3. The amortization charge is recognized in profit or loss unless another IFRS (standard) requires that it be included in the cost of another asset. 4. The amortization period should be reviewed at least annually. © Intangible Assets with Indefinite Useful Lives - an intangible asset with an indefinite useful life should not be amortized. - its useful life should be reviewed each reporting period to determine whether events and cricumstances continue to support an indefinite useful life assessment for that asset. - if they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate. - the asset should also be assessed for impairment in accordance with IAS 36. = Subsequent Expenditures - due to the nature of intangible assets, subsequent expenditures will only rarely meet the criteria for being recognized in the carrying amount of an asset.- subsequent expenditures on brands, mastheads, publishing titles, customer lists and similar items must always be recognized in profit or loss as incurred. e Patent - an exclusive right granted by the government to an inventor enabling him to control the manufacture, sale, or other use of invention for a specified period of time. - the legal life of a patent is 20 years in ac -cordance with RA 8293 or the Intellectual Code of the Phiippines. fet ays ne - a patent can be acquired by purchase, in which the cost comprises the purchase pr- ice, import duties, non-refundable purcha- se taxes, and directly attributable costs. - if internally developed, costs include licen- sing and related legal fess in securing the rights. Business Insider - if the patent was defended subsequently, any legal fees related to the successful defense of the patent is expensed outright. If the entity lost, the legal fees are considered losses of the entity. - a patent shall be amortized over the legal life or its useful life, whichever is shorter. - if a competitive patent is acquired to protect an original patent, the cost shall be amortized over the remaining life of the old patent.- if the franchise is granted indefinitely, the cost is not amortized but tested for impairment, at least annually. ¢ Other Intangible Assets - broadcasting license - airline rights - customer list database (acquired, not internally generated) © Problem Solving: CJ Company has the following account balances at year-end: Franchise Cost (10-year agreement) - 5,000,000 Computer Software - 2,000,000 Prepaid Expenses (rent and insurance) - 400,000 Patent on Newly-Developed Invention - 2,000,000 Internally-Generated Customer List (cost of creation) - 400,000 Customer List (purchased at cost) - 500,000 Bond Sinking Fund - 1,600,000 Goodwill - 1,900,000 Research and Development Cost - 800,000 1. How much should be reported in the balance sheet as intangible assets at year-end? (11,400,000) Franchise Cost - 5,000,000 Computer Software - 2,000,000 Patent on Newly-Developed Invention - 2,000,000 Customer List (purchased) - 500,000 Goodwill - 1,900,000 Total Balance = 11,400,000 © Problem Solving: Sela Comlany had the following transactions and account balances during 2019:Legal Costs in Organizing the Newly-Formed Corporation - 250,000 Insurance Premium (for four years) - 70,000 Copyright Purchased - 300,000 Legal Fees for Filing a Patent on a New Project - 70,000 Franchise - 1,000,000 Advertising Cost of the Newly-Franchised Business Unit - 200,000 2. How much should be reported as intangible assets? (1,370,000) Copyright Purchased - 300,000 Legal Fees (for filing a patent) - 70,000 Franchise - 1,000,000 Total Balance = 1,370,000 © Problem Solving: Frances Company developed a new machine. Since the company regarded it as valuable, the entity had it patented. The following costs were incurred: Purchase of Special Equipment (machine development) - 2,000,000 Salaries of Scientists, Workers, Assistants, and Engineers - 300,000 Prototype Testing - 100,000 Patent Filing (legal fees) - 200,000 Fees Paid to Government Patent Office - 20,000 3. How much should be recorded as intangible assets? (220,000) 4. How much is the research and development expense? (2,400,000) + Intangible Assets: Patent Filing (legal fees) - 200,000 Fees Paid to Government Patent Office - 20,000 Total Balance = 220,000» Research and Development: Purchase of Special Equipment - 2,000,000 Salaries of Workers, etc. - 300,000 Prototype Testing - 100,000 Total Balance = 2,400,000 © Problem Solving: On January 1, 2016, Cream Company purchased a patent for 7,140,000. The patent is being amortized over the remaining legal life of 15 years expiring January 1, 2031. During 2019, the entity determined that the economic benefits of the patent would not last longer than ten years fro the date of acquisition. 5. How much is the patent amortization in 2016? (476,000) 6. How much is the patent amortization in 2019? (816,000) 7. How much is the carrying value of the patent to be reported in the December 31, 2019 Statement of Financial Position? (4,896,000) Amortization Expense (2016) - 476,000 (7,140,000 + 15 years) Amortization Expense 476,000 Patent (Accumulated Amortization) 476,000 Cost of Patent - 7,140,000 Accumulated Amortization - (1,428,000) (476,000 x 3 years) Carrying Value (Jan. 1, 2019) - 5,712,000 Divide by - 7 years (remaining life based on the new useful life) Amortization Expense (2019) - (816,000) Carrying Amount (Dec. 31, 2019) - 4,896,000 © Problem Solving: Chim Company was granted a patent on January 1, 2016 and capitalized 450,000. The entity was amortizing the patent overthe useful life of 15 years. The entity paid 150,000 (2019) in successfully defending an attempted infringement of the patent. After legal action was completed, the entity sold the patent to the plaintiff for 750,000. 7. How much is the gain from sale of patent in 2019 assuming no amortization will be taken in the year of disposal? (390,000, gain) Cost of Patent - 450,000 Less: Accumulated Amortization - (90,000) (450,000 + 15 years) x 3 years (from 2016-2018) Carrying Amount (Jan. 1, 2019) - 360,000 Selling Price of Patent - 750,000 Less: Carrying Amount (2019) - (360,000) Gain on Sale - 390,000 e Goodwill - arises when earnings exceed normal earnings by reason of good name, capable staff and personnel, high credit standing, reputation for fair dealings, reputation for superior products, favorable location, anda list of regular customers. - itis the most intangible of all intangible assets. - goodwill standing alone cannot be bought and sold, and is only identified with the entity as a whole. - there are two kinds of goodwill - internal and purchased goodwill. - internal goodwill shall not be recognized as an asset. - purchased goodwill arises when a business is purchased. - itis recognized as an asset because it is paid for. - goodwill shall not be amortized because its useful life is indefinite. - however, it should be tested for impairment at least annually or whenever there is an indication of impairment. - if the purchase price transferred in purchasing an entity is greater than the fair value of identifiable net assets, the difference is goodwill.- if the purchase price transferred in purchasing an entity is less than the fair value of identifiable net assets, the difference is a gain on bargain purchase, recognized in profit or loss. © Problem Solving: On April 1, 2011, ZZ Corp. paid cash of 620,000 for all of the net assets of AA Company appropriately accounted for as a merger. The recorded assets and liabilities of ZZ Corporation on April 5, 2011 follow: Cash - 60,000 Inventory - 180,000 Property, Plant, and Equipment - 320,000 (Net of Accumulated Depreciation of 220,000) Goodwill -100,000 (Net of Accumulated Amortization of 50,000) Liabilities - (120,000) Net Assets - 540,000 On April 1, 2011, AA's inventory had a fair value of 150,000, and the PPE (net) had a fair value of 380,000. 8. The amount of goodwill recorded in the books of ZZ Corp. as a result of the business combination should be: (150,000) Consideration 620,000 Less: FMV-INA (Fair Market Value of Identifiable Net Assets) Cash 60,000 Inventory 150,000 PPE 380,000 Liabilities (120,000) (470,000 Goodwill 150,000 Consideration - 450,000 Less: FMV-INA - (470,000)Consideration - 450,000 Less: FMV-INA - (470,000) Gain on Bargain Purchase - 20,000