CONCEPTUAL FRAMEWORK

&
ACCOUNTING STANDARDS
2020 Edition

Lecture Aid
By: Zeus Vernon B. Millan

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PAS 38 Intangible Assets
Learning Objectives

• Define an intangible asset.

• State the initial measurement of intangible assets

that are (a) externally acquired and (b) internally

generated.

• State the subsequent measurement of intangible

assets that (a) have finite useful life and (b)

indefinite useful life.
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Standards (by: Zeus Vernon B. Millan)
Intangible assets
• An intangible asset is an identifiable non-monetary asset

without physical substance.

• Goodwill acquired in a business combination is outside

the scope of PAS 38 because it is unidentifiable.

Goodwill is accounted for under PFRS 3 Business
Combinations and PAS 36 Impairment of Assets.

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Standards (by: Zeus Vernon B. Millan)
Essential criteria in the definition of intangible
assets

1. Identifiability – separable or arises from contractual

rights

2. Control – power to obtain (or restrict others from

obtaining) the economic benefits from an asset.

3. 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. Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
Recognition

An intangible asset shall be recognized if management can

demonstrate that:

1. The item meets the definition of intangible asset;

2. It is probable that the expected future economic

benefits will flow to the entity; and

3. The cost of the asset can be measured reliably.

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Standards (by: Zeus Vernon B. Millan)
Initial measurement
An intangible asset shall be measured initially at cost.
Measurement of cost depends on how the intangible asset is
acquired. Intangible assets may be acquired through:

1. Separate acquisition

2. Acquisition as part of a business combination

3. Acquisition by way of a government grant

4. Exchanges of assets

5. Internal generationConceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Separate acquisition

The cost of a separately acquired intangible asset

comprises:

1. Its purchase price, including import duties and

non-refundable purchase taxes, after deducting trade

discounts and rebates; and

2. Any directly attributable cost of preparing the asset for

its intended use.

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Standards (by: Zeus Vernon B. Millan)
Acquisition as part of a business combination

• The cost of intangible asset acquired in a business

combination is its fair value at the acquisition date.

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Standards (by: Zeus Vernon B. Millan)
Acquisition by way of a government grant

Intangible assets acquired by way of government grant may

be recorded at either:

1. fair value

2. alternatively, at nominal amount or zero, plus direct

costs incurred in preparing the asset for its intended use

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Standards (by: Zeus Vernon B. Millan)
 Exchanges of assets
• If the exchange has commercial substance, the intangible asset is initially

recognized using the following order of priority:

a. Fair value of the asset Given up (Plus cash Paid or minus cash received)
b. Fair value of the asset Received
c. Carrying amount of the asset Given up (Plus cash Paid or minus cash
received)

• If the exchange has lacks commercial substance, the intangible asset is initially

recognized using (c) above.

• An exchange transaction has a commercial substance if the expected

future cash flows from the asset received significantly differ from those of the
asset given up. Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
Internally generated intangible assets
The costs of self-creating an intangible asset are classified into:

a. Research costs – include costs of searching new knowledge

and identifying and selecting possible alternatives.

b. Development costs – include costs of designing from selected

alternative and using knowledge gained from research.

• If an entity cannot identify in which phase a cost is incurred, the cost

is regarded as incurred in research phase.

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Standards (by: Zeus Vernon B. Millan)
R&D Costs
1. Costs incurred in research phase are expensed immediately.

2. Costs incurred in development phase are expensed

immediately, unless they meet all of the following conditions for

capitalization:
(1) Technical feasibility,
(2) Intention to complete,
(3) Ability to use or sell,
(4) Probable economic benefits,
(5) Availability of adequate resources, and
(6) Measured reliably.

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Standards (by: Zeus Vernon B. Millan)
 R&D Costs (continuation)
The following are not R&D expenses but rather regular expenses.
a. Costs incurred during commercial production:

i. Trouble-shooting during commercial production

ii. Periodic or routine design changes to existing products

iii. Modification of design for a specific customer

iv. Design, construction and operation of plant that is feasible for

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

vi. Quality control during commercial production

b. Advertising and other marketing expenses

c. Training costs

(HINT: R&D expense relates to something that is still

Conceptual Framework in the process of being invented. It
& Acctg.
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Standards (by: Zeus Vernon B. Millan)
does not relate to periodic changes to an existing product . The following terms generally
Items of PPE used in R&D activities

• If the item of PPE can be used in various R&D activities or other

purposes, the cost of the PPE is capitalized and depreciated. The

amount of depreciation is included as R&D expense.

• If the item of PPE is can only be used on one specific R&D

project, the cost of the PPE is expensed immediately in its

entirety as R&D expense.

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Standards (by: Zeus Vernon B. Millan)
Items not recognized as intangible assets

• The cost of internally generated brands, mastheads,

publishing titles, customer lists, goodwill and items

similar in substance are expensed when incurred.

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Standards (by: Zeus Vernon B. Millan)
Subsequent expenditure

• Subsequent expenditures on an intangible asset are

generally recognized as expense.

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Standards (by: Zeus Vernon B. Millan)
Reinstatement of costs in subsequent period

• Expenditure on an intangible item that was initially

recognized as an expense shall not be recognized as part

of the cost of an intangible asset at a later date.

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Standards (by: Zeus Vernon B. Millan)
Measurement after recognition

• After initial recognition, an entity shall choose as its

accounting policy either the

a. Cost model, or
b. Revaluation model – applicable only if the intangible
asset has an active market.

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Standards (by: Zeus Vernon B. Millan)
Amortization

• Intangible assets with finite useful life are amortized

over the shorter of the asset’s useful life and legal life.

• Intangible assets with indefinite useful life are not

amortized but tested for impairment at least annually.

• The default method of amortization is the straight line

method.

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Standards (by: Zeus Vernon B. Millan)
 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

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 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

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 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

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OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

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 END

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