Intangibles

• Intangible Assets: Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.
• According to IAS 38, these are the essential criteria for Intangibles:

  (a) identifiable;

  (b) control; and

  (c ) future economic benefits.
• Recognition of Intangibles:

  (a) expected future economic benefits are probable to flow to the entity; and

  (b) cost can be measured reliably.
• Limited life of Intangibles

  • amortize over useful life or legal life, whichever is shorter
• Intangibles Useful Life:

  • period of time the asset is expected to remain in service
• Intangibles Legal Life

  • period of time mandated by law for which the asset is protected
• Indefinite life of an Intangible

  • enjoys perpetual future economic benefits, hence, is not amortized.
• Common types of intangibles:

  1. Patents
  2. Copyrights
  3. Goodwill
  4. Trademarks and Trade Names
  5. Franchises
• Accounting for Limited-Life Intangibles

  • amortize to expense
  • credit asset account
• Accounting for Indefinite-Life Intangibles

  • no foreseeable limit on time the asset is expected to provide cash flows
  • no amortization
• Patents

  • Exclusive right to manufacture, sell, or otherwise control an invention for 20 years from date of grant (Republic Act No. 8293: legal life of patent is 20 years)
  • Non-renewable but extendable through application of a patent for a significantly the same formula but with minor alterations
• Patents

  • Capitalize costs of purchasing a patent and amortize over 20-year legal life or its useful life, whichever is shorter
  • Expense any R&D costs in developing a patent
  • Legal fees incurred in successfully or unsuccessfully defending a patent are expensed
• calculating for amortization:

  Cost / UL or LL of patent = annual amortization
• Copyrights: Gives owner exclusive right to reproduce and sell an artistic or published work
• Copyrights

  • Legal life extends over the life of the creator plus 50 years (RA No. 8293)
  • Cost of copyright is the cost of acquiring it
  • Amortized to expense over useful life (Why? Because useful life is usually shorter than legal life.)
• Trademarks and Trade Names

  • Word, phrase, jingle, or symbol that identifies a particular enterprise or product
  • legal protection for 10 years (RA No. 8293)
  • renewable for an indefinite number of times (10-year life)
  • capitalize acquisition costs
  • generally, no amortization (because renewable for an indefinite number of times)
• Franchises

  • Contractual arrangement between a franchisor (collects the money) and a franchisee
  • If life is limited, franchisee (or licensee) amortizes the franchise over the shorter of its useful life or legal life
  • If life is indefinite, cost is not amortized
• Goodwill: Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc.
• Goodwill is only recorded when an entire business is purchased
• goodwill is recorded as EXCESS of purchase price over fair value of net assets acquired and is generally NOT amortized
• Research and Development Costs

  • expenses that may lead to the creation of new products, new processes and other intangible assets
  • Uncertain in nature regarding the amount and timing of future benefits
  • All costs incurred in the research phase are expensed
• Development costs are capitalized only when specific criteria are met, primarily upon achievement of technological feasibility, and only until the point of commercial production
• Research and Development Costs

  
• Presentation

  • Usually, companies combine plant assets and natural resources under “Property, plant, and equipment” in the statement of financial position.
  • Intangible assets are shown separately
• example of SOFP showing PPE and Intangible Assets