[go: up one dir, main page]
Scribd
Upload
191 views31 pages

Aud Ass 2 - Chapter 23

Aud ass 2

Uploaded by

Black Panther
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
191 views31 pages

Aud Ass 2 - Chapter 23

Aud ass 2

Uploaded by

Black Panther
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
You are on page 1/ 31
Grapter 29 -Intangibe Assets CHAPTER 23 INTANGIBLE ASSETS ‘TOPIC OVERVIEW: This chapter discusses intangible assets, its characteristics and types, nt measurement and subsequent measurement foreach type of Intangible sy wells the corresponding amortization, LEARNING OBJECTIVES: ‘After studying ths chapter, you shouldbe able to: 1. Describe the three critical attributes ofan intangible asset 2. Identity the different ypesofincangible asset 3. Describe the inftal recognition, intial measurement, subsequent ‘measurement, derecogntion and financial statement presentation of Intangible asset 4 Diferencate intangible asset under fll PFRS and PFRS for SME, 5. Calculate the corect amount of intangibles and its related accounts INTANGIBLE ASSET ‘intangible aset 6 an Wontifable non-monetary asset without physial substance. The followingare thre critical attributes of an intangible asset 1) Idenutably 2) Contra 53) Future economic benefits Hdensinabiity ‘An intangible assets identifabeifiteither: (@) Is separable, (ie. capable of being separated or divided from the entiy and sold, transferred, lcensed rented or exchanged either individually ‘or together with related contract, Identifiable. asset or abil, ‘egardless of whether the entity intends todo 0, oF (b) Arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the ent ofr other rights and obligations Bramples: a) Separable assets rights to fms, aiport landing slots, fishing o milk (quotas, tax licenses patents, copyrights and traders 'b) Non-separable & trading license whichis not tesak rable to anothet entity 48 not separable, but it stil san intangible se rane from legal eights ET cod 20 ere nuit’ operations or goodwil. iL.usTRATiON On January 1, Anita Co. incurred the following costs forthe generation & trademark Costs of materials and services used or consumed in generating the wademarie sont Aeron tetas a were tT iy Siliags“naministrate and other general overhead 60. orvoming cons arsing specially from the funds borowed 10.00 or generation of the trademark saxo ‘Advertising and promotional cost forthe product generated by the trademark 928 peer 23 ~Intangble Assets os — GPT ot employee benefits Incured in generating the 40,000 ae 2) Assad how much the cost ofthe intangible asset? aa ee gas eerie nrg sr vedemarl . 500000 te dee patents and Icenes that were weds generate ‘poundemar a canst arsng special fromthe fnds borrowed 10,00 pron on ofthe trademark eee iencsree‘benets incurred. In generating the 40000 rasemark eat ester the trademark a Tl 25000~ Requirement No.2 seaiesvot the above costs are to be charged to expense since the cost unred on internally generated masthead isnot capitalized. [SUBSEQUENT EXPENDITURE, “ubsequent expenditure incurred on intangible aset shall Be expensed Unless the following criteria are met itis probable that future economic benefits that are atibutable tothe subsequent expenditure wil low to the entity. and 1 The subsequent expenditure can be measured reliably. ‘SUBSEQUENT MEASUREMENT Subsequent to initial measurement, an entity must choose ether the cost model or the revaluation model foreach cass of intangible asset ost model ‘Aker inital recognition the benchmark treatment is that intangible assets ‘shouldbe caried at cost ess any amortization and impairment losses. Revaluation model Intangible assets may be carried ata revalued amount (based on fair value at the date of revaluation) less any subsequent amortization and Impairment losses only i fair wale can be determined by reference (0 an 929 — — Ul chapter 23 -Intangibe Assets sete ania Sach cine mates oy apmaed fe thm intangible asets. Examples where they might existare as follows: 3) production quotas ) Mshing licenses ) taxilicenses Under the revaluation model, revaluation increases are credited direct “evaluation surplus" within equity xeept tothe extent that i reverses, Tovaluation, decrease previously recognized In profit and Toss. If ty Texalued tangible has a finite hfe and i, therefore, being amortized (i below) the revalued amount is amortized. Refer to Chapter 24 for detaieg diseusion of revaluation. Classification of intangible assets based on useful Ife Tntangble assets are classified as 1) definite fe: no foreseeable limit tothe period over which the asses ‘hperted to generate net cash inflows forthe entity 2) Finite life a limited period of benefit tothe entity. Intangible asset with finite and indefinite lives is iesubjectto Intangible asset with: Amortization? Possible Impairment? 1 Finite ives Yes Yes 2. Indefinite lives No Yes AMORTIZATION. AMORTIZATION ‘jmortzation Is the systematic allocation of he amortizable amount of= Ineangible asset over its useful ie. Amortization Period ‘The depreciable amount of a intangible asset with finite seful ie sal evalleated on a systematic Basis over its useful life. Amortization sl Begin when the assets avallale for use, Le. when itis in the location abt okdilon necessary frit oe capable of operating in the manner ste ymanagement, Amortization shall cease atthe earlier ofthe date that loot Is tamsified a5 held forsale (or included in a disposal group tht ‘sued a held forsale) in accordance with PFRS 5 and the date that Ssset s derecognized. Amortization Method ‘The amortination method used shall reflect the pattern in which the ast future economic benefits are expected to be consumed by the entity pattern cannot be determined reliably, the straight-line method sl {sed The amortization charge for each period shall be recognized 8 PG, rioss uniews this or another Standard permits or requles ito be inci In the carrying amount of another asset 920 OO aer——™ tangle Assets cmon’ eet - sretated amortization should be credited since it # one Of {he di itis also acceptable to credit ong Predominant Limiting Factor Revanaty should choose the predominant limiting factor inherent in the ‘ntangible asset For example: Ti) the contract that sets out the entity's rights over its use of an intangible asset might specify the entity's use ofthe intangible asset iu.a predetermined number of years (Le, time), then straight-line amortization maybe appropriate or (b) as a mumber of units produced, then units of output method of Smnortzation may be appropriate or (¢) asa fixed total amount of revenue to be generated, then revenue ‘method may be appropriate, ldeotinetion of such of such a predominant limiting factor could serve as the {rong pin forthe ntcaton ofthe appropriate Dass of amortisation, ut another basis may be applied if it more closely reflects the expected ‘Pattern of consumption of economic benefits. . seacaie Revenue Method venue Method is appropriate when the predominant limiting factor that 'sinherent aan sntangibe assets the i achievement of a revenue threshold, evento be generated can be an appropriate basis for amortisation, oan a eee (Chapter 23 ~Intangible Assets For example, an entity could acquire a concession to explore and extra fod from a gold mine. The expiry of the contract might be based on ag amount of total revenue tobe generated from the extraction (fr example’ contract may allow the extraction of gold from the mine until tot ‘cumulative revenue from the sale of gold reaches P2billion) and not by based on time or on the amount of gold extracted. In another example, the right to operat atoll road could be based on a total amount of revenue to be generated fom cutmlatve tolls charged (ie ‘example, a contract could allow operation of the toll road until the ‘cumulative amount of tolls generated from operating the road reaches 17100 milion). In the case in which revenue has been established a the predominant limiting factor in the contract for the use of the intangible asset, the revenue that sto be generated might be an appropriate basi os “amortising the intangible asst, provided thatthe contract species a fixed total amount of revenve to be generated on which amortisation isto be determined Residual Value ‘The residual value of an intangible asset witha finite useful life shall be assumed tobe zero unless: (@) there isa commitment by a third party to purchase the asset at the end ofits ureful lie or (©) there isan active market (as defined in PFRS 13) for the asset and (0) residual value canbe determined by reference to that market and (0) tis probable that such a market wil exist atthe end of the asset's Use, PATENT 4 Patemer fe Sone yA Nie tance stinens | A patent isan excuse right granted by the government giving the ole? ‘thereof to exclusively use, manufacture and sella product or proces fF Beriod of 20 years witout erence rinringement by ater. The te ‘of patent shall be twenty (20) years fom the fling dat of the application. (ee! 54 RA 8293) " Sa Cost of Patent a. When Includes purchase price and any directly attributable purchased expenditure in preparing the asset for its intended us? '. Iintermally Cost includes ony the issusing and other elated ep developed feesin securing the patent right, Costs that are expensed as incurred|'rr'») i") «vim ol 4 Research and development cost Wa Yoh 1. Legal fes and other costs of successfully prosecuting or defending © patent re Legal fees and other costs of unsuccessfully prosecuting or defending? 932 patent. Amortization of Patent 1} The original cost should be amortized over the legal fe or useful life whichever SHORTER, 2) Competitive patent was acquired. The competitive patent and the OLD patent should be amortized over the remaining ie of the old patent 13) Related patent 2} Extension of Life the related patent together with the OLD patent ‘should be amortized over the extended Ife by No Extension of Life- the NEW related patent should be amortized ‘over its own life while the OLD patent should be amortized over the remaining life ofthe OLD patent. Joural entries: 1 Tozecord development of the patent: Re Dexpense Xx Cast (oF other appropriate account) x 2, Torecord the costof licensing and other necessary cost for is intended Patent Xx Cash (or other appropriate account) xe 3. To ecord the amortization Patent amortization xx “Accumulated amortization ~ Patent xx 4 Torecond the cost of sucessful or unsuccessful defense of patent infringement Legal and professional expenses xx ‘ash (or other appropriate account) Xx 5. Torecord sae of patent cash xx ‘Accumulated amortization - Patent x oss on sale (ifany) x Patent x Gain onsale (ifany) xx Towrite off the patent account: loss on patent written off Accumulated amortization - Patent Patent RE xx oa —— cere eee ILLUSTRATION: On January 1, 2022, Ria Company incurred 1,000,000 of research development ‘cost to develop a product. Legal fees and other cont Associated withthe registration ‘ofthe patent totaled 400,000 ang patent was granted on January 1, 2023. On July 1 2023, Ria paid Ps for legal fes ma successful defense ofthe patent On December 31 207) the patent was written off de to the advent ofa new product coming the market Required: Prepare al the necessary entries from 2022 to 2024 SOLUTION: ‘The journal entries ofthe above transaction are a follows: (01/01/2022 Research and dev'texpense P1,000,000, (Cash (or ther appro. Account) 1,000.00) (01/01/2023 Patent 400,000 Cash (or ther appro, Account) 400.000 (07/01/2023 Legal expense 500,000 Cash (oF other appro. Account) 500,000 12/31/2023 Amortization expense 20,000 “Accumulated smortiation 20000 12/31/2024 Amortization expense 20,000 “Accumulated amortization 20000 12/31/2024 Loss on patent written off 360.000 ‘Accumulated amortization 40,000 Patent (cost) 400,000 ILLUSTRATION: Change in Estimate ‘On January 1, 2019, Drenz Company purchased a patent for P600,000. The [patent was being amortized over its remaining legal life of 15 yeas. During 2024, Drenz determined that the economic benefits ofthe patent would last longer than ten yeas from the date of acquisition Required: Compute for the carrying amount ofthe patent on December 3. 2024 ‘stot he Patent rong cemetin a2/1z0(eanannsxs) sn Style 1/3/2004 wat ae 207 (00 00/ (05 Te Ceyaaiace razon pe ee ‘copyRIGHT (a Copyright is an exclusive right granted by the government to the author composer oF artist enabling him to publish, sell or otherwise benefit om fis iterary, musical or artistic work ‘Te rights ofan author shall lst during the lifetime ofthe author and for fifty (50) years ater his death and shall not be assignable or subject t0 Tense. (Sec. 198, A 6283) Cost of copyright 1) Developed copyright - cost assigned to copyright consists ofall expenses incurred in the production ofthe work including those required to establish or obtain right 22) Purchased «cost includes the ash pald, and other expenses incidental tothe acquisition, ‘Amortization of copyright ‘The amortization should be based onthe copyrights useful life. However, it {acceptable in practice to directly write off the cost ofthe copyright agaist the revenue of the first printing. [FRANCHISE ‘Franchise i an agreement in Which one pary led the Fanchisor rans certain rights to another party called the franchisee Franchise cost 1) Initial franchise fee - includes the lump sum payment forthe acquisition (ofthe franchise and all legal fees and expenses incurred in connection ‘with the acquisition ofthe right 2) Continuing (periodic) franchise fe / sales-based or usage-based royalty thie represent continues payment to the franchisor for providing Specific future services, such as advertising, and for continued use of Intangible rights by the franchisee. Ths is recognized a5 an operating pense ofthe company when continuing services are rendered ‘Amortization of Franchise 2. Granted fora. Amortise over the wsefl Me or definite period definite period whichever is shorter. & Granted Shall not be amortized but rather tested for indefinitely impairment atleast annual. ‘Books of franchisor: Revenue in the books ofthe franchisor Is accounted under PPRS 15 when (3s) the franchisor transfers control of the goods or services to the franchisee. Depending om the satisfaction of performance obligation, the franchisor wil recognize is revenue at point ine or over 3 period of os Chapter 23 -Intangble Assets tu.ustearion: On Janay, 202% Jonah Company sped an agreement oper franchisee of Luke Company for an fia france fee af PLO BO0og this amount 2000300 was pad when the agen ase balance is payable in equal annual payments of P1,600,000 beginnt® January 1, 2025, The agreement provides that the down payment is a Tendile anno ture moe we rogared of ease a Sayeement lo prove tha Sef even re hoseaae eae pal othe anior naa oss con ng lense are Borrow mend) titers extn Required: What is the carrying value of the franchise on December 31, 2028? SOLUTION: (Cost of franchise Downpayment resent value of payable (+3.4331 x 1,600,000) “Total cost f franchise - 01/01/2024 Less: Amortization in 2024 (97,492.960/5) Carrying value, 12/31/2024 “The present value factor is the present value of ordinary”annully using 14% for 5 periods. [LEASEHOLD OR LEASE RIGHT [Leasehold 5 the right acquired by the lessee by virtue oF contract of ease touse the specific property owned by the lessor fora definite period of tine {in consideration for a certain sum of money. Cost of leasehold Accounting Treatment ‘a Lump sum payment at the first Charged to leasehold account or negotiation ofthe lease prepaid rent and amortize it over the Tease term, Amount paid in obtaining an Charged to leasehold account. Assignment of lease from the ‘original lessee ‘é Periodie payments in the form Expensed on the part of the less ofrental and income on th part ofthe Iess0 ‘Amortization of leasehold: over the lease term, 936 Chapter 23 ~Intanpble Assets LEASEHOLD IMPROVEMENT {Leasehold Improvements are improvements or modiations on a Tased roperty, such as additions, akerations, remodeling ot renovations. Ths 1 fonsidereds property plant and equpment Exes Building wal Pavements Landscaping Driveways and other structures onthe leased land Lighting installations Extraordinary repairs Partitions Cabinets ‘Shelves jf Ventilating system made on leased building ‘Upon termination of the lease, such improvements normally become the property of the owner (lessor) without any cost or obligation (businessdictionary-com) Depreciation ofleasehold improvements Lesechold improvements should be deprecated over the lease term or life tf the improvements whichever is shorter. If the lease is terminated prior to the agreed term, the unamortized cor ofthe leasehold improvements Is fonsidered as. oss Renewal Option 3. Toouncertain Deprecat the leasehold improvement: ‘Over the lease term or life of the leasehold Improvements whichever is shorter. Highly probable Over the extended lease period or the Ife of the (Woocertain) leasehold improvements whichever is shorter. ILLUSTRATION: (On January 2, 2021, Brayden Company signed an eight year lease for office space. Brayden has the option to renew the lease for an additional five-year Period on or before January 2, 2025. During January 2023, two years afer Decupying the leased premises, Brayden made genera improvements tothe Premises costing P1080,000 and having an estimated useful Ife of ten years Required: Compute forthe carrying value ofthe leasehold improvements at December 31, 2024 if Brayden’s intention a to exercise of the renewal ‘option on December 31,2024: 1) Uncertain. 2) Too certain or highly probable, 937 A Cost of leasehold improvement Less: Accumulated depreciation (P1,080,000/6) x2 360,000, Carrying value, 12/31/2024 P 720,009 Life of the improvement 10 “ Remaining lease term (8 years minus 2 years) Depreciation was based on the shorter (6 years) between the Useful ie the improvement or the remaining lease term. Requirement No.2: Too certain or highly probable {Cont of leasehold improvement Less, Accum. deprecation, 12/31/2023 (P1,080,000/6) x1 Carrying value, 12/31/2023 {ess Depreciation 2024 (P800,000/9) Camying value, 12/31/2024 ‘Shorter between remaining life ofthe improvement 10-1) -9 30 Or Extended lease term (8 years -2 years 1 year +5 years) Notes: ye Spreciaton in 2023 was based on the shorter between the useful ie oft Improvement or the remaining ease erm © Daprecaton n 2024 was based on the remaining life of the improvemec DDelause this was shorter than the extended lease term as computed above. “TRADEMARK. fark" means any wale sign capable of distinguishing the “good (rademark) or services (service mark) ofan enterprise and shall includes Stamped or marked container of goods. (RA 8293) lentiying or dstnguisint “Trade name” means the name or designation id anenterprise. (RA 8293) Cost of trademark einen tne cost includes the purchase price plus cost diec¥ purchased attributable to the acquisition. b. Htinemally The cost includes expenditures require developed including fling fees, registry Tees and other Incurred in securing the trademark, Legal foes and other costs of successfully prosecuting or defen tratdemark isan outright expense. sto establish I expenses ing 2 938 ccropter 23 -Inangble Asst ‘amortization of trademark. 7 ‘fe el ife of trademarks 10 years and maybe renewed for periods of 10 Jars each (RA 8293) Because of easy renewals othe Iie ofthe radar. yeentty may. appropriately clasiy ths as an intangible asset with atc Iie. Therefore, the cost of a trademark is not amortized but ‘ect to test for impairment atleast annually ILLUSTRATION: (On January 1, 2024, Ashlly Company bought a trademark from Elisha Ge pany for 4,500,000, Ashly retained an independent consultant who Ceirmated the trademark’s life 19 be indefinite. Its carrying, amount in Esna's accouncing records was 4,000,000. Required: In Ash's December 31, 2024 statement of financial poston ‘Reatumount should be reported as trademark? SOLUTION: sekhing amount is equal to the cost of 4,500,000 because the trademark faran indefinite life, therefore no amortization i recognize. ‘cuSTOMER LIST ‘Castomer list sa databace that includes names, contact information, order ‘tory, and demographic information for alist ofeustomers. Cost of customer ist 2 when ‘The cost includes the purchase price plus cost directly purchased attributable tothe acquisition. by internally ‘The cost shall be expensed and not capitalized as developed” intangible asset. ILLUSTRATION: Customer List (On any 1 ofthe curent year, Gabrielle Company acquired the customer listo lange advertising agency for 2,000,000. Gabrielle expects to benefit from the information acquired from the customer ist fra period of 5 years. Required: Prepare the journal entries forthe current year souvrion: Customer lst 2,000,000 ‘Cash (or ether appropriate account) 72,000,000 1. Amortization expense (P2M/5) 400,000 400,000 “Accumulated amortization 939 chapter 23 -Intangible Assets (COMPUTER SOFTWARE a Internally developed computer software Costs incurred in creating 2 computer software product should be charge, to expense when incurred until a technological feasibility has he established tothe product Technological feasibility is established when an enterprise has prod ‘either a detailed program design ofthe sftware ora working model, [After technological feasibility has been established, capitalizabe softwan costs include the cost of coding and testing and the cost to produce te product masters. ‘The costs incurred to actually produce the software from masters ang package the software forsale shouldbe charged as inventory ‘Classification of computer sofware 2 Asa rule, computer software fs cassfied asan intangible asset 1 Computer software purchased for resale should be treated as inventory. << Computer software purchased as an integral part of 2 compuer Controlled machine tool that cannot operate without the spectc ‘oftware shouldbe treated as property, plant and equipment. 4 However ifthe computer software is not an integral part ofthe relates hardware itis classified ae an intangible asset. 3 gE 2o-intangble ewts oa Ngo Ecole Crapter 23 ILLUSTRATION: During the year, Amor Company incurred y Incurred costs to develop and ‘routine low-risk computer software productasfollows: =e joie Aesets incr cong ang ct eg eam loan ‘costs after establishment of technological Sa) cone os costs after establishment of technological me Corl ruing reduc matersoriing male 20h eginaroduct *potor Required 1. "What amount should be charged to expense for the year? 2 In the December 31, statement of financial position, what amous shouldbe capitalized as software cost subject to amortization? 3. In the December 31, statement of financial position, what amoun should be reported as inventory? SOLUTION Requirement No.1 Completion of detailed program design or working model 400,000 irred for coding and testing to establish technological Cost Teasibility 50,000 ‘Total amount tobe charged to expense Pasc.ouo Requirement No.2 Other coding costs afer establishment of technological 00,000 feasibility ea Other testing costs afer establishment of tecnologia * 700,000 feasibly ee ducing product masters for triningmaterls 16 out sohware coe * sain ‘Total software cost Requirement No.3 seer af computer software and wining materials “fram product master ioe ging product 300,000. Paine P:,500,000 ‘Total inventoriable cost cor 23 -IntangbieAasets ILLUSTRATION: Accounting for Computer Software Costs During. 2023. Socorro Company spene #2500000 developing ts new PameASap software package OF this smourt. 1 300,000 wae spent before ‘aitiogical feasibility was established for the product, whichis 10 BE teermered to third partes. The package was completed at December 31 sae Gocorro expects a useful Ife of 8 years for this product with total 2orenues 01 PB000.000. During 2024, Socorro realizes revenues of 1600000. reguie: neti cpare journal entries required in 2023 for the foregoing fet. 2 Prepare the entry to record amortization using the appropriate method, fon December 31,2028 4 luehat amount should the computer sofware costs be reported in the J December 31, 2024 statement of financial position? SOLUTION: 1) Research and development expense 1,300,000 Computer software cos (P2SM-P13M) 1.200.000 ‘Cash (or ther appropriate account) 172500000 2) Amortization expense 150,000 “hecumlated amortization (P1,200,000 /8 years) 150000 3), Computer software cost 1,200,000 {ess Accumulated amortization 150.000, 050.000, Carrying amount - 12/31/2024 Note that straight line was used instead of the revenue method of weasire Website Cost ‘Anentty may incur internal expenditure onthe development and operation ‘of own web site for internal or external access. A web site designed for external acces may be use or various purposes such 35 8) To promote and advertise an enttys own products and services, 1) Provide electron services, and 6) Sell products and services A web site designed for internal access may be used to store company Dollees and customer details and search relevant information, Stages of Web Sites Development Tr sages ofa web t's development in be described as follows: () Planning eludes undertaking feasibly studies, defining objectives Sd specifications, evaluating alternatives and Selecting preferences. 93 oa a (Chapter 23 -Intangible Assets (©) Application and infrastructure Development - includes obtaining domain name, purchasing and developing hardware and oper, software, installing developed applications and stress testing. Stress testing (sometimes called torture testing) is a form Aeliberately intense or thorough testing used to determine the stab ‘of a given system or entity, It involves testing. beyond nome) ‘operational capacity, oRen to a breaking point, in order to observe yi sults Reasons can inclade: ‘+ Todetermine breaking points or sae usage limits ‘Toconfirm intended speciiations are being met % Todetermine modes of failure (how exactly a system fis) ‘+ Totes stable operation of apart or system outside standard usage (Wikipedia) (6) Graphical Design Development - includes designing the appearance of web pages. (4) Content Development - includes creating, purchasing, preparing aad uploading information, either textual or graphical in nature, on the wes site before the completion of the seb site’ development. ‘Tit ‘information may either be stored in separate databases that art Integrated into (oF accessed from) the web site or coded directy ine the web pages, ‘Once development of a web site has been completed, the Operating stage begins. During this stage, an entity maintains and enhances the applications infrastructure, graphical design and content of the web When accounting for internal expenditure on the development and ‘operation ofan ents own web site for internal or external access ht 8) whether the web site isan internally generated intangible asset tht Ss subject to the requirements of PAS 35 and 1) the appropriate accounting treatment of such expenditure = “Treatment Expenditure on purchasing, | PASTS developing, and "operating hardware (eg web ‘servers, staging servers, production Servers and internet connections) ofa web ste a 2 [Expenditure onan Internet| Expense whon services are vecowe™ service provider hosting the | under PAS 1 ry u future economic bene chapter 23 ~Intangble Asset ‘entity's web site intangible assets including | PASZ or PAST website held by an entity for Sale in the ordinary course of business ‘When a website Waved) SIC 32 Taangibe Avets Web Site ‘When a website is leased) SIC 32 afer itil recognition ofthe Under a finance lease leased asset “Aa entiy’s own vieb site Tat) internally generated fatangibte vies from development and asset if it meets recognition is for internal or eternal | requirement under” PAS 38. (In access Particular an entity may be able to Satsty "the "requirement to | demonstrate how its ed site will generate probable’ future economic benefits in. accordance ‘with PAS 3857() when for example the wed site is capable of enerating revenues. including iret revenues from enabling orders Web site developed solely oF ll expendare on developing such = Primarily for promoting and | web site shall be recognized 35 an Iivertiing Its‘own products | expense when incurred because an andservices entity isnot able to demonstrate how Such website will generate probable ‘ny internal expenditure on the development and operation ofan entiy’s {en web site sal be accounted for in aeordance sth PAS 38 The nature ach activi for which expenditure i Inurred (ex. traning employees 3d maintaining the web st) and the web site's tage of evelopment or estdevelopment shall bev evaluated To determine the” appropriate ‘counting treatment For example 83) The Planning stge is silar in nature to the research phase PAS 38, Sspendtare incre inthe stage shal be recognized a an expense when te incured The hppleaon ad Inrastractre Development tage, the Graphical Design stage and the Content Development sage, tothe extent that sontentIn'develped for purposes her than to advertise and Fomote an eny’s wn products ané service txpenditue incurred ‘in these sages shal eine nthe cos 2 web site recognized ee an intangible asset acardance with paragraph 8 of SIC 32 whee te » sas Se Chapter 23 -Intangiole Assets a o xpd cin be dre atid nd ees w cae producing epi eeoerttbe pleoepesek ‘the manner intended by management. 7 For example expenditare on purchasing oF creating content (other ‘content that advertises and promotes an entity's own products Services) specially fora web ste, or expenditure to enable we of ‘content (ea fe for acquiring a license to reproduce) onthe webs ‘hall be included inthe cost af development when this condition sa However in accordance with PAS 3871, expenditure on an intanga, item that was initially recognized as an expense in previous fang statements shall ot be recognized as part ofthe cost of an intanga, asset at a later date (eg if the costs of a copyright have been fay Amortized, and the content is subsequently provided ona web site). Expenditure incurred in the Content Development stage, tothe exe, that content is developed to advertise and promote an entity: om products and services (eg. digital photographs of products), shal recognized as an expense when incurred. For example, when accounting for expenditure on professional series for taking digital photographs of an entiy’s own products and fe ‘enkancing their display, expenditure shall be recognized as an expen 45 the profesional services are received daring the praces, not whe {he dighal photographs are displayed on the web sit. ‘The Operating stage begins once ‘of a web ste & ‘complete. Expenditure incurred inthis stage shall be recognized asa ‘expense when itis incurred unless it meets the recognition criteria ® Pasa 23 -Intongibie Assets te to operate io the | (software) Tithe webs | —Beveloping code for the manner intended by management, application WS [Ind the web. site meets. the =—inaling developed applications | Fecognition “criteria in PAS. 38.21 inte we and PAS 3857 | aie nabs” HoStesstestng : (eae development —! = [piel cei eras Recognize as_an_ expense when | ‘curred, unless the expenditure can be directly attributed to preparing the web site to. operate im the | | manner intended by management, ] and the web site meets. the | Fecognition enter in PAS. 3821 | ind Pas 3057 connentaoaTapment — fea cacianns praia (or icp wr on epee wie] SSsing nts and temafang tags) | nce in accordance wth PAS Ses sbauing information’ ele | 3069(0) tothe exten that coments | ‘tiul or grarical in ature on the | developed tavern and prmte bane beer the completion afthe | an entys own produce tod web site's development. Examples of | services (e. digital photographs of | Contest facade norman about | products). Otherwise, renpnae = | Stentiy, products or services access | an expense whem Incured unl ‘the expenditure can be directly | Sttabuted to preparing the web te | to operate ite mtr tne ty ‘management andthe web ate tnees the recognition cream PAS Seat andrasses? [ Stage/nature of expenditure | Accounting treatment Planni = ‘undertaking easbiity studies | Recognize as_an_expense_ wit Incurred in accordance with PS ‘defining hardware and software 3858 specifications plication and evaluating alternative products _and suppliers selecting preferences | 4 Infrastructure ‘Operat ‘+ Updating graphics and revising | Assess whether jt meets the sontent definition ofan intangible asset and ‘Adding new fonctions, features | the recognition enteria set out in | pas “3818, in which case the + Rewstering the web site with) expenditure & recognized in the arch engines Re SSH Carrying amount of the web site ‘development “Apply the requirements ofPAS 16 Purchasing or developing hardware. Obtaining a domain name Recognize as an expense wh° ‘© Developing operating, software Incurred, unless the expenditure Server | be directly atibuted to prepa 946 ¥ | nalyzing usage ofthe web site| Sapatasng usage othe website | Sling. administrative and other | Recognize as an expense when | {generat "overhead! expenditure | neuted. poe a Chapter 23 ~Intanglble Assets unless it ean be directly attributed to preparing the web site for use to operate in the manner intended by management > Geearly_ identified tnefciences and. initia!” operating losses incurred before the web site achieves planned performance Training employees to operate thewebsite ‘ll expenditure on developing a website solely or primarily for pronase ‘and adversing an entity's own products and services is recognized ‘expense when incurred in accordance with PAS 3868 ILLUSTRATION: ‘The following costs were incurred by Edmundo Company in developing website: Undertaking feasibility studies 200 Evaluating alternative products and suppliers 1500 Purchasingor developing hardware 600 Obtaining 8 domain name 0 Installing developed applications on the web server noon Stress testing ‘3000 Designing the appearance (eg layout and color) of web pages 400, Creating” purchasing. preparing (eg. creating. links and ‘dentiying tags), and uploading information 15000 Updating graphics and revising eontent 000 ‘Adding new functions, features and content 3000 3008 Reviewing security access ‘Training employees to operate the web site 000 Required: Compute forthe website cost to be Included as intangible assets assuminé 1) The website is developed solely or primarily for promoting Advertising an entity's own products and services, 2) ‘The website arises from development and is for internal or exe access and shall be used for placing orders and the expenditares = “rectly attnbuted to preparing the web site to operate inthe ma” intended by management. SOLUTION: Requirement No.1 Zero, all costs are charged to expense. 948 ment No.2 ea 9.000 eam domaih name tat developed applications on the web server 20,000 ee 3.000 SiSgnne th appari og pout andclo fw pages 40000 ra Preparing (eg creating 15000. ‘anuiting tags), and uploading information ‘foal intangible asset 86,000 “The following costs are treated as expense: ns craking feasity studies F 20000 rg Sternative prot andsoppies 15.000 000 training ceaployees fo operate the web site ‘The cost of purchasing or developing hardware is treated as property, plant Tutequipmentin accordance with PAS 16 ‘The following operating costs are treated as expense not unless it meets the {eri for secognition a tangible assets in which case t will added tothe Canying amount of website cost: Upiating graphics and revising content 8,000 ‘Aing new functions, features and content 3.000 ‘oncanmarion c0sts These are the cosis that are Incurred tw forming or organizing the corporation Organization costincudes: 1) Legal foes confection with the Incorporation ~ drafting articles of inearporation sn by-laws and corporate registrations 2 ramon ad underwating en conection with the suance af 3) Incorporation fees; 4 Stock issuance cost ~ printing of stock cericates, cast of stock and teanster book seal ofthe corporation and accountng and legal foes Im According. to PAS 3 ; ‘According to PAS 32 paragraph 25, “transaction costs of an equi “amation shall be accounted for a8 dedction from eaulty. net of any lated income tax benefit: Thereore, stock Issuance cost stall then ‘debited to the following eae be) 1) Share Premium fam ssuance Retained earnings if there ts no share premium from issuance or i the ‘share premium from issuance is not sufficient. vn 949 — ee Chapter 23 -Intangible Assets MAUSTRATION: (n january 1, 2024, Anabelle Corporation incurred organization cost 4 600,000. What portion of the organization costs will Anabelle defer years subsequent to 20247 ‘SOLUTION: Zero, since organization cost i recognized as expense in 2025 ‘Advertising and promotional activities Expenditures on advertising and promotional activities is recognized a 4 expense when the entity ether has the right to access the goods or kt ‘received the serves [PAS 38.69] In some cases, expenditure is incurred to provide Future economic benef toanentiy, but no intangible asset or other asset is acquired or created the ‘an be recognized. Inthe case ofthe supply of goods, the entity recogning Such expenditure as an expense when ithas aright to access those goad, Inthe ease ofthe supply of services, the entity recognizes the expenditar asan expense when it recelves the services. For example, expenditure ce ‘esearch i recognized as an expense when itis incurred, except whem ie equiredas part ofa business combination. Other examples of expenditure that is recognized as an expense when iis Incurred inch: {@) Expenditure on startup activites (be. startup costs), unless ths expenditure is included inthe cast ofan Item of property, plant and equipment in accordance with PAS 16, Startup caste may Consie of establishment costs such as legal and secretarial costs incurred establishing a legal entiy, expenditure to open a new facility or business (Le. pre-opening costs) or expenditures Tor starting new {epertan or aching new produto processes pre-operaig (0) Expenditure on training activities. (©) Expenditure on advertising and promotional activities (including ‘mail order catalogues). (2) Expenditure on relocating or reorganizing part orall ofan entity. ‘An entity has a right to access goods when it owns them. Similarly, it as Tight to access goods when they have been constructed by a supplier ® accordance withthe terms ofa supply contrat and the entity could dematd delivery of them in return for payment. Services are received when they af performed by a supplier in accordance witha contract to deliver them entity and not when the entity uses them to deliver another service, ‘example, to deliver an advertisement to customers. [PAS 38, 694] 950 ~~ | ee Chapter 23 -Intangibie As {GOODWILL ‘Asset arising fom the excess ofthe camsilesmioe eee ‘aco the het acts sean! Gnsderton Wanaerie over We IE Recognition of goodwit Internally developed good snot come Purchased Goodwitt isthe nd istherefore recognized, Measurement of Goodwi 2b Indirect valuation approach '. Direct vation or excess of earnings approach Indirect valuation approach Goodwill is measured by the excess ofthe cost of investments over the fair Walue of the net tangible asets acquit The rs ‘ith PERS 3 Business Combination TH AMProach is i accordance oodwil that arises rom business combination Direct valuation oF exces of earnings approach This approach the measurement of ote xing he future earings ofthe business. Although this approche net nace a {pproach canbe used to determin the reasnaheea in eet iene purchase pice This approach needs olowinntng 1) "The normal rat return ofthe sample ndstry where the company 2) The ar valu ofthe tangible assets 3) Faure earings and 4) Peto of dartion of the exces arings. In computing forthe future earnings the following should be noted: 1) Normal operating income is needed as such any pans and losses from sale of property, plant’ and equipment or inestments should be excluded 2) ‘The key management bonus should be excluded from the computation andi therefore added bac from the net income. Procedural approach: ‘Step 1: Compute forthe far value ofthe net asset acquired by sing this Total adjusted or fair value of tangible assets of the acquired ‘company (excluding any goodwil ofthe acquired company) xx Less: Fair value ofthe lables of the acquired company x Total fair value ofthe net asset acquired x ‘Step 2: Compute forthe normal earnings using the Following formula 9a Chapter 23 ~Intangble Assets __— — —— Normal rate. ) Five of the mal rate og Normalearnings = netasset acquired return ‘Step 3: Compute forthe average earnings using this formula “Total earings fr number of periods Less: Gain onsale ‘Add: Loss onsale ‘Total bonus of management personnel Adjusted earings Divided by: Number of periods ‘Average earnings ‘Step 4: Compute for goodwil using the different methods described below. Methods of Computing Goodwill 1 Purchase of average excess earings 2. Capitalization of average excess earnings ‘3 Capitalization ofaverage earnings 4. resent vale or discounted value average excess earnings ‘Purchase of Average Excess earnings, ‘Average Earnings ‘Les Normal earings ‘Average exces earings Maliply by Number of periods Gocdwll Captazation of Average Excess carmings ‘erage rings (as Normal euiogs dreage exes earings Dvd by Caan ate Coote Capitalization of Average Ean Average earnings me Died by Capaliation rate Fair valu of net asec nding Good Less: Flr vale of net assets, exclu au ing Good Present Value or Discounted Value Average Exces ‘Average earnings socal ar ‘Less:Normal earnings Average excess earnings Mati Present val odinary anny Goodwill annulate BeBetaeee BEL MBE BREE sarnings BeBe EE 952 chapter 23 ange assets oranertaton Gotu ‘he godwil shal not be morta because ts However good shall be exe or npatment tat aul oe frequent stn or hg cramonce ne» Pose Cain rom Bargin Purchase (Previously called N Joust called Negative Goodwi Ath segue interest inthe na va the eae net assets betured exceeds the con othe busines combine see shal 2) "Reasses wheter has correct weed ao the ast ire nd all of the Ibe sete and all recone ay adonal doses ov lable tataedeted ashton 2) iat exces remains the acres sal cop he resting ann rotor loss onthe acguston ate The gan shld quer (te gam bargain prc asa) ILLUSTRATION: ‘Aryen Company engaged your services to compute the goodwill and purchase price for the acquisition of Rosalina Company. The following ata bre available fr the Rosalina Company: Current Assets 5,000,000 Currentlibiities __-F 3,000,000 Investments 2,000,000 Noncurreatliablties 5.500.000, PPE 15,000,000 Ordinary shares 700,000, ‘Share Premium 500,000 ‘Accumulated Profits _ 6,000,000 ‘Total Assets _“P2Z000}0O0_ Total Liaband SHE — 772,000,000" You found! out thatthe investments havea fair value of PI.500.000 and the Current asets and propery, plant and equipment are understated by 11,000,000 and 2,000,000, respectvely. All other assets and equities are properly stated. An examination of the company’s income for the lst 5 [ears revealed that the total earnings amounted t0 P8,900,000. The said armings Include loss on Sale of equipment during the last year of F300,000 find #200,000 annual bonus of the president. The normal rate of return is 10%, Required: ‘Compute for the goodwill and the corresponding purchase price assuming 4) Purchase of goodwil for 5 years. 2) Capitalization of average excess earings wsing 10% 3) Capitalization of average earnings using 12% 4) Discounted average excess earings using 1496.ate Assets SOLUTION: Current Assets (PSM + PIM) Investments (P2M - 500,000) Property, plant and equipment (P1SM + P2M) Current liabilities Noncurrent Habilites Fair value of net asset acquired Fair value of net asset acquired Multiply: Normal rate of return Normal earnings Total earnings Loss on sale of equipment Bonus for S years (P200,000 x5) Operating income Divide by: Number of years Average earnings Requirement No.1 Average earnings Normal earning Average excess earnings Multiply by: Capitalization period Goodwill Goodwill ‘Add: Fair value of et asset acquired Purchase price Requirement No.2 Average excess earnings Divide by: Capitalization rate Goodwill Goodwill ‘Aad: Fair value of et asset acquired Parchase price Requirement No.3 ‘Average earnings Divide by: Capi Purchase price Less: Fair vale of net asset Goodwill ration rate 954 6,000,000 4,500,000 17,000,000 (3,000,000) 5,500,000) 716,000,000 16,000,000 aOR F 1,600,000 8:00.00 300,000, 4,000,000 70,200,000 es. P 2040,000 2,040,000 4,600,000, 440,000 5 2,200,000 200.000 16,000,000 718,200,000. 440,000 10% F4400,000 4,400,000 16,000,000 20,400,000, P 2,040,000 12%, “FH7.000,000- 16,000,000 =F 1,000,000- {copter 23 Intangible Ass Requirement No.4 laverage exces arnings ress util by: PV of ordinary annuity 014% or Speeds Gooswill Goodwil 1510564 Aad: Fale value of net asset acquired 16,000,000 Parchase price PI7510564 ‘Return on Average Net Assets When the normal earnings are based on the average net assets the procedures fr the computation of normal earnings would bea follows: 4) Compute for the average assets by totaling the total Net assets for certain numberof periods 2) Get the average net assets by using the following ormul: Total met asets divide by numberof periods 8) ‘Then, normal earnings would be “Average net assets multiplied by normal rate of return HLLUSTRATION: renalyn Company engaged your services to compute the goodwill and purchase price for the acquisition of Mayumi Company. The following data fre available for the Mayumi Company Netincome Netassets 2021 71,200,000 6,400,000 2022 1500.00 -&600,000 2023 2100000 800,000, 2024 2200000 3,000,000 It is agreed that goodwill measured by capitalizing excess earings at 20% with normal Feturn on average ne assets at 18% Required: How much are the goodwil and the purchase price for Mayumi Company? SOLUTION: Average net assets 2021 6.400.000 2002 2023, 2024 Total net assets Divide by: Number of periods Average net assets ‘Average earn 1B earning 2021 s » 1,200,000 2022 11500,000 2003 2,100,000 2024 —_2.200,000_ Total earings 7.000.000 Divide by: Number of year 4 Average earnings +L RaO Less: Normal earnings (PB2M x 18%) __1,476,000 Average excess earings 274,000 ‘Average excess earings 274,000 Divide by: Capitalization rate 20% Goodwill F1,370,000, Goodwill 1,370,000 ‘Add: Fairvalue of netassetacquired __ 9,000,000 Purchase price $10,370,000 DERECOGNITION OF INTANGIBLE ASSET. “An intangible asst shall be derecognized oF eliminated fom the Sateen of financial positon: a. On disposal ofthe asset 1 When no future economic benefits are expected from it use ané Aisposal Gain or loss on derecogaition ‘The gain of loss on derecognition isthe difference between net disposi proceeds andthe carrying amount atthe date of derecogntion. Gain or los ‘5 disposal/derecognition should be recognized in the Income staterieat x ‘gains (ie, other income) in prof or Toss (unless PFRS 16 Leases reqs ‘therwise on a sale and leaseback) and should not be assified as revenue INANCIAL STATEMENT PRESENTATION tangible assets are presented ar one Tne Wem under the heading Tntangible Assets” on the non-current asset section of the statement e financial position as required by PAS 1 Presentation of Financol Statement Note that goodwill is not an intangible asset since fe does not possess Ue attribute of identifiability. Hence, goodwill may be presented fa asa separate line item under the Beading “Goodwll” oF 1b included in the intangible assets, however the heading should be “Intangible Assets, including Goodwil 956 23 -Intangible Assets cs nin Recognition . keg research and’ development cot inated Is expensed inet iia Measurement boquent Measurement subealieTamts are aubsguemly measred at cost model only. Al inardie asst. inlding poodle rved verter entiated timed bed on managements bat xia ut sh mot ered cavers 97 gs6 ‘SUMMARY OF ACCOUNTING FOR INTANGIBLE AssETs, Cost model or Revaluation model Statement of Financial Position Non-current Asset (Operating Amottzation expense ~ Add Statement of Cash Flows Investing activities Comprehensive Income (Pa + Amortization expense + Gain or ss onsale + Impairment loss ——sassy siaiBuewl- ez sNdeUD COST OF INTANGIBLE ASSETS ‘Generally the amount paid for the asset and any directly attributable costs needed to brepare the asset for its intended use, Fair value at the date of ‘acquisition Fair value or nominal amount + directly attributable cost nt grant. amps + Materials used and services consumed ‘+ Employee benefits arising from the generation of the intangible asset + Other direct costs, such as fees to register a legal right ‘+ Amortization of patents and licenses used to generate the asset Borrowing costs capitalized under PAS 23 —W] commerdal substance: FV of asset given up + Cash paid = FV of asset received + W/o commercial substance: BV of asset given + cash paid Costs that can be directly attributed to creating, producing, ‘and preparing the asset for its intended use ‘Auditing and Assurance: Conceots and Aooicatons bv Asuncion. Naina & Escala SiS5V SiqiBuE\uT- Ez JIdeUD

You might also like