MIDTERMS TOPICS

March 28, 2023 8:46 PM

PAS 2: Inventories
- Provides guidance in the determination of cost of inventories, including the use of
cost formulas, and their subsequent measurement and recognition as expense

PAS 2 Applies to all inventories Except:

- Assets accounted for under other standards
a. Financial Instruments
b. Biological Assets and Agricultural Produce at the point of harvest
- Assets not measured under LCNRV under PAS 2
a. Inventories of products measured at NRV
b. Inventories of commodity broker-traders - measured at Fair Value less Cost to
Sell (FVLCTS)

Inventories
a. Held for sale in the ordinary course of business
b. In the process of production for such sale
c. In the form of materials or supplies to be consumed in production process or in the
rendering of services

Measurement
- Inventories are measured at Lower of Cost or Net Realizable Value (LCNRV)

Cost of Inventories
a. Purchase Cost
- comprise the purchase price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing authorities), and transport,
handling and other costs directly attributable to the acquisition of finished goods,
materials and services.
- NOTE : Trade discounts, rebates and other similar items are deducted in
determining the costs of purchase.

b. Conversion Cost
- Cost necessary needed in converting raw materials into finished goods
- Includes direct labor and production overhead

a. Other Cost
- Other costs are included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition.

Costs EXCLUDED from inventory (expensed as incurred)

• Abnormal amounts of wasted materials, labor or other production costs;
• Storage costs, unless those costs are necessary in the production process before a
further production stage;
• Administrative overheads that do not contribute to bringing inventories to their present
location and condition; and
• Selling costs

Cost Formulas
Specific - Specific costs are attributed to identified items of inventory
identification - Used for Inventories that are not ordinarily interchangeable
of cost - This is the appropriate treatment for items that are segregated for a
specific project, regardless of whether they have been bought or
produced.
- However, specific identification of costs is inappropriate when there
are large numbers of items of inventory that are ordinarily

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 are large numbers of items of inventory that are ordinarily
interchangeable
• First-in, first- - items of inventory that were purchased or produced first are sold
out (FIFO) first, and consequently the items remaining in inventory at the end
of the period are those most recently purchased or produced
- Cost of Sale represents cost from earlier purchase while the cost of
ending inventory represents costs from the most recent purchases
Weighted - the cost of each item is determined from the weighted average of
Average Cost the cost of similar items at the beginning of a period and the cost of
Formula similar items purchased or produced during the period
- Used only in PERIODIC INVENTORY SYSTEM
NOTE: An entity shall use the same cost formula for all inventories having a similar nature
and use to the entity. For inventories with a different nature or use, different cost formulas
may be justified

Net Realizable Value

• Estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
• NRV is the amount an entity expects to realize from the sale of inventory
• The practice of writing inventories down below cost to net realisable value is consistent
with the view that assets should not be carried in excess of amounts expected to be
realised from their sale or use.
• Inventories are usually written down to net realisable value item by item, however, it
may be appropriate to group similar or related items.
• Estimates of net realisable value are based on the most reliable evidence available at
the time the estimates are made, of the amount the inventories are expected to realise
• Materials and other supplies held for use in the production of inventories are not written
down below cost if the finished products in which they will be incorporated are
expected to be sold at or above cost.
• However, when a decline in the price of materials indicates that the cost of the finished
products exceeds net realisable value, the materials are written down to net realisable
value. In such circumstances, the replacement cost of the materials may be the best
available measure of their net realisable value.
• A new assessment is made of net realisable value in each subsequent period.
• When the circumstances that previously caused inventories to be written down below
cost no longer exist or when there is clear evidence of an increase in net realisable
value because of changed economic circumstances, the amount of the write-down is
reversed (ie the reversal is limited to the amount of the original write-down) so that the
new carrying amount is the lower of the cost and the revised net realisable value.

Instances where COST exceed NET REALIZABLE VALUE

• Damaged
• Wholly or partially obsolete
• Selling prices have declined
• Estimated costs of completion and costs of disposal has increased

Inventory write-down
• Estimates of net realisable value are based on the most reliable evidence available at
the time the estimates are made, of the amount the inventories are expected to realise.
- item by item
- by group
• Materials and other supplies held for use in the production of inventories are not written
down below cost if the finished products in which they will be incorporated are
expected to be sold at or above cost.
• However, when a decline in the price of materials indicates that the cost of the finished
products exceeds net realizable value, the materials are written down to net realizable
value.

Inventory write-down (Subsequent)

• A new assessment is made of net realizable value in each subsequent period.
• When the circumstances that previously caused inventories to be written down below

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 • When the circumstances that previously caused inventories to be written down below
cost no longer exist or when there is clear evidence of an increase in net realizable
value because of changed economic circumstances, the amount of the write-down is
reversed (i.e. the reversal is limited to the amount of the original write-down) so that
the new carrying amount is the lower of the cost and the revised net realizable value.

Recognition as an expense
• When inventories are sold, the carrying amount of those inventories shall be
recognized as an expense in the period in which the related revenue is recognized.
• The amount of any write-down of inventories to net realizable value and all losses of
inventories shall be recognized as an expense in the period the write-down or loss
occurs
• The amount of any reversal of any write-down of inventories, arising from an increase
in net realizable value, shall be recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the reversal occurs
• Some inventories may be allocated to other asset accounts, for example, inventory
used as a component of self-constructed property, plant or equipment. Inventories
allocated to another asset in this way are recognized as an expense during the useful
life of that asset.

Items to be included in inventory

1. Goods in transit from supplier
a. FOB shipping point
b. FOB destination
2. Consigned goods
a. Held out on consignment
b. Held on consignment
3. Sales out on approval/trial
4. Sales with buyback agreement
5. Sales with right of return
6. Sales on installment
7. Segregated goods on warehouse
a. Special order-goods
b. Hold for shipping instructions

Two approaches in inventory estimation

Gross profit method
Useful when:
1. Periodic inventory system is used and inventory balance is required for interim
statements
2. Inventories have been destroyed and specific data are not available
3. Relationship between gross profit and sales remains stable over time
Not useful when:
1. Significant change in the mix of products being sold and the gross margin percentage
changes significantly during the year
2. Estimating inventories to be reported in the annual financial statements

Determining the gross profit rate

1. Look for possible trend
2. Overall gross profit
3. Average gross profit

Retail inventory method

Used when:
1. Large number of rapidly changing items of inventories with similar margins for which it is
impracticable to use other costing methods

PAS 21:The Effects of Changes in Foreign

Exchange Rates
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Exchange Rates
DEFINITIONS
Closing rate
- is the spot exchange rate at the end of the Reporting period.
Exchange difference
- is the difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.
Exchange rate
- is the ratio of exchange for two currencies.
Foreign currency
- is a currency other than the functional currency of the entity.
Foreign operation
- is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting
entity, the activities of which are based or conducted in a country or currency other
than those of the reporting entity.
Functional currency
- is the currency of the primary economic environment in which the entity operates.
Presentation currency
- is the currency in which the financial statements are presented.
Spot exchange rate
- is the exchange rate for immediate delivery.

Factors to be consider during determining Functional Currency

(a) sales prices for goods and services are denominated and settled
(b) The currency of competitive forces and regulations
(c) the currency that mainly influences labor, material and other costs

Factors that provide evidence of an entity’s functional currency

(a) the currency in which funds from financing activities (ie issuing debt and equity
instruments) are generated.
(b) currency in which receipts from operating activities are usually retained.

Note:-
- When the above indicators are mixed and the functional currency is not obvious,
management uses its judgment to determine the functional currency that most faithfully
represents the economic effects of the underlying transactions, events and conditions
- Once determined, the functional currency is not changed unless there is a change in
those underlying transactions, events and conditions.

REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE FUNCTIONAL

CURRENCY
Initial recognition
- A foreign currency transaction shall be recorded, on the functional currency, by
applying to the foreign currency amount the spot exchange rate between the functional
currency and the foreign currency at the date of the transaction.
Reporting at the ends of subsequent reporting periods
At the end of each reporting period:
a. Foreign currency monetary items shall be translated using the closing rate;
b. Non-monetary items that are measured in terms of historical cost in a foreign currency
shall be translated using the exchange rate at the date of the transaction; and
c. Non-monetary items that are measured at fair value in a foreign currency shall be
translated using the exchange rates at the date when the fair value was measured.

Recognition of exchange differences

- When a gain or loss on a non-monetary item is recognized in Other comprehensive
income, any exchange component of that gain or loss shall be recognized in other
comprehensive income.
- Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss,
any exchange component of that gain or loss shall be recognized in profit or loss.
- Exchange differences arising on monetary Items shall be recognized in profit or loss.
- Change in functional currency - The effect of a change in functional currency is
accounted for prospectively

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 accounted for prospectively

USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONALCURRENCY

Translation to the presentation currency
Procedures to translate functional currency to presentation currency in
a. assets and liabilities for each statement of financial position presented (ie including
comparatives) shall be translated at the closing rate at the date of that statement of
financial position;
b. income and expenses for each statement presenting P/L and other comprehensive
income (ie including comparatives) shall be translated at exchange rates at the dates
of the transactions; and
c. all resulting exchange differences shall be recognized in other comprehensive income.

PAS 41: Agriculture

Definition
•Agricultural activity
- the management of the biological transformation of biological assets for sale, into
agricultural produce, or into additional biological assets.
•Agricultural produce
- the harvested product of the biological assets.
•Biological transformation
- comprises the processes of growth, degeneration and production that cause qualitative
or quantitative changes in a biological asset.

• Consumable Biological Assets

- are those that are to be harvested as agricultural produce or sold as biological assets.
Examples: Livestock intended for the production of the meat, livestock held for sale,
fish in farms, crops such as wheat Bearer
• Biological Assets
- are those other than consumable biological assets. Examples: livestock from which
milk is produced, fruit trees from which fruit is harvested. Bearer biological assets are
not agricultural produce but, rather, are held to bear produce.

Measurement
An entity shall recognise a biological asset or agricultural produce when:
• the entity controls the asset as a result of past events;
• it is probable that future economic benefits associated with the asset will flow to the
entity; and
• the fair value or cost of the asset can be measured reliably.

A biological asset shall be measured on initial recognition and at each balance sheet date at
its fair value less cost to sell, except where the fair value cannot be measured reliably.
Note:
1. All cost related to biological asset that are measured at fair value are recognized as
expense when incurred, other than costs to purchase biological asset
2. The change in fair value of biological asset is part of physical change and price change

Agricultural produce harvested from an entity’s biological assets shall be measured at its fair
value less cost to sell at the point of harvest.

Gains and Losses

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Gains and Losses
- The gain on initial recognition of biological assets at fair value less costs to sell, and
changes in fair value less costs to sell of biological assets during a period, are included
in profit or loss. [PAS 41.26]
- A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair
value less costs to sell are included in profit or loss for the period in which it arises.
[PAS 41.28]

PAS 16: Property, Plant and Equipment

Scope
- The Standard shall be applied in accounting for property, plant and equipment except:-
○ IFRS 5,
○ IFRS 6,
○ IAS 41

Definition
• Property, Plant and Equipment
○ Tangible items that:
a. Held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
b. Are expected to be used during more than one period
• Carrying Amount
○ is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
○ Cost - (AD+AIL)
• Depreciation
○ is the systematic allocation of the depreciable amount of an asset over its useful
life.
• Fair value
○ is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
• Recoverable amount
○ is the higher of an asset’s fair value less costs to sell and its value in use.
• Value in use
○ is the present value of the future cash flows expected to be derived from an asset
or cash generating unit.
• A cash-generating unit
○ is the smallest Identifiable group of assets that generates cash
• Impairment
○ is a fall in the value of an asset i.e recoverable less than its carrying amount
• Bearer Plant: A living plant that:
a. is used in the production or supply of agricultural produce;
b. is expected to bear produce for more than one period; and
c. has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

Recognition
• The cost of an item of property, plant and equipment shall be recognized as an asset if
and only if:
a. it is probable that future economic Benefits associated with the item will flow to
the entity;
b. the cost of the item can be measured reliably.

MEASUREMENT
• Initially recorded at cost
• If payment is deferred beyond normal credit term, Cash Price Equivalent - Total
Payment = Interest over credit period
• Subsequent costs are only recognised if costs can be reliably measured and these will
lead to additional economic benefits flowing to the entity.
• Subsequent Expenditure that can be capitalized

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 • Subsequent Expenditure that can be capitalized
a. Replacement Cost
- Old part is derecognized (depreciated or not) and cost of new part is
capitalized
b. Major Inspection
- Treated the same as replacement cost - Cost of new major inspection is
capitalized while cost of old inspection is derecognized

Elements of cost
a. Its purchase price , including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates.
b. Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
c. The initial estimate of the costs of dismantling and removing the item and restoring the
site on which it is located, the obligation for which an entity incurs either when the item
is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.

Acquisition and Treatment

1. Cash Basis
2. On Account subject to cash discount
3. Installment Basis
4. Issuance of Share Capital
- Property should be measure based on the priority of:
1. FV of the Property Received
2. FV of the share capital
3. Par value or stated value of the share capital
5. Issuance of Bond Payable
- Property should be measure based on the priority of
1. FV of bonds payable
2. FV of the Property Received
3. Face amount of bonds payable
6. Exchange
- Commercial Substance
 depends on the extent to which future cash flows are expected to change
as a result of the transaction
 Note: If there is minimal impact on future cash flows then the exchange
lacks commercial substance.
- Property Should be measured
1. FV of the asset given up
2. FV of the asset received
3. CA of the Asset Given Up (Use immediately if no commercial substance)
7. Donation
- By Shareholder
 Recorded at fair value with credit to donated capital
 Direct cost attributed to the donation is charge to donated capital.
- By Non-Shareholder
 Recorded at fair value with credit to Income.
 Direct cost attributed to the donation is charge to P/L
8. Government Grant
9. Construction
- Includes
a. Direct Cost of Materials
b. Direct Cost of Labor
c. Indirect cost and incremental overhead specifically identified or traceable to
the constructions
- Note:
a. Saving or loss on construction is not part of the asset.
b. Abnormal waste material, labor or overhead not part of the asset.
c. Incidental operation not part of the asset.

Subsequent Measurement
- An entity shall choose either the cost model or the revaluation model as its

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 - An entity shall choose either the cost model or the revaluation model as its
accounting policy and shall apply that policy to an entire class of property, plant and
equipment.

Cost Model
- The asset is carried at cost less accumulated depreciation and impairment losses.
- Measured at Carrying Amount

Depreciation
- The depreciable amount is allocated on a systematic basis over the asset’s useful life
- The residual value, the useful life and the depreciation method of an asset are
reviewed annually at reporting date
- Revenue based depreciation is prohibited.
- Depreciation method reflects the pattern in which future economic benefits are
expected to be consumed.
- Changes in residual value, depreciation method and useful life are changes in
estimates are accounted for prospectively in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors
- Depreciation is charged to profit or loss, unless it is included in the carrying amount of
another asset
- Depreciation starts when the asset is available for use
- Depreciation Stops if asset is:
a. Derecognized
b. Classified as held for sale under PFRS 5
c. Fully Depreciated
 Idle PPE - continuous to be depreciated

Terms
• Depreciable Amount
- Depreciable amount is the cost of an asset, or other amount substituted for cost,
less its residual value.
• Residual Value
- The residual value of an asset is the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition expected at the
end of its useful life.
• Useful Life
- the period over which an asset is expected to be available for use by an entity; or
- the number of production or similar units expected to be obtained from the asset
by an entity.
• Carrying Amount
- Cost - any accumulated depreciation and accumulated impairment loss

Parts of an asset
• Each part of an asset that has a cost that is significant in relation to the total cost of the
item must be depreciated separately.
• This means that the cost of an asset might be split into several different assets and
each depreciated separately.

Depreciation methods
- PAS 16 does not prescribe any specific method
1. Straight line method
2. Sum of the years digits method
3. Double declining balance method
4. Units of production method

Revaluation Model
 The asset is carried at a revalued amount, being its fair value at the date of the
revaluation, less subsequent depreciation, provided that fair value can be measured
reliably.
 Revaluations should be carried out regularly (the carrying amount of an asset should
not differ materially from its fair value at the reporting date – either higher or lower)
 Revaluation frequency depends upon the changes in fair value of the items measured

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  Revaluation frequency depends upon the changes in fair value of the items measured
(annual revaluation for volatile items or intervals between 3 - 5 years for items with less
significant changes)
 If an item is revalued, the entire class of assets to which that asset belongs is required
to be revalued
 Revalued assets are depreciated the same way as under the cost model
 The gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. The accumulated depreciation at the
date of the revaluation is adjusted to equal the difference between the gross carrying
amount and the carrying amount of the asset after taking into account accumulated
impairment losses
 Accumulated depreciation is eliminated against the gross carrying amount.
 If an asset’s carrying amount is increased as a result of a revaluation:
- the increase shall be recognised in other comprehensive income and
accumulated in equity under the heading of revaluation surplus; or
- the increase shall be recognised in profit or loss to the extent that it reverses a
revaluation decrease of the same asset previously recognised in profit or loss
 If an asset’s carrying amount is decreased as a result of a revaluation:
- the decrease shall be recognised in profit or loss; or
- the decrease shall be recognised in other comprehensive income to the extent of
any credit balance existing in the revaluation surplus in respect of that asset. The
decrease recognised in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.

Impairment
 To determine whether an item of property, plant and equipment is impaired, an entity
applies IAS 36 Impairment of Assets.

Compensation for impairment

 Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up shall be included in profit or loss when the compensation
becomes receivable.

Derecognition
 The carrying amount of an item of property, plant and equipment shall be
derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal.
 The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be included in profit or loss.
 The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds, if
any, and the carrying amount of the item.

PAS 20 Accounting for Government Grants and

Disclosure of Government Assistance
Definition
Government Grants
 Government grants are assistance received from the government in the form of
transfers of resources in exchange for compliance with certain conditions.
 Government grants exclude government assistance whose value cannot be reasonably
measured or cannot be distinguished from the entity’s normal trading transactions.

Examples of Government Grants

a. Receipt of cash, land, or other non-cash assets from the government subject to
compliance with certain conditions
b. Receipt of financial aid in case of loss from a calamity
c. Forgiveness of an existing loan from the government
d. Benefit of a government loan with below-market rate of interest

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The following are not government grants:
a. Tax benefits
b. Free technical or marketing advice,
c. Provision of guarantees
d. Government procurement policy that is responsible for a portion of the entity’s sales,
and
e. Public improvements that benefit the entire community.

Recognition
 Government grants are recognized if there is reasonable assurance that:
a. the attached conditions will be complied with; and
b. the grants will be received

Classifications of government grants according to attached condition

a. Classifications of government grants according to attached condition
- grants whose primary condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term assets.
b. Grants related to income
- grants other than those related to assets.

Initial measurement
Monetary grants are measured at the
a. amount of cash received; or
b. the fair value of amount receivable; or
c. carrying amount of loan payable to government for which repayment is forgiven; or
d. discount on loan payable to government at a below-market rate of interest.

Non-monetary grants (e.g., land and other resources) are measured at the:
a. fair value of non-monetary asset received.
b. alternatively, at nominal amount or zero, plus direct costs incurred in preparing the
asset for its intended use.

Accounting for Gov’t. Grants

 The main concept in accounting for gov’t. grants is the MATCHING CONCEPT.
 This means that the gov’t. grant is recognized as income as the entity recognizes as
expense the related cost for which the grant is intended to compensate.

Presentation of Government grants related to assets

Government grants related to assets are presented in the statement of financial
position either by:
a. Gross presentation –the grant is presented as deferred income (liability); or
b. Net presentation – the grant is deducted when computing for the carrying amount of
the asset

Presentation of Government grants related to income

 Grants related to income are sometimes presented in the income statement
either by:
a. Gross presentation – the grant is presented separately or under a general
heading such as “Other income”, or
b. Net presentation – the grant is deducted in reporting the related expense

Repayment of Gov’t. Grants

 A government grant that becomes repayable is accounted for as a change in
accounting estimate that is treated prospectively under PAS 8.

PAS 23 BORROWING COSTS

Core principle
 “Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset form part of the cost of that asset. Other borrowing
costs are recognized as an expense.” (PAS 23.1)

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 costs are recognized as an expense.” (PAS 23.1)

Borrowing costs
 Borrowing costs are interest and other costs incurred by an entity in connection with
the borrowing of funds. Borrowing costs may include:
1. interest expense on financial liabilities or lease liabilities computed using the
effective interest method
2. Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.

Qualifying asset
 Qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale. Depending on the circumstances, any of the
following may be qualifying assets:
a. Inventories
b. Manufacturing plants
c. Power generation facilities
d. Intangible assets
e. Investment properties measured under cost model
f. bearer plants
 The following are not qualifying assets
a. Financial assets, and inventories that are manufactured, or otherwise produced,
over a short period of time.
b. Assets that are ready for their intended use or sale when acquired are not
qualifying assets.
c. Assets that are routinely manufactured or otherwise produced in large quantities
on a repetitive basis
d. assets measured at fair value

Commencement of capitalization
 The capitalization of borrowing costs as part of the cost of a qualifying asset
commences on the date when all of the following conditions are met:
a. The entity incurs expenditures for the asset;
b. The entity incurs borrowing costs; and
c. It undertakes activities that are necessary to prepare the asset for its intended
use or sale.
 The activities necessary to prepare the asset for its intended use or sale encompass
more than the physical construction of the asset. They include technical and
administrative work prior to the commencement of physical construction, such as the
activities associated with obtaining permits prior to the commencement of the physical
construction.
 However, such activities exclude the holding of an asset when no production or
development that changes the asset’s condition is taking place. For example,
borrowing costs incurred while land is under development are capitalised during the
period in which activities related to the development are being undertaken.

Suspension of capitalization
 Capitalization of borrowing costs shall be suspended during extended periods of
suspension of active development of a qualifying asset.
 An entity also does not suspend capitalising borrowing costs when a temporary delay
is a necessary part of the process of getting an asset ready for its intended use or sale.
For example, capitalisation continues during the extended period that high water levels
delay construction of a bridge, if such high-water levels are common during the
construction period in the geographical region involved.

Cessation of capitalization
 An entity shall cease capitalizing borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.

Determining borrowing costs eligible for capitalization

1. Qualifying assets financed through Specific borrowing

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 -

2. Qualifying assets financed through General borrowing

- The amount computed in the formula above shall be compared with the actual
borrowing costs incurred during the period. The amount to be capitalized is the
lower amount.

Financial statement presentation

- Qualifying assets are not segregated from other assets in the financial statements.
They are presented as regular assets under their normal classification as provided
under other standards.

PAS 38: Intangible Assets

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 Asset

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.

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.

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
 The cost of a separately acquired intangible asset comprises:
1. Its purchase price, including import duties and nonrefundable
purchase taxes, after deducting trade discounts and rebates; and
2. Any directly attributable cost of preparing the asset for its intended
use.
2. Acquisition as part of a business combination

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 2. 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.
3. 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
4. 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.

5. Internal generation / self-creation

 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.

Research and Development Cost (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: (TIAPAM)
(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
- 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
- NOTE: R&D expense relates to something that is still in the process of being
invented. It does not relate to periodic changes to an existing product . The
following terms generally indicate that a cost is not an R&D expense:
‘commercial,’ ‘customer,’ ‘advertising’ and ‘market’.

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

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 • 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.

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.

Subsequent expenditure
• Subsequent expenditures on an intangible asset are generally recognized as expense.
• Exception: capitalized if the following criteria are met:
○ Probable future economic benefits attributable to subsequent expenditure will
flow to the entity
○ Subsequent expenditure can be measured reliably

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.

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.

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.
• Systematic allocation of the amortizable amount of an intangible asset over its useful
life
• Shall begin when the asset is available for use, i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by the
management

Intangible Assets with finite and indefinite lives

Kinds of Intangible Assets

Patent
• Exclusive right granted by the government giving the holder thereof to exclusively use,
manufacture and sell a product or process for a period of 20 years without interference
or infringement by others.
• Cost
○ When purchased: Purchase price + any directly attributable cost
○ If internally developed: Licensing + Other legal fees related in securing patent
rights
• Costs that are expensed as incurred
○ R&D costs
○ Legal fees and other costs of successfully prosecuting or defending a patent
○ Legal fees and other costs of unsuccessfully prosecuting or defending a patent

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 ○ Legal fees and other costs of unsuccessfully prosecuting or defending a patent
• Amortization of patent
○ Legal life or useful life whichever is shorter
○ Acquired competitive patent – competitive patent + old patent must be amortized
over the remaining life of the patent
○ Related patent
 Extension of life – old + related patent must be amortized over the extended
life
 No extension of life – old = amortized over remaining life of old estimated
UL; related patent = amortized over its own life

Copyright
• Exclusive right granted by the government to the author, composer or artist enabling
him to publish, sell or otherwise benefit from his literary, musical or artistic work
• Lifetime of the author + 50 years after death
• Cost of Copyright
○ Developed copyright = All expenses incurred in the production including those
required to establish or obtain right
○ Purchased = Cash paid + other expenses incidental to the acquisition
• Amortization of copyright
○ Based on useful life
○ Direct writeoff of the cost of copyright against revenue of the first printing may
also be appropriate

Franchise
• Agreement in which one party called the franchisor grants certain rights to another
party called the franchisee
• Franchise Cost
○ Initial Franchise Fee
○ Continuing (periodic) Franchise Fee
• Amortization of Franchise
• Book of Franchisor

Leasehold or Lease Right

• Cost of leasehold
• Accounting Treatment

Leasehold Improvements
• Depreciation of leasehold improvements
○ Lease term or useful life of the improvements which is shorter
○ If the lease is terminated prior to the agreed term, the unamortized cost of the
leasehold improvements is considered as a loss
• Renewal option - Depreciate the leasehold improvement
○ Too uncertain - Lease term or UL whichever is shorter
○ Highly probable (too certain) - Extended lease period or life of the leasehold
improvements whichever is shorter

Trademark
• Mark – any visible sign capable of distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall continue a stamped or marked container of
goods
• Cost
• Amortization

Customer List
• Database that includes names, contact information, order history, and demographic
information for a list of customers

Internally developed computer software

• Classifications
○ Computer software = intangible asset (general rule)

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 ○ Computer software = intangible asset (general rule)
○ Purchased for resale = inventory
○ Integral part of computer = PPE
○ Not an integral part of computer = intangible asset

Website Cost
• For internal and external access
• Various purposes of external access:
○ Promotion of entity’s own products and services
○ Provide electronic services
○ Sell products and services
• Intangible asset if it meets the criteria of PAS 38

Organization Costs
• Costs incurred in forming or organizing a corporation
○ Legal fees – drafting of Articles of Incorporation and Bylaws and corporate
registration
○ Promotional and underwriting fees for the stock issuance
○ Incorporation fees
○ Stock issuance cost
• Deduction from equity net of tax benefit (if any) – Share premium; RE

Advertising and promotional activity

• Expensed as incurred when the entity either has the right to access the goods or has
received the service

Goodwill
• Arises from the excess consideration transferred over the fair value of the net assets
acquired
• Not part of PAS 38
• PFRS 3

Derecognition of intangible asset

• Disposal
• No future economic benefits are expected from its use and disposal
• Net disposal proceeds vs. carrying amount = gain(loss) on disposal (P/L)

Financial Statement Presentation

• One-line item in the Statement of Financial Position as “Intangible Assets” on the non-
current section
○ Goodwill – not intangible asset
 Separate line item – “Goodwill”
 Intangible Assets, including Goodwill

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