Intangibles, biological assets, and impairment

These three standards score because they punish memorized shortcuts and reward candidates who know the exact rule. PAS 38 tests what you may capitalize, PAS 41 tests one clean fair value rule with a bearer-plant twist, and PAS 36 tests one comparison that recurs across the whole exam. Learn the boundaries and you convert a cluster of tricky items into steady points.

Intangible assets (PAS 38)

An intangible asset is an identifiable non-monetary asset without physical substance. Identifiable means it is either separable (can be sold, licensed, or transferred on its own) or arises from contractual or other legal rights. It is recognized only when future economic benefits are probable and its cost can be measured reliably, and it is initially measured at cost.

The decisive rule is on internal generation. Research costs are always expensed as incurred, because at the research stage the entity cannot demonstrate that an asset exists. Development costs are capitalized only when the entity can demonstrate all six criteria: technical feasibility, intention to complete, ability to use or sell, how the asset will generate probable future economic benefits, availability of resources to complete, and the ability to measure the development expenditure reliably. Internally generated goodwill, brands, mastheads, publishing titles, and customer lists are never recognized as assets.

Worked example. Silang Devices spends P600,000 on research and P900,000 on development, of which P200,000 was incurred before the six criteria were met and P700,000 after. Capitalize the P700,000 that qualifies. Expense the rest: 600,000 plus 200,000 equals P800,000 to profit or loss.

After recognition, an entity applies the cost model or, only when an active market exists, the revaluation model. A finite-life intangible is amortized over its useful life with residual value normally zero. An indefinite-life intangible is not amortized but is tested for impairment at least annually. A patent bought for P900,000 with a legal life of 20 years but an expected useful life of 6 years is amortized over the shorter period, 6 years, giving amortization of P150,000 per year.

Biological assets and agricultural produce (PAS 41)

A biological asset is a living animal or plant. Agricultural produce is the harvested product of the entity's biological assets. The core rule is one line: a biological asset is measured at fair value less costs to sell at initial recognition and at each reporting date, and any change in that amount goes to profit or loss. Agricultural produce is measured at fair value less costs to sell at the point of harvest; that amount becomes its cost when the produce moves into inventory under PAS 2.

Watch the bearer-plant exception. Under the amendments to PAS 16 and PAS 41, a bearer plant (for example a grapevine or an oil palm that bears produce over many periods) is accounted for as property, plant, and equipment under PAS 16, while the produce still growing on it stays within PAS 41. The living animals in a dairy herd remain biological assets.

Worked example. Amadeo Dairy holds a herd measured at fair value less costs to sell of P700,000 on January 1. During the year it buys additional animals for P90,000, and the herd is measured at P850,000 on December 31. The gain recognized in profit or loss is 850,000 less 700,000 less 90,000 equals P60,000.

Impairment of assets (PAS 36)

An asset is impaired when its carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use, where value in use is the present value of the future cash flows expected from the asset. The impairment loss is the excess of carrying amount over recoverable amount.

You test when there is an indicator (external, such as a market-value decline or rising interest rates; internal, such as obsolescence or physical damage). Three assets are tested for impairment at least annually regardless of indicators: goodwill, an intangible with an indefinite useful life, and an intangible not yet available for use. When an asset does not generate largely independent cash inflows, it is tested within its cash-generating unit, the smallest group of assets that does.

Item	Impairment reversal
PPE, finite-life intangibles	Reversal allowed, capped at the depreciated carrying amount had no impairment been recognized
Goodwill	Impairment is never reversed

Worked example. A machine has a carrying amount of P5,000,000. Its fair value less costs of disposal is P4,200,000 and its value in use is P4,600,000. Recoverable amount is the higher figure, P4,600,000, so the impairment loss is 5,000,000 less 4,600,000 equals P400,000.

Exam-day strategy

• On PAS 38, split the spend at the research or development line first: research and pre-criteria development are expensed, only post-criteria development is capitalized, and internally generated goodwill and brands are never assets.
• Amortize a finite-life intangible over the shorter of useful life and legal life, and never amortize an indefinite-life intangible; test it for impairment instead.
• For PAS 41, default to fair value less costs to sell with the change in profit or loss, then check whether a bearer plant (PAS 16) has been slipped into the herd.
• For PAS 36, always take recoverable amount as the higher of the two measures, and remember goodwill impairment is a one-way street that is never reversed.