Question

do brand names such as coca cola have a monetary worth which should be reflected in the company 's balance sheet ? what arguments are there for and against internally generated intangible assets being recognised in financial statements?

Answer 1

Answer:

Brand Value is different than Goodwill. But, for accounting purpose, brand value is considered as a part of Goodwill only. Coca-Cola's brand value does not appear in its Balance Sheet. This is due to the accounting standards. Accounting Standards along with US GAAP, require items to be recorded at Historical Cost. Historical cost is purchase cost which is evidenced by documents such as receipts, vouchers etc. Any such costs which are attributed to historical cost is shown in the Balance Sheet. Other costs are ignored such as Brand Value which is generated at current value.

Moreover, Brand Equity is considered as an intangible asset because the value of a brand is not a physical asset and is ultimately determined by consumers' perception of the brand. Hence, it cannot be easily accounted for on a company's financial statements.

Historical Cost ignores Fair Value untill it is actually sold. So brand value could appear as goodwill in the acquiring company's balance sheet because they will have actually paid for it in real money and not just be a valuation based on market variables and the value placed by differing interested parties.

Conclusion:

Only aquired goodwill is shown in the Balance Sheet and not internally generated goodwill.

Arguements for and against internally generated intangible assets being recognised in financial statements:

This is a long standing debate in the accounting standadards board. To give detailed and useful information to the users, the board decides to go with Historical Cost which is constant and does not change according to market fluctuations. Let the users of information decide on the market valuation of the assets.

Arguements for:

• Internally Generated intangible assets are the result of good organisation of business and better management. There is effort included in this asset generation.
• Company has certainly spent on earning this asset. If expensidture is included and that could be tangible or intangible, why not its result? Result is the best outcome which has grown cumulatively over a period of time.
• Brand value also acknowleges going-concern concept.

Arguements against:

• Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset because it is not an identifiable resource.
• The cost of generating an intangible asset internally is often difficult to distinguish from the cost of maintaining or enhancing the entity’s operations or goodwill.

Comment if more explanation is needed.

All the best !!