Question

Imagine you are the chief financial officer of a company with valuable internally created intangible assets. Create an argument supporting the inclusion of the intangibles on the balance sheet at fair market value. What are the risks and challenges involved in assigning a dollar value to internally created intangible assets?

Answer 1

First of all we have to understand that as per GAAP Intangible assets are only recorded in the balance sheet when it is acquired. That way the company has an identifiable value for the asset and its lifespan is known si it can amortize the acquired intangible assets and show its value in the balance sheet. Further Intangible assets with an indefinite life like goodwill are not amortized and hence not shown in the balance sheet.

Now as per Internallly created intangible assets are concerned like say Brand value, it can't be shown in the balance sheet as per GAAP. However the company can determine its Fair value by estimating the Future cash flows aor income or cost savings. Now as per the changing accounting requirements where the Fair value concept is given importance and all the financial instruments are shown at Fair value the changes could be made in the existing GAAP and the internall genertaed intangible assets can also been shown in the balnce sheet based on the estimate made each year.

The challanges are as follows:-

1. If fair value is taken then it will be based on the estimate of future earnings or cash flow which is not certain.

2. The life of internally generated intangible assets cannot be determined accurately and mostly it is indefinite.

3. Present accounting rules of GAAP does not allow for recording of internally generated intangible assets in the balance sheet.