Valuation of intangible assets

The valuation of intangible assets is not a simple matter. The estimation of value and the type and extent of amortization pose a problem.

Valuation of Intangible Assets

When rights are acquired, these derived intangible assets can be relatively easily valued. The measurability of value is provided by negotiations between the parties, and usually, a clear value is established. This fulfills the prerequisite for capitalization, and the corresponding amount can be recorded in the balance sheet. In subsequent periods, however, valuation becomes more difficult. While, for example, brands are not time-limited in their use, licenses continuously lose value because their duration of use is limited. This leads to significant variations in amortization depending on the intangible asset. A company is required to continuously assess the value of such an asset and make corrections if necessary (impairment test).

The capitalization of self-created intangible assets is permitted. However, it is important that the value must be identifiable and a measurable cash inflow or benefit to the company can be estimated. Problems in this context primarily arise with the capitalization of development costs. These can usually only be capitalized at a rather late stage, which is particularly problematic for young entrepreneurs with limited financial resources.

Requirements for Accounting

For the accounting of intangible assets, four conditions must be met.

1. The asset is controlled by the company.
2. There is a sufficient probability that a benefit to the company can be generated from the asset.
3. The asset is identifiable.
4. The acquisition and production costs can be reliably determined.