Question

#1 Please explain and provide examples for better understanding

What are some of the judgments used in estimating the future economic benefit (i.e., measuring the value) of intangible assets? Why would you want to estimate risk associated with cash flows?

Answer 1

Hey buddy !!

The following points help in the judgement of future economic benefits:

An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law. In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way. Market and technical knowledge may give rise to future economic benefits. An entity controls those benefits if, for example, the knowledge is protected by legal rights such as copyrights, a restraint of trade agreement (where permitted) or by a legal duty on employees to maintain confidentiality. An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to future economic benefits from training. The entity may also expect that the staff will continue to make their skills available to the entity. However, an entity usually has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training for these items to meet the definition of an intangible asset. The future economic benefits flowing from an intangible asset 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. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues.

.We would also want to measure the risk of cash flows because an Intangible asset is only recognized in the books when the probability of future economic benefits from such intangible asset exceeds 50% and if the risk of cash flows is high then the measurement aspect would also be affected by the same. Thus it is important to assess the risk of cash flows.

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