Although the company may have identified an intangible asset, recognizing it on the balance sheet is another matter. Before the company may record the asset in its books, the company must be able to demonstrate that the asset meets the definition of an intangible asset and also the recognition criteria for such assets.

According to IAS 38 an intangible asset shall be recognized if, and only if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. As you may have understood, both those conditions have to be met obviously.

Of course, we all dream of making lots of money and gaining huge profits, however the probability of expected future economic benefits need to be assessed using reasonable and supportable assumptions that is the management’s best estimate in the current economic climate and the ones reasonably to be expected over the useful life of the asset. What I’d like to emphasize here are the words ‘reasonable’ and ‘supportable’ – the questions you need to ask yourself are for an example the following: ‘is the market really this big?’, ‘what are the alternatives for clients?’, ‘is there need for discounts perhaps?’, ‘what is needed to maintain this level of income and is this achievable?’, ‘what evidence do I have that supports my estimates?’ etc. Dreaming is a good thing, but once in a while you need to come down to earth.

When you may have reached to a reasonable and supported figure in terms of future benefits, what you still need to measure is the cost of an asset. Now, if the asset is acquired, the cost is in most cases easy to measure as it comprises of the cost price as well as any directly attributable cost of preparing the asset for its intended use. However, internally generated assets are entirely another matter that we’ll cover in other posts.

To sum it up – if the company has identified an asset, it will generate profits (or help reduce cost) and the cost can be measured reliably, the asset shall be recognized on the balance sheet.