The recent financial crisis highlights the tradeoff between ‘reliable’ and ‘relevant’ accounting and has sparked off an incessant debate. The pursuit of measuring ‘reliability’ vis-ŕ-vis ‘relevance’ persistently comes under the focus of this study. This paper examines the inclusion of intangible assets in the financial statements and the challenges in balance sheet approach of reporting with fair value. Since the measurements are relatively unreliable, there is a need to verify whether they conform to the relevance of intangible assets and also the extent to which the disclosure of intangible assets can be capitalized in the balance sheet. Therefore, it is imperative that unanimous approach of valuation of intangible assets is to be structured under the fair value accounting. This paper seeks to project ‘future earnings’ associated with intangible assets, particularly in reference to brands, in the balance sheet.

Accounting and reporting of intangible assets have been the subject of criticism for various reasons and are among the most contentious issues of debate for the past three decades. It is unlikely that this debate will cease since the fair value accounting practices are endorsed both by the Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB). The issue of SFAS No. 157 ‘Fair Value Measurements’, though working in ‘bilateral convergence’ with the IASB, is aimed at improvising and converging the fair value accounting by plugging the loopholes present in the current standards (Alali and Cao, 2010). The growing volume of international operations and mergers and acquisitions by multinational firms necessitates greater harmonization of financial accounting standards (Smith, 2008). Kamal et al. (2008) additionally endorsed the need to facilitate the acceptance and practice of International Financial Reporting Standards (IFRS) for the US-based firms as favorably adopted by countries worldwide.

The regulators who follow the fair value accounting practices tend to do away with the historical cost accounting practices in the backyard of its application. Nevertheless, increasing controversies have been shaping up ever since it was debated that ‘reliability’ can be a ‘scapegoat’, in the relative case for the accounting fraternity to increase ‘value relevance’. The debate is concurrent with the increasing recognition of intangible assets and their reporting in the financial statements by companies, especially applicable to the software technology firms. The practice and endorsement of fair value accounting brings up another contentious issue, that the representation of intangible assets in the financial statements would close the gap between the market values and the book values (Mouritsen, 2003). On the contrary, Hitz (2007) asserted that intangible assets are not likely to eliminate the gap between the book and market value for two factors—the fair value of identifiable but non-recognizable category and the other is nonidentifiable factor that becomes a component of goodwill.

The reporting of intangible assets is ‘forward looking’, while ironically the sacrificial pursuit by managers for reporting these estimates can be subject to manipulation and biases and may be very difficult to validate. This is further aggravated by the use of ‘Mark-to-market’ and ‘Mark-to-model’ accounting with the complexity, unreliability and scarcity of market value information (Shim and Larkin, 1998). It invariably becomes a challenge for the standard setters and regulators to amend the statement in the light of corporate needs and on other corporate governance concerns by involving different stakeholders. These multiple interpretations have intensified the debate on reliability and credibility.

The paper is organized as follows: First, it discusses the background of the fair value hierarchy, followed by a comparison of fair value accounting and historical cost approach. Subsequently, it explains the different perspectives of the inclusion of intangible assets in the balance sheet statement, and the challenges involved in the balance sheet approach. Finally, it concludes by summing up the discussions.

Accounting Research and Audit Practices, Economic Performance, Millennium Development Goals, Corporate Sustainability, Economic Transactions, Social Management, Environmental Accounting, Corporate Houses, Environmental Management System, Community Development, Waste Management, German Firms, United Nations Environment Program.