Discounted cash flows (DCF) have been a traditional method in business valuation. This method is most useful in judging the risk and uncertainty of a project. Since few years, companies like Infosys have used this approach to value their brands and represent the same in their balance sheet. The US GAAP FASB 142 outlines the fair value measurement of intangibles and goodwill impairment by using the discounted approach. This has further been described in the provisions of the Statement of Financial Accounting Concepts No. 7. The concepts provide guidelines for analyzing new or up-and-coming problems of financial accounting and reporting.
The DCF methodology is not without its drawbacks, yet it makes a popular tool for measurement of projects under capital budgeting and in large-scale business valuation. Lately, for the measurement of intangibles and goodwill impairment, DCF approach has been used. Intangible assets are recognized according to the statement FAS 142 as over the period which an asset is expected to contribute directly or indirectly to future cash flows. Therefore, it makes it more challenging to understand the scope of the accounting standards and the cash flow implication on intangible assets valuation.
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