Question

Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?

Answer 1

When intangibles are created internally, it is often difficult to determine the validity of any

future service potential. To permit deferral of these types of costs would lead to a great deal of

subjectivity because management could argue that almost any expense could be capitalized

on the basis that it will increase future benefits. The cost of purchased intangibles, however, is

capitalized because its cost can be objectively verified and reflects its fair value at the date of

acquisition.