Final answer:
The cash flow approach for recognizing intangible assets focuses on future cash flows and uses present value calculations. Straight-line amortization spreads the cost evenly over the useful life. The cash flow approach provides a more accurate valuation by considering the time value of money.
Step-by-step explanation:
When recognizing intangible assets using the cash flow approach, the focus is on the expected future cash flows generated by the asset. This approach considers the present value of those cash flows to determine the value of the intangible asset. On the other hand, straight-line amortization spreads the cost of the intangible asset evenly over its useful life.
Comparing the two approaches, the cash flow approach provides a more accurate valuation of an intangible asset because it takes into account the expected future cash flows. It considers the time value of money by discounting those cash flows to their present value. Straight-line amortization, on the other hand, may not reflect the actual financial benefits of the intangible asset.
For example, let's say Company A has a patent with a useful life of 10 years. Using the cash flow approach, the company estimates that the patent will generate $1 million in cash flows per year. If the discount rate is 10%, Company A would calculate the present value of the cash flows for each year to determine the overall value of the patent. On the other hand, straight-line amortization would simply spread the cost of the patent evenly over the 10-year period.