Accounting for intangibles


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Accounting for intangibles

  1. 1. 1 Accounting for Intangible and Brand Prof. Mallikarjun Bali BLDEA’s VP Dr. P G H C E T Department of M B A Bijapur
  2. 2. Introduction “Intangible assets are all the elements of a business enterprise that exist in addition to working capital and tangible assets. They are the elements, after working capital and tangible assets, that make the business work and are often the primary contributors to the earning power of the enterprise. Their existence is dependent on the presence, or expectation, of earnings” 2
  3. 3. Characteristics of intangible assets They are capable of legal enforcement and also of legal transfer of ownership They are capable of producing revenues in their own right The assets are capable of generating additional resources / cash flows / profits over and above those which the business would otherwise make if it did not own the rights in question They are often separable from the underlying business The asset can be regarded as a capital asset rather than a carryover of recent expenditure 3
  4. 4. Importance of Intangibles PwC research shows that total intangible assets comprise, on average, some 80% of companies’ value. Intangible assets may be the only thing of significant value in the business. This is because: - They provide barriers to entry -They differentiate products (even commodities) - They provide a more stable and profitable earnings stream - They can have a long life (e.g. brands / trademarks) - They may provide international recognition 4
  5. 5. Objectives of Intangible Accounting Identification of Intangibles requirement Measuring the cost on Intangibles Collection of data Amortization of cost Reflecting the same in financial statement Interpreting the result thereon 5
  6. 6. 6 Common Types of Intangibles Patents, Copyrights, Franchises, Trade names, Trademarks, Goodwill etc..
  7. 7. 7 Valuation of Intangibles Intangibles are recorded at cost and are also reported at cost at the end of an accounting period. Intangibles with limited life are subject to amortization and possible impairment test. Intangibles with indefinite life are only subject to impairment test at least annually.
  8. 8. 8 Costs of Intangibles Costs of Intangibles include acquisition costs plus any other expenditures necessary to make the intangibles ready for the intended uses (i.e., purchase price, legal fees, filing fees etc). Essentially, the accounting treatment of valuation for intangibles closely parallels that followed by tangible assets.
  9. 9. 9 Intangibles Assets with Finite lives Patents (20 years), copyrights (the life of the creator plus 70 years), franchise and license (the contractual life). The costs are subjected to amortization (a process of cost allocation) over the shorter of the legal or useful life, not to exceed 40 years.
  10. 10. 10 Amortization of Intangibles The impairment test needed only when events indicate that the book value may not be recoverable. Amortization Method: Straight-line method. Other method can be applied if it is more appropriate than the S-L method. Residual value: Usually zero.
  11. 11. Summary of the Chapter Intangible Legal Life Amortization Patent 20 The shorter of useful or legal life Copyrights Life of creator + 70 years The shorter of useful or legal life not to exceed 40 years Franchises or Licenses Contractual agreements The shorter of contractual Life or useful life Trade Names & Trademarks Unlimited (renewed every 10 years) Impairment test only (at least annually) In-Process R&D Unlimited Impairment test only Goodwill Unlimited Impairment test only 11
  12. 12. Brand Accounting 12
  13. 13. Introduction to Brand “A name, term, design, symbol or any other feature that identifies one seller’s good or service as distinct from those of other sellers.” Intangible Assets 13
  14. 14. Brand as a Strategic Assets It Creates goodwill in the market Brand enhances the market share Brand generates huge revenue as other assets It creates competitive position in the market It is an intangible asset 14
  15. 15. Need for Brand Accounting Collection of data and cost of Brand creation Allocation and apportionment of cost on various centers Valuation of brand and life Amortization of cost of brand Reflection on financial statement Interpreting on the financial statement Intangible Assets 15
  16. 16. Valuation of Brands Homegrown Brands The total cost incurred in order to develop the brand Acquired Brands Total cost paid to purchase the brand Intangible Assets 16
  17. 17. Practice Intangible Assets 17 In Australia Rupert Murdoch’s News Corporation included a valuation of some of its magazines on its balance sheets in 1984. British firms used brand values primarily to boost their balance sheets. In the United States, generally accepted accounting principles (blanket amortization principles) mean that placing a brand on the balance sheet would require amortization of that asset for up to 40 years. Such a charge would severely hamper firm profitability; as a result, firms avoid such accounting maneuvers.
  18. 18. General Approaches Intangible Assets 18 In determining the value of a brand in an acquisition or merger, firms can choose from three main approaches: Cost approach: Brand equity is the amount of money that would be required to reproduce or replace the brand Market approach: The present value of the future economic benefits to be derived by the owner of the asset Income approach: The discounted future cash flow from the future earnings stream for the brand