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Accounting for Intangible and Brand

Prof. Mallikarjun Bali

BLDEA’s VP Dr. P G H C E T

Department of M B A

Bijapur

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”

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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

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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

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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

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Common Types of Intangibles

Patents, Copyrights, Franchises, Trade names, Trademarks, Goodwill etc..

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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.

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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.

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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.

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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.

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

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Brand Accounting

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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.”

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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

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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

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Valuation of Brands

Homegrown Brands The total cost incurred in order to develop

the brand Acquired Brands

Total cost paid to purchase the brand

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Practice

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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.

General Approaches

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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