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Reporting of Intangibles by Service Sector in India

In: Business and Management

Submitted By acesrinivas
Words 1221
Pages 5
Title: Reporting of Intangibles by Service Sector in Indian context

Introduction

"I can make a whole lot more money skillfully managing intangible assets than tangible assets." – Warren Buffet

In the current knowledge based economy, there is a transition from matter based economy to one based on ideas. The emphasis is shifting from natural resources to new thoughts and designs. With the shift from monetary economy to knowledge based economy, the wealth can be added by increasing the intangibles.

The intangibles are the growth drivers for the Indian Economy. The high productive sector is the service sector whose contribution to GDP of the nation has displaced the contribution of Agriculture and Industry and the contribution is rising. In service sector nearly 22% of the population of the nation is contributing around 55% of GDP. The reason for high productivity can be attributed to only intangibility. The financial statements of the service sector enterprises do not depict the intangibles – because of difficulty in identification, measurement and valuation. The growth of the Service Sector may be slowed down if the service firms which are mostly knowledge driven are not growing and the two major obstacles in the growth of knowledge driven firms are (a) Finance and (b) Coverage of risk. Since the methodologies have not been developed for valuation of the intellectual properties, there are no reported resources on the basis of which sources for raising the resources can be approached and also the assets can be insured.

While addressing a gathering of students, an eminent speaker has said “Help the country by investing in yourself.” He emphasised that by investing in self one can create intangibles (intellectual property) which can bring tangible development of the nation. But question is how to measure the intangible? The measurement of intellectual capital created by investing in self is more difficult compared to business where money can be invested for hiring experts for valuation and for such economic enterprises it has become herculean task to find the value of intangibles.

“Just as you can't measure what you can't describe, you can't manage what you can't measure...”

Essentially the balance sheet represents the original assets and liabilities at the time of formation plus all increases in tangibles accumulated and intangibles acquired since that time. These statements do not include the value of a solid customer list, franchise contracts, brand name and other generated intangible assets. These intangible assets often can reflect more value than the tangible assets within the company. When financial statements are presented to third parties for purposes of raising additional capital or at a time when the company is on the market for sale, the misstatements are realised. This statement in the quote justifies the importance measuring the intangible asset to better manage the affairs of the company.

Objectives

The important objectives of the study are: * To study the practices in reporting and valuation of intangibles by the major Indian companies in service sector * To understand the standards on valuation and reporting of intangibles * To analyse the gap in market value and book value of the companies in the context of reporting under the standards * To study the methodology in valuation of intangibles * To identify the method suitable for each major intangible assets

Definitions of intangible assets

According to AS – 26 “An identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.”
International Accounting Standard Board in its IAS 38 defined “Intangible asset as an identifiable nonmonetary asset without physical substance.
International Valuation Standard Council in its Guidance Note 4(Valuation of Intangible Assets) defines an Intangible Asset as a non-monetary asset that manifests itself by its economic properties. It does not have physical substance but grants rights and economic benefits to its owner or the holder of an interest.

Baruch Lev, the Philip Bardes Professor of Accounting and Finance at New York University defines an intangible asset as “An intangible is a source of future benefits that doesn't have a physical embodiment.”
An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. Thus, the three critical attributes of an intangible asset are:
 identifiability
 control (power to obtain benefits from the asset)
 future economic benefits (such as revenues or reduced future costs)

Need for Valuation of Intangibles

Financial Reporting aims at true and fair reporting of financial position of the enterprise and the performance of the enterprise. The reporting should also be cost effective to the reporting enterprise. Considering the cost and scarcity of valuation professionals, in measuring the intangibles, the companies are ignoring the valuation. However to meet the need of valuation of companies for mergers and acquisitions, the valuation of intangibles has got its prominence. Again with the emergence of the knowledge based economy, the valuation of intellectual capital cannot be sidelined.

This Guidance Note is published by the International Valuation Standards Council, Valuations of intangible assets are required for different purposes including, but not limited to:
• acquisitions, mergers and sales of businesses or parts of businesses;
• purchases and sales of intangible assets;
• reporting to tax authorities;
• litigation and insolvency proceedings; and
• financial reporting.

The major benefits of measuring and reporting of intangibles have been identified by different researchers as: * ‘What gets measured gets managed’ which states that if intellectual capital is not reported, there is a risk that it is not receiving sufficient attention from management and other stakeholders. * Favourable response of capital market by way of:
Improve in the stock price and Higher market capitalisation
Decrease in cost of capital
Increase in intrinsic value
Reduction in volatility of stock prices

Approaches in Valuation of Intangibles
Text copied from International Valuation Standards Council Guidance Note 4
Analysis of the nature and attributes of the each intangible is critical for determining the appropriate valuation approach. More than one approach can be considered and within an approach there could be different methods.

All intangible asset valuation methods fall within one of the three fundamental valuation approaches identified within the International Valuation Standards, which are based to some extent, at least, by reference to market data i.e.:
• the comparison approach;
• the income approach; and
• the cost approach.
There are additional valuation approaches such as the real option approach, which are not discussed in this GN. Such approaches may be appropriate for the valuation of intangibles under certain circumstances.

Intangibles for Service Sectors

Every economic activity is driven by human being and so for every economic enterprise the Human Assets are common and so also for service sector. In this section intangible assets of service sector are studied under the headings Common Intangibles and Specific Intangibles.

Common Intangibles in Service Sector:
The intangible assets which may be common to any service company even to manufacturing company may be:
Human assets
Computer Software
Internet Domain Name
Trade and service mark
Brands

Specific Intangibles in Service Sector:
Intangibles specific to the service companies are enumerated below: Industry | Name of Intangibles | Banking | Customer Relationship | Insurance | Policy, Risk Analysis | Education | Course design, Research activities | Health | Medical Records, Prescription | IT & ITES | Team, Customers List | Media | Library, Mastheads | Hotels | Recipe | Telecom | Spectrum, Bandwidth, Licences |…...

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