Title: Reporting of Intangibles by Service Sector in Indian context
"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 ...view middle of the document...
“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.
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:
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...