Intangible Accounting.

Vidyavahini Group Of Institutions ®
Vidyavahini Post Graduation College Innovations in Accounting

Master of Commerce (M.Com)
By: Syeda Huma Nayara

Vidyavahini Post Graduation College Intangible Accounting
Intangible: It does not have a physical existence an remains untouched.
Intangible assets:
It is an asset that lacks physical existence unlike physical assets

like plant or machinery or building etc. The value of intangible
asset is fairly difficult to evaluate. But, increase in value of
intangible asset shows a positive growth in the earning capacity
of business.
Eg: Goodwill, Intellectual Property like patents, trademarks,

copyrights etc.
Accounting Standard 26(revised) – Intangible Accounting
AS-26, “Intangible Assets”, issued by the Institute of Charted Accountant (ICAI), the apex
accounting institute of India.
This standard was issued in 2002 and came into effect from 1-April-2003 and is mandatory for all
enterprises.
As per International Accounting standard(IAS) and Indian Accounting standard(Ind AS): AS – 38.
Meaning:
Intangible accounting stands for recording the asset as a long-term asset whether acquired or
created and amortize the asset over the useful life.
Intangible Accounting does not consider other financial assets. Rather only focuses on intangible
assets.

Important aspects of Intangible accounting:
 Intangible asset if acquired by purchase, then I should be recorded at purchase price.

 Intangible asset developed within an enterprise:
It is recorded at cost of labour + material consumed in production + legal cost incurred in securing
the asset.
 Under general practices, expenditure incurred in developing intangible asset is not recognised as asset.
But, expenditure incurred in acquiring intangible asset from other firms through exchange is
recognised as value of asset.
 Intangible assets are deferred charges.

Deferred charges are expenditures not recognized as costs of the period in which they are incurred.
Treatment: It is carried forward & written off in future periods to match future revenue.
 Amortization: According to AS-26, Amortization is the systematic allocation of the depreciable amount
(original cost – written off) of an intangible asset over its useful life.
Importance of intangibles in corporate success
1. Significant increase in value: IA increases the value of the company; customer support, market
capitalization, productivity, quality products etc.
2. Barriers to entry: The companies with high IA act as a barrier to other firms trying to enter the
market. This makes the firms more stronger giving an opportunity to acquire whole market.
3. Product differentiation: Having IA creates product differentiation among the organizations in

the market. The value of products and Co. will be considered to be high if the goodwill is
good.

4. More stable and profitable earnings.
5. Ensures long term sustainability: having good name creates brand ensuring long
term existence.

6. International recognition: IA offer international recognition.
Objectives of Intangible Accounting
1. Identification of intangible requirement.

2. Measuring the cost of intangibles.
3. Collection of data.
4. Amortization of cost.
5. Interpreting the results: Value of intangible asset = Actual value – market value

Types of Intangible Assets
1. Trademark:
A trademark is an intellectual property consisting of a recognizable sign or design or
expression which distinguishes a product or service of an enterprise from that of other enterprises.
The trademark can be on package, label, voucher or on product itself.

 A trademark is used to identify a specific type of business.
 A trademark will be valued or accountable at the price which it is acquired.
 Trademarks are not subject to amortization. But, if the trademark loses its value,
then it is impaired.
Treated as Expenditure

2. Copyrights:
A copyright is an amortizable, intangible asset. It is a legal right of the owner to
use the intellectual property exclusively either to publish a work or reproduce a work.

 The work can include movies, novels, computer software's, songs etc.
 A copyright generally has a duration or life of 70 years.
 The value of copyright will be;

• The cost incurred to secure the legal copyright on a work the business has
created, or
• The price business has paid to purchase the copyright from the legal owner.
 Copyrights are subject to amortization and;

It will be equal to the original value of the copyright divided by the time required
to generate revenue from that copyright.

3. Patents
It is an intangible, amortizable asset, where the exclusive right is granted by the
government to an inventor or manufacturer to use and manufacture the goods or to sell an
reinvention.

 Patents have a time period of 20 years.
 Types of patents:
• Utility Patent is used for processes, machines & articles of manufacture.
• Design patent is used for any new or original ornamental designs that will be affixed to
an item of manufacture.
• Plant patent is used when a new plant is created.
 Valuation of patent:
• If patent is developed internally by firm. The value of patent right includes all the R&D
expenditure incurred during creation.
• If patent is acquired, it is recorded at acquisition cost.
 The value of patent should be amortized over the years and should not exceed 20 years.

4. Goodwill
It also arises when the company earns more than the expected or normal profits.
 Goodwill will be recorded in the balance sheet at the price at which it is acquired i.e.,
at acquisition price.
 Good will should be amortised over the number of years.
 If goodwill is not amortised, the whole value will be impaired and will be adjusted
with the present value of future revenues of business.

5. Franchising
Franchise is an intangible asset. It is a license that gives the right to franchisee to use the
franchisor’s property or business knowledge or process or products or service, thus allowing the
franchisee to sell its products under franchisor’s business name.
The franchisee has to pay certain amount to the franchisor as initial start-up fee and annual
licencing fees.
 It is a contract between 2 parties franchisor and franchisee.

 The franchisee makes periodic payments to the franchisor.
 If the franchise is secured by paying lump-sum amount, then it is recoded in B/S as franchise
asset.
 Amortise the asset. Amortised value = Initial value of asset / useful life of asset.

6. Licensing
Licensing is an intangible and intellectual property. It is an agreement between
two parties licensor and licensee based on certain rules and regulations for a specified
period of time.
This gives the right to the licensee to utilize the license for manufacturing process, brand
name, trademark, trade secrets, technology etc.
In return the licensee pays a specified amount or consideration.
 The business records a license asset in B/S, if the term of license exceeds the date of
B/S.

Amortization is an accounting term which refers to the process of allocating the cost of
an intangible asset over a period of time.
Intangibles amortization:
It refers to consistent reduction in the recorded value of intangible asset over time.
Intangible assets do not have physical existence.
It can be trademarks, copyright, patent right, goodwill etc.
 If intangible assets are acquired, then the value will be recorded at the cost of
acquisition.
 Amortization methods helps the business to check any profound impact on the
reported profits of the acquiring entity.
The value of amortization generally remains unchanged over the years once after it is
fixed by the entity.
Unless the intangible asset to be amortised is impaired.
When the value is impaired, then the organization should check the remaining useful
life of asset (to see whether it is changed or not)

Amortization of Goodwill
Accounting procedure to amortize goodwill:
According to Accounting Standard Board issued statement of financial accounting standards

which shows that the value of goodwill should be measured annually in order to determine the loss
of impairment if incurred.
Methods of valuation of goodwill:
I. Average Profits method.

II. Super profits method.
III. Capitalization method.
1. Capitalization of average profits.
2. Capitalization of super profits.
IV. Annuity method
I. Average profits method:

Under this method the value of goodwill is calculated by considering the
average profits and the number of years of purchase of goodwill.
Value of goodwill = Average profits x Number of years of purchase.
Steps:
1. Calculation of average profits by considering the profits of past consecutive years.
2. Calculation of past profits before tax.
3. The past profits should be adjusted to the abnormal items which may effect the future
profit.

4. Calculate average past adjusted profits (either simple average or weighted average is
applicable)
If the profits show increasing trend, then simple average is calculated.
If profits fluctuate then weights should be adjusted to profits.
5. Calculate the value of goodwill by multiplying the number of years of purchase with
the average adjusted profits.
Value of goodwill = Average profits x Number of years of purchase.

II. Super Profits method:
Super profits refers to the excess profits earned by the company over the normal
expected profits.
The value of goodwill is ascertained by multiplying the super profits with the number
of years of purchase.
Steps:
1. Calculation of capital employed.
2. Calculation of normal profits

Normal profits = Capital employed x Normal rate of return.
3. Calculation of average adjusted profits.

4. Calculation of super profits

Super profits = Average adjusted profits – Normal profits
5. Valuation of goodwill.
Value of goodwill = super profits x Number of years of purchase.
III. Capitalization method:
Under this method the value of goodwill is calculated by capitalizing average normal
profits or by capitalizing super profits.
A. Capitalization of average profits

B. Capitalization of super profits
A. Capitalization of average profits:

Goodwill is ascertained by deducting actual capital employed from the
capitalised value of average profits on the basis of normal rate of return
Also known as value of business

or capitalised value of business
Steps to calculate goodwill:
1. Calculate average future profits of the firm over the years.
2. Calculate capitalised value of business on the basis of average profits.

3. Calculate the capital employed on the valuation date.

Capital employed is more accurate estimate of total assets.
Capital employed:
Capital employed = Fixed Assets(FA) + Current assets(CA) – current liabilities
Or
Capital employed = Shareholders fund(equity) + non-current liabilities(LTL) – Fictitious

assets(If there)
4. Calculation of value of goodwill.
Goodwill = capitalised value of firm – capital employed.

B. Capitalization of super profits method

The goodwill is calculated by capitalizing all the super profits on the basis of
normal rate of return.
Goodwill = Average annual super profits x 100 / Normal rate of return.
IV. Annuity Method:
Goodwill is calculated by taking average of super profit as the value of annuity

for a certain period of years.
The present value of annuity is computed by discounting the normal rate of return(r).
The discounted & adjusted present value of the annuity is the value of goodwill.
Value of goodwill = Average of super profits x Present value of annuity.

Amortization of Patents
Valuation of patents:
It is very important to calculate the value of patent rights specially in case of mergers,
acquisitions, business dissolution etc.
The most common method of patent valuation is “Economic analysis method”.
Amortization procedure for patents:
1. Determine the initial cost of patent:
 The initial cost is based on the invention to which the patent belongs to.
 The cost incurred during R&D to invent a design can be added.

 The R&D expenses incurred are capitalized for future as engineering and
development cost and further amortized.
 The cost of patent goes beyond initial cost. It also includes regulatory costs like
patent application cost, cost to verify originality, issuing fee etc.
2. Determine the beginning date of patent:
Amortization of patent begins from the date it is acquired or purchased or

approved by the patent authority.
Eg: The date from which the patent is approved or purchased from Indian Patent Office
(IPO).
IPO is administered by Controller General of Patents, Designs & Trade Marks (CGPDTM).

3. Obtain the estimated useful life of patent:

Determine the useful life of patent based on the type of patent right taken.
Types of patents:
• Utility Patent is used for processes, machines & articles of manufacture. This patent
lasts for 20 years.
• Plant patent is used when a new plant is created or invented. This patent lasts for 20
years from the date it is granted.
• Design patent is used for any new or original ornamental designs that will be affixed to
an item of manufacture. This patent lasts for 14 years from the day it is granted.
The life of the patent right may change over the years with the technological advances.
4. Calculate the value of patent amortization:
The value of amortization is ascertained by dividing the initial cost of patent by

the useful life of patent.
Amortised value of patent = Initial cost of patent / Useful life of patent

Brand:
Brand Accounting
It is an intangible asset which does not appear in a physical form.

Brand is a name, term, design, symbol that identifies sellers goods and services as distinct from
those of other sellers.
Brand increases the value of goodwill of the organization. It brings reputation to the organization and
the goods.
Customer loyalty towards the company and towards

the products motivates them to repurchase the
products which creates brand.
Brand Accounting
Brand as a strategic asset
Offers Competitive Advantage

A brand = Marketing + Brand management
Driver of business strategy for creating brand
Brand Building
The companies may promote products or take up real-time experiments like Price promotion (focus on
price of products)
Effective tool for generating sales
But, such companies find it extremely difficult to gain customer loyalty.
In current scenario, the best and effective way to generate brand;

Brand Accounting
Create an innovative, new offering, focus on the vision and mission of the company, use the existing
platform and support the new offering to strengthen the organizational existence in the market.
Customers Purchase = Generate sales
Repurchase of products
Customer loyalty = creates brand

Brand as a strategic asset Brand Accounting

Brand is an intangible asset which does not appear in a physical form, brand can be in the form of name, term, design,
symbol.
The organizations which has brand, considering it as a strategic asset offers competitive advantage, which creates a
favourable situation for the companies to produce good quality goods and services at less cost, generate more sales and
have superior margins when compared to rival firms.
The companies trying to create a brand name or brand in general should focus on marketing and brand management.
Marketing is a buying and selling activity which involves promotion of goods produced with the objective to increase
sales and earn more profit.
The businesses should focus on producing superior quality goods and services which will satisfy the customers and
gain customer loyalty.
Brand management refers to the function which involves analysis, planning and positioning of brand in the market.
Thus, marketing and brand management acts a driving force in creating brand. This leads to brand building.

Brand as a strategic asset Brand Accounting

Earlier the companies in order to create brand focused mainly on promoting products or took up real time experiments
involving on price promotion to increase the sales and earn higher profits. But, the companies failed to create customer
loyalty. As it just focused on price promotion which acts as a tool for generating more sales.
In the current scenario, successful companies focus on producing and selling superior quality goods and services at
reasonable prices.
It produces innovative products, new offering, focus on the vision and mission of the company, use the existing
platform and support the new offering to strengthen the organizational existence in the market.
Producing good quality goods and services at reasonable price allows the public to purchase and try goods and
services. If the quality of goods is high then the customers come back to repurchase the products which automatically
increases the sales and in-return profits of the company.
Increasing sales and repurchase of products shows that the customers have become loyal towards the products and
satisfied with the products and service. This creates brand of a company over a long period of time.
The companies should maintain the quality and price of goods and services to retain the existing customers and to
attract new customers towards the products which will lead to creation of brand.
Brand as a strategic asset – benefits:

Brand Accounting
1. Creates Goodwill in the market.

2. Brand enhances market share.
3. It creates competitive position in the market.
4. Helps to generate huge revenue as compared to other assets

Brand Accounting
Brand equity:
It is a value premium that a company generates from a product with a recognizable name
when compared to a generic equivalent.
The value over and above the normal price of product the amount collected is brand
equity.
Companies creates brand equity for their products by making memorable, easily
recognizable and superior in quality.

Brand Accounting
Objectives of Brand equity
1. Reduces the strain on companies income:

Brand ensures continuous flow of income in the business due to customer loyalty
towards products.
2. Provides strategic brand information:

Market information and changes in market gives the opportunity for companies
to take necessary steps;
Analysis of brand equity
Brand repositioning
Withdrawal of brand
Formulation of strategies to tackle competitors.
Brand Accounting
3. Improves the quality of financial report:
Brand gives weightage to balance sheet and to overall financial statements.
Increasing value of brand increases the investment value of business.
4. Helps in quoting accurate value of business:

Valuation of brand in case of mergers and acquisitions. It also helps in quoting
high value of business during collaborations.
5. Assists stock exchange market players:

Assists the stock exchanges and credit rating agencies in determining the value of
business. It gives weightage in improvisation of ranking of company in national and
international level.

Brand Accounting
6. Helps in brand licensing:
Offering brand as license to the third party, which ensures fixing fair amount of
licensing fee by the organization.
7. Helps in appraising brand attributes:

Marketing plays a major role in creating brand, providing incentives to
employees.
Brand accounting is the base for accessing the performance and attributes of marketing
department by the top management.

Problems of accounting brand equity Brand Accounting

1. Disclosure:
Difficult to disclose brand accounting in financial statements, as no specific
accounting standard (AS) is available for brand accounting. Difficult to analyse with regard
to where to be disclosed and its procedure (how to be recorded).
2. Differences:
Difficult to distinguish between goodwill & brand, also difficult to identify the
method of valuation of brand and goodwill.
3. Joint costs:
The components and expenses used in valuation of goodwill will also be used for
valuation of brand. This creates difficult to segregate the costs and may create duplication
of cost and transactions.
Problems of accounting brand equity Brand Accounting

4. Non – existence in market:
There is no proper method or standard of valuation available for brand
accounting. This makes the brand non-existent in the books of the company even when the
value of brand and company is high.
5. Amortization:
Expected life of intangible asset Is the main component for amortization and it is
difficult even for the experts to analyse the life of brand. Thus, it lacks practical applicability.

Types and methods of valuation of Brands

Brand Accounting
Brand
Home-grown
Acquired Brands or
Self – generated Brand
1. Acquired Brands:
These are the brands which are already existed in the market.
Companies acquire brands to have strategic technology and software to augment broad
portfolio and improve our coverage in critical markets.
Types and methods of valuation of Brands

Brand Accounting
Brand acquisition involves a firm's acquisition of an existing brand offered in the market by
another firm

Types and methods of valuation of Brands Brand Accounting

Valuation of acquired brands:
 When a company acquires only brand name only.

Brand value = Amount paid for acquiring the brand name.
 When a company acquires an existing company along with the brand name.
Brand value = Amount of purchase consideration – Value of net assets.
Grown or produced at home or in a particular local area.
2. Home Grown or Self-generated brands:
These are the brands where the companies create their own brand by spending and investing huge
amount on R&D, advertisements, marketing, promotions etc.

It refers to brands that have been created primarily for consumers in India, whether made by an
Indian brand owner or multinational.


Valuation of Self generated brands:
1. Cost Based Approach:

 Historical Cost Model:
This model considers the marketing cost, development cost, advertisement and
communication cost incurred by the organization.
Development cost includes the cost of developing the brand logo and promoting taglines or logo, which
requires expert advice and technicians to create brand.
 Replacement Cost Model:

It is the cost which will be incurred when the organization goes for replacement of existing
brand from the market.
The company having a brand name in the market may think of changing the brand logo or design over
time.

2. Value Based Approach:

 Market Price Method:
It is a method where the value of the brand is determined based on the market data and on
the basis of experience of the expertise. The data will be accessed from the authorities based on their
market experience.
In this method, the value is based on the probable value payable by the buyer and the benefits buyer
will get from the brand.
It considers the following:

Search of license transactional data.
Selecting or adjusting price multiples.


 Potential Earnings Method:

The brand value of the company is determined and fixed by capitalizing the
earnings with the future rate to calculate future benefits.
It is usually a result of increased turnover, increased profits, cost savings.
Brand value = Net Brand earnings x Capitalization rate.
 SDR Brand valuation model:

SDR considers three components to calculate the brand value.
• Physical appearance of product – features and attributes of product and
related service.

related service.


related service.
• Brand Equity
• Price.
These 3 components
are inter - connected
and helps create brand
value as per SDR model

Indian Practices of Brand Accounting Brand Accounting
In India very few companies like BHEl, Reliance industries have attempted to record and
maintain reports of brand accounting.
But, the actual value or figure of the brand is not mentioned in the Balance sheet of the
company.
As per the accounting standard and by ICAI;

It says to disclose or mention just the value of goodwill as a part of fixed asset.
There is no separate procedure as to valuation and reporting of brand or brand value.

Intangible Accounting.

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Vidyavahini Group Of Institutions ®

Vidyavahini Post Graduation College Innovations in Accounting

By: Syeda Huma Nayara

Intangible: It does not have a physical existence an remains untouched.

It is an asset that lacks physical existence unlike physical assets

Eg: Goodwill, Intellectual Property like patents, trademarks,

Accounting Standard 26(revised) – Intangible Accounting

By: Syeda Huma Nayara

Important aspects of Intangible accounting:

 Intangible asset if acquired by purchase, then I should be recorded at purchase price.

 Intangible assets are deferred charges.

Importance of intangibles in corporate success

3. Product differentiation: Having IA creates product differentiation among the organizations in

By: Syeda Huma Nayara

Importance of intangibles in corporate success

4. More stable and profitable earnings.

By: Syeda Huma Nayara

Importance of intangibles in corporate success

6. International recognition: IA offer international recognition.

Objectives of Intangible Accounting

1. Identification of intangible requirement.

By: Syeda Huma Nayara

Types of Intangible Assets

By: Syeda Huma Nayara

 A trademark is used to identify a specific type of business.

 A trademark will be valued or accountable at the price which it is acquired.

By: Syeda Huma Nayara

Types of Intangible Assets

By: Syeda Huma Nayara

 A copyright generally has a duration or life of 70 years.

 The value of copyright will be;

 Copyrights are subject to amortization and;

By: Syeda Huma Nayara

Types of Intangible Assets

By: Syeda Huma Nayara

 Patents have a time period of 20 years.

By: Syeda Huma Nayara

Types of Intangible Assets

 Good will should be amortised over the number of years.

Types of Intangible Assets

 It is a contract between 2 parties franchisor and franchisee.

By: Syeda Huma Nayara

Types of Intangible Assets

By: Syeda Huma Nayara

Unless the intangible asset to be amortised is impaired.

By: Syeda Huma Nayara

According to Accounting Standard Board issued statement of financial accounting standards

Methods of valuation of goodwill:

I. Average Profits method.

I. Average profits method:

Value of goodwill = Average profits x Number of years of purchase.

2. Calculation of past profits before tax.

By: Syeda Huma Nayara

If the profits show increasing trend, then simple average is calculated.

If profits fluctuate then weights should be adjusted to profits.

Value of goodwill = Average profits x Number of years of purchase.

By: Syeda Huma Nayara

II. Super Profits method:

2. Calculation of normal profits

3. Calculation of average adjusted profits.

4. Calculation of super profits

III. Capitalization method:

A. Capitalization of average profits

A. Capitalization of average profits: