A CRITICAL ANALYSIS OF CONTEMPORARY APPROACHES TO ACCOUNTING AND VALUATION OF INTANGIBLES

Abstract

Intangible assets have invariably been a paradox for the accounting fraternity. There have been several issues that have come up, related to the recognition, valuation and accounting which, have been a bone of confrontation since the last three decades. These concerns have been debatable in theory and practice by the academic scholars, industry practitioners and the accounting regulators and providers. The significance of intangible assets cannot be ignored; more so, with growing number of service companies which operate on intangible assets. However, a large amount of intangible assets are not recognized. As a corollary effect, the unaccounted business that intangible assets fetch is not capitalized in the financial statements of the companies. The companies' financial reports reflect the book value of the assets rather than the market price, therefore the true and fair value of the firm is left unaccounted. The recognition of intangible assets has been a subject that leaves open two sides of a coin for debate, which are, either in favor of or against the recognition of intangibles assets. The focal point of the studying intangible assets was to understand and appreciate the importance of goodwill and brand assets in the companies' books of accounts. The marketing specialists are in favour of capitalization of goodwill and brands assets, while the financial experts have reservation in showing these assets unless there is a business combination. This leads us to the first concern which is the recognition of internally generated assets by the company, such as brand assets and goodwill. The accounting regulators and providers have not only been a watch dog but a means to provide convergence of the accounting provisions. The international agencies such as the SFAS of U.S., FRS of U.K, IFRS and at the national level the Indian Standard provide provisions of accounting of intangible assets. The study provides an extensive analysis of the present provisions of FAS 141, FAS 141R, FAS 142, FRS 10, IFRS 3, IAS 36, IAS 38, AS 14 and AS 26. The first initiative of convergence between the two boards, IASB and FASB started with the enactment of the provision of business combination and recognition of goodwill and other intangible assets; FAS 142 and IAS 38 subsequently endevoured to bridge the loop holes present in the earlier in the provisions. The elimination of the amortization of goodwill and the termination of purchase method provided a novel IV evolution in accounting of intangible assets with the endorsement of the pooling method that records net assets acquired at the fair value. The research looks into in-depth studies by various researchers in U.K, U.S., Canada and Australia of the pre and post era of pooling method. How the accounting of intangible assets, in particular, goodwill and brand assets affect the capitalization and firms' performance. The study examines the treatment of research and development, and how inturn brand assets could be treated. The need of lucidity in the definitions of items provided in the provisions and the lack of disclosures in the valuation methodologies and reporting of intangible assets were determined. The valuation of intangible assets brings us to a ubiquitous debate about the methodologies of valuation of goodwill and brands assets. The impairment tests of goodwill led to a two tier process, where fair value will be compared to the carrying amount. If the latter is greater than the fair value then impairment loss would be recognized. However, there is no unanimous conformity of an approach to valuation of this intangible asset. The progression of measurements becoming forward looking have translated into broader marketing concepts such as brand equity, brand based customer equity and customer equity. The marketing measures help in determining the customer satisfaction and loyalty in terms of brand valuation, whereas the financial measures help in the deciding the royalty rates or licensing fee, stock market returns and decision making during mergers and acquisition. An evaluation was made of the various techniques (cost, market and income) and the models formulated both by academicians and market specialists for the valuation of brand assets and goodwill. Experts from marketing and finance have provided metrics for the valuation of brands. The marketing parameters are subjective, while the financial scales are short term; and neither of the approaches is incorporating the all-inclusive dimensions for which brand asset could be reliably estimated. Closing the gap between theory and practice, a single metric may not be a conclusive parameter for brand valuation. The multi dimensional holistic approach of both financial and non-financial metrics of brand valuation is to overcome the limitations of biasness and relevance by valuators and accounting fraternity. The transition of the corporate practice of fair value accounting from the historical cost accounting provided a practice of forward looking of accounting and reporting of intangible assets. The FASB presented a provision FAS 157 for an endorsement of the fair value measurements, propounded a new definition and promotion of fair value. Illuminating the practice of mark-to-market and mark-to-income models, where observable data is inadequate or not easily available, market price confirms the fact that the market is the ultimate decider of assets and liabilities values. The standard concept of reliability provided by Concept No. 2 has become more comprehensive by a professional and technical pursuit for standard setters to include relevance defined in terms of market. The joint codification of the standards by the two boards, FASB and IASB has led to scrutinization of issues related to the fair value measurements. The study presents an assessment of the relevance of accounting over the reliability of accounting. The corporate practice vouches that fair value models produce more relevant information for decision making by different stakeholders. Pertinently, in the case of business combination, the accounting and reporting of brand assets and goodwill are value relevant in the financial statements. Therefore, the relevance of reporting units reflected in the balance sheet over shadows the reliability of accounting, which has led to manipulation and biasness and are issues of major concern. The research echoes concern over the propagated procedures for determining the extended fair value measurements and dearth related disclosures of intangible assets and financial instruments. Discounted cash flow has been a ubiquitous approach of present value in the valuation of company, security portfolio and now, intangible assets. The accounting standards such as Concept No. 7 and the SFAS 157, IAS 38 and AS 26 provisions have all endorsed the present value methodologies that are prominent for the valuation of intangible assets under business combinations. The objective was to perform a dissection of this model and adduce its anatomy. While on this, further the study explores interrelationships of DCF with other extant methods of valuations that include income multipliers, residual income and accrual accounting based methods. A forensic analysis of discounted cash flow was on the premise to see the extent of its adaptation in the valuation of goodwill and brand assets. Various researchers and industry specialists have applied the adapted versions of discounted cash flow models while VI estimating intangibles assets' value. The side effect of this is that there is no unanimous authentication of a single approach or a model, due to the unlimited short coming which invites manipulations or ambiguity and difficulty when empirically tested. There is a relative disagreement in the tax shield practices when used by companies. There is lack of consensus among firms regarding the best suitable theory which could be adopted universally. The discount rate should be adjusted only for the systematic risks are a paradox while applying the discounted cash flow models. These issues necessitate an intensive and in-depth analysis. The five contemporary issues related to goodwill and brand assets are namely, recognition, accounting, valuation, fair value accounting and discounted cash flow; have been subjects of contention since last three decades. These subjects are studied in detail by presenting the analysis of the theories and practices provided by various scholars and experts in the field of accounting and valuation. The FASB and IASB are jointly working towards global aspiration to bring in more coherence in the field of accounting, reporting and measurement systems. The issues cannot be studied in isolation. For instance, the initial recognition of an asset or liability by the Standards provides a scope for accounting and valuation. Otherwise, the entity remains unrecognized although it may bring large value to the firm. Therefore, the endevour of the corporate for the recognition and treatment of 'home grown assets' such as assembled workforce or internally generated brands is yet to see the light of day. The disclosure of intangible is a voluntary procedure by the Indian companies unless there is a merger or acquisition, conversely, not limited to its growing recognition. The research presents numerous loop holes in the areas which need to be sealed for more efficacies in the accounting and management of intangible assets. The study also incorporates recommendations and future area of research after the accounting standard codification and adoption of IFRS by various nations worldwide and more prevalently India.