From 2009, advertisers and marketers in the country will have to increasingly account for the impact their advertising and marketing initiatives have on shareholder value, or, at the least, on the profit of companies. India will adopt the IFRS (International Financial Reporting Standards) accounting norms starting that year and companies have a year to transition to it.
Marketing strategist Al Ries
After that companies will not be allowed to use goodwill as a nebulous entry in their balance sheets. Most firms here use goodwill to account for or put a number to intangible assets such as brands, relationships with customers, and access to technology. In 2009, the current Indian Accounting Standards (IAS) that companies follow will give way to IFRS. The standards have been evolved by the International Accounting Standards Board, an independent entity that sets accounting standards, and are in use in the European Union, Australia, Russia and several other countries. Others, including the US, which use the Generally Accepted Accounting Principles or GAAP, have laid down a policy of convergence with IFRS.
Among the changes IFRS will bring about is one related to the capitalization of brands and intangible assets. Brand valuation will thus clearly find a place on Indian balance sheets, say brand analysts.
Here’s why: IFRS standard 3 relates to branding and customer base, and it states that all goodwill accounting will be abolished. Instead, goodwill has to be broken into components and separately recognized: marketing related (trade marks, brands, trade names, Internet domain names, etc.); those coming from customer relationships (customer lists, customer contracts and related relationships, etc.); contractual (ad contracts, licensing and royalty agreements, franchise agreements, etc.); technology related; or art related (magazines, newspaper, films, theatre, etc.).
These intangible assets will then be capitalized onto the balance sheet of the acquiring company. The sting in the tail: the company will need to annually check impairment (or erosion) to the value of brand and intangible assets and, if any reduction has happened, reflect this in the balance sheet or subtract it from profits for the year, says Unni Krishnan, managing director, India, Brand Finance Plc., a leading global brand valuation firm.
Indian companies are currently not required to mention brand valuation on their balance sheets. And accountants conveniently and routinely dump anything more than the book value or value of tangible assets of a firm into a large basket called goodwill, resulting in over valuation of many companies.