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Journal of Indian Institute of Management Bangalore

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Disclosure Norms for Intangible Assets

Volume 17, Number 1 Article by Krishna Kumar T March, 2005

Disclosure Norms for Intangible Assets: Suggestions for Improving the Valuation of Intangibles :

With the growing prominence of new technology firms in the new economy, intangible assets are becoming important. Investors are interested in credible valuation of intangibles. Valuation of intangible assets is also an important component of information needed to make business decisions on mergers and acquisitions. One of the reasons for stock market bubbles in the IT sector is that short- and medium-term expectations on earnings from intangible assets were not realised and needed correction through bubbles. The deviation of market capitalisation and the book value of assets is partly due to lack of credible valuation of intangible assets. In view of this the US FASB issued new Financial Statements on how to value intangibles and how to calculate goodwill impairment. The methodology used by FASB is the one proposed by Baruch Lev of New York University.

Given the increasing importance of intangibles, accountants made a bold beginning by requiring their financial disclosure. However, the present financial disclosure norms on valuation of intangibles are not satisfactory, due to inadequate attention paid to this problem by economists. T Krishna Kumar identifies some limitations of the method proposed by Lev, and suggests alternatives. The methods suggested here are based on the fundamental principles that there are internal prices for non-traded assets, goods, and services, and that those internal prices can be derived by assuming that financial resources are allocated optimally between alternate tangible and intangible resources at any single point in time and over time. Statistical methods are suggested for estimating the value of some goods and services in processes such as R&D activities. The research agenda calls for implementing the proposed alternative methods of valuing intangibles and validating them.

Reprint No 05105b