Marketing & finance worlds to join in Indian boardrooms

International Financial Reporting Standards (IFRS)is gathering storm and most countries barringthe US and a few others have either adoptedIFRS or their national GAAPs are converging to IFRS.

Australia, New Zealand, Singapore, China, Middle East, Japan, Africa and the European Union are prominent names that have either adopted or are converging to IFRS. The numero uno status to IFRScame about after the EU made IFRS mandatory for all its listed companies starting 2005. Consequently, more than 8,000 EU listed companies adopted IFRS in one go.

As per the findings of a survey of the chairmen of 145 European companies by the executive search firm Russell Reynolds: (a) more than half chairmen of the companies with US listings said that they would consider de-listing because of Sarbanes- Oxley in spite of the difficulties of taking shares off the US exchanges (b) 70 per cent of those heading companies not yet listed in the US said Sarbanes- Oxley would dissuade them from seeking a US listing.

An extensively regulated US capital market is losing its attractiveness and predominance of US GAAP. This could make large companies look at other capital markets and in many of those capital markets IFRSs are accepted. Whilst such situations provide IFRS an opportunity to flourish, it would nevertheless be inappropriate to see things merely from that perspective. This is because IFRS on its own stands a fair chance, with its acceptance by EU as well as given the fact that many countries traditionally followed IFRS or an IFRS-inspired national GAAP.

 India will adopt the IFRS (International Financial Reporting Standards) accounting norms starting that year and companies have a year to transition to it. 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.

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.

That leads to questions such as: How does the 65% impact value of enterprise? What is driving value of enterprise? How will the enterprise secure future earnings? That’s where IFRS3 steps in, says Unni Krishnan.
This issue really came into focus in the US and Europe in the late 1980s with a wave of M&As and hostile takeovers. Huge amounts were paid for goodwill and had the accounting community scratching its head over the real value of underlying assets. Later on, companies such as Diageo and Cadbury started capitalizing band value in their balance sheet which was considered a heresy in accounting circles.

Globalizing Indian firms will obviously be the first to adopt IFRS3. Tata Steel bought Corus for about $13 billion, with $6-7 billion going to value of intangibles in balance sheet.Building and capitalizing brand value will become critical across sectors, not just for companies in the packaged goods and durables business. In bulk chemicals, oil and gas, average value of intangibles is 40% of EV, show studies by Brand Finance. India will open up its banking sector in 2009 in keeping with its commitments to the World Trade Organization and IFRS3 is critical for the sector since it is all about branding and customer base.

“Companies here don’t appreciate the gravity of this yet, but they will have to do much more due diligence before acquiring companies and brands,’’ says Unni Krishnan who cites the experience of Vodafone Group Plc. to underscore the importance of such standards. Vodafone bought Mannesmann AG for about $100 billion in Germany, about five to six years ago and a large part of this amount went to goodwill. When the IFRS3 standards rolled out in 2004 in Europe, Vodafone had to show components of goodwill, and a year later show brand value and impairment if any. It posted the largest losses in British corporate history when it wrote off intangible value worth $60 billion last year.