Brand valuation

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CA. Iti Arora (Querist)
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19 December 2011 ABC Ltd. is 100% holding company of XYZ Pvt. Ltd. XYZ Ltd has valued its brand at a valuation of Rs. 20.00Crores and set off accumulated losses to an extent of Rs. 8.00Crores by the same. As per AS 26, accounting for the value of Brands (slf generated brands) is not allowed, is there any exception to this. Is the company having any scope to justify the treatment?
Ques. 1. - Is the treatment of writing off accumulated losses correct?
Ques. 2. - Who is authorised to value the Brand, as an auditor, are we required to take the help of an expert to get the correct valuation or the amount as arrived by using Potential Earning Model and certified by the management is acceptable. Who is authorised to do brand valuation in our country.
Ques. 3 - In case of Unlisted Public companies, the swap ratio arrived by the management of both the companies can be accepted, or is there any kind of regulation, that restricts the companies to do so. Can we blindly rely and accept the swap ratio as agreed between the companies or it has to be certified by a competent/ authorised person.

CA Kishore Tallam

CA Kishore Tallam (Expert)
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20 December 2011 Hi...
As you rightly said, recognition of internally generated is prohibited by AS-26. There is no exception to this.
Q1: Recognition of internally brand itself is a violation of Accounting Standards and hence writing off accumulated losses is incorrect. (Here, I assumed the entry passed is
Brand A/c Dr 20 Crore
To P&L A/c 20 Crore)
Hence, the auditor has to qualify his report in this respect.
Q2: As of now, there are no persons who are authorised by law to value the brand. It is generally done by Banks or Chartered Accountants or Investment Bankers.
But the concept paper for making the bill is ready. The title of it is "THE COUNCIL OF VALUATION PROFESSIONALS OF INDIA BILL". Once this is approved, then the persons who satisfies the criteria laid down in the bill will be authorised to do valuation.
However, the auditor should verify and get comfort over the inputs given by the company for valuing the brand and also the assumptions used by the valuer in getting the brand value.
Q3: There is no bar on the swap ration in case of merger or a demerger. Generally companies do valuation of both the transferor and transferee company and arrive at the swap ratio. However, for the purposes of income tax, a minimum price which is NAV as per latest audited balance sheet is taken for determining swap ratio. If the Board of both companies approve the swap ratio, then that would be sufficient compliance.

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