Verification and Valuation of
Individual Intangible
Assets
The
Procedure of Verification and Valuation of individual Intangible Assets are
explained in the following paragraphs.
Goodwill
is an intangible concealed asset, which represents the earning capacity of the
business. As a rule, this does not appear in the Balance Sheet except when it
is actually purchased, or in case of a partnership when it is brought into the
books of account in case of change in the partnership deed. It arises because
of several reasons such as special popularity of a particular place,
attractiveness of the goods dealt in, the popularity of the firm and reputation
of the owners of the business enterprise etc. It also refers to the monetary
value of reputation of a business. Since, goodwill is not tangible; it does not
call for physical verification. The Goodwill is shown in company’s Balance
Sheet under the head Fixed Assets. Goodwill is used for attracting the
customers. It attracts more customers and therefore, increases profits in
future. It is an intangible real asset and not a fictitious asset. Goodwill is
a valuable asset if the concern is profitable. On the other hand, it is,
valueless if the concern is in loss. Goodwill is to be verified and valued in
the following manner.
·
Ascertain that the company is justified in
creating goodwill in its books of account.
·
Where goodwill is generated in own business,
the auditor's should verify the particulars of expenses debited to Goodwill
account.
·
In a partnership firm, the partnership deed
should be verified by the auditor. He may also verify the changes made in the
goodwill account from time to time based on the provisions made in the
partnership deed.
·
Auditor should confirm himself that goodwill
has not been shown in excess of its cost price.
·
Examine that the sum paid for goodwill does not
exceed the difference between the total purchase consideration and the value of
net tangible assets acquired.
·
He should see that it is valued as per method
stated in partnership deed, purchase or agreement.
·
Goodwill may appear in the Balance Sheet at
cost less amounts written off.
·
The amortization period and method of
amortization should be reviewed at the end of each financial year.
·
An intangible asset should be eliminated in the
books of accounts when no future economic benefits are expected from its use.
According
to the Patent Act 1970, “A patent is an official document that guarantees to
the inventor an exclusive right for a term of years to make, use or sell his
invention”.
While
verfication and valuation patent right the auditor must bear in his mind the
following important points.
The
auditor should examine the actual certificates issued by the patent office in
respect of patents granted.
·
The auditor should ensure that patents are
registered in the name of the client.
·
Obtain a list showing the description of each
patent, registered number, date, patented item, renewal date and number of
years to run etc., concerning each patent.
·
Where patents have been purchased from an
individual, auditor should inspect the agreement for the purchase and note the
age of various patents.
·
Auditor should carefully verify that none of
the patent rights have lapsed. Care should be taken the lapsed patent are
written off.
·
The original fees paid to purchase the patent
right should be capitalised and should be debited to patent account while the
subsequent renewal fee should be treated as a revenue expenditure.
Patents
must be valued at cost less depreciation. There may be three causes of
depreciation, viz: (a) lapse of time, (b) obsolescence, and (c) the patented
article going out of fashion.
At time
a patent might become valueless due to obsolescence or failure to create a
demand of the patented article. In such cases the auditor should see that its
value is written off before the expiry of the period covered by the patent.
Copyright
refers to the exclusive right to produce or re-produce or authorise for doing
certain acts specified in the Copyright Act, 1957 in respect of some kind of
literary, dramatic, musical, computer programme, cinematograph film, sound
recording or artistic works. It is the legal right given to an author, which
prohibits the publication of the work by other persons. The effects of such
copyright is that the author or the publisher gets an exclusive right to
publish or reproduce the work for a certain number of years or even it may be
for the life time of the author or the publisher as the case may be. The
verification of this item will be on the lines similar to those described under
patents.
The
auditor should also inspect the original agreement between the author and the
publisher. Where there is purchase of copyright, verification of price paid
should be from written agreement.
· Copyright must be revalued at
the date of the Balance Sheet.
·
Copyright that has become obsolete should not
be valued and shown in the Balance Sheet. Hence, it is clear that copyright is
to be valued only based on profit earning capacity.
·
Auditor should ensure that copyrights, which
have expired, are written off.
·
In the Balance Sheet, generally copyrights must
be shown at cost less amounts written off from time to time.
A
registered and legalised brand name or brand mark is what is known as Trade
Mark. It provides a better protection for goods and services and for the prevention
of use of fraudulent marks. A trademark is a distinctive mark attached to goods
offered for sale in the market, to distinguish the same from similar goods and
to identify them with a particular trader, or with his successor as owner of
the particular business.
·
Examine the certificates of registration issued
by the Registrar.
·
Examine the last renewal fee receipt to ensure
that the trademark has not been allowed to lapse. Verify that renewal fee has
been charged to revenue expenditure.
·
Trademarks can be acquired like copyrights. The
auditor should vouch the expenditure incurred in connection with their
acquisition like registration fees, payments made to designer and artist,
expenditure on account of salaries and overheads, attributable to the time
spent in developing designs of trademark should be capitalised for arriving
exact value of trademarks.
·
If the trademark has been acquired by
assignment, vouch the amount paid for that with the assignment should be
capitalised.
·
To judge the accurate value of trademarks, the
auditor should carefully note that proper distinction is made between capital
and revenue expenditure. The incorrect allocation, which means the items of
revenue expenditure are shown as capital expenditure or vice – versa, would
falsify and distort the financial statements.
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