“Measure what is measurable, make measurable what is not”: Accounting for Intangibles at Dr. Reddy’s Laboratories
What makes several companies in the knowledge economy many times more valuable than their book value or recorded assets? In industries where more value is embedded in intangible assets like patents, innovation and research than in financial assets, traditional accounting systems can mislead internal and external stakeholders. A prime example of one such industry is pharmaceuticals. The phenomenal growth in India’s pharmaceutical industry has been largely powered by R&D and resultant innovation.
Dr. Reddy’s Laboratories is among the world leaders in the generics market. The company has evolved a meticulous system to measure and account for its intangible assets. The organization assigns numerical values to intangibles by using a combination of accounting techniques/metrics including Market Value Added, Calculated Intangible Value, Brand Valuation and EVA. Among the intangible assets measured are technical know-how, marketing know-how, trademarks and designs.
When a company discloses the value created by intangible assets, it empowers investors and stakeholders to make better-informed decisions. Besides, it enables the organization to streamline its investment in these assets particularly in knowledge-intensive industries. Looks like the adage “Knowledge is Wealth” has acquired an entirely new meaning!
Tags: Brand Valuation and EVA, Calculated Intangible Value, Dr. Reddy’s Laboratories, Market Value Added, measure and account intangible assets
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Thursday, July 17, 2008 at 7:28 pm
Valuation of intangible assets is not new in India – the Institute of Chartered Accountants of India issued the “Accounting Standard 26” for intangible assets in 2002. In fact, India is ranked third in the world in intangible assets as a proportion of Total Enterprise Value. This reflects the prominence of knowledge-intensive industries like software and pharmaceuticals in India’s economy. However, the accounting of intangibles poses several challenges. In the pharma sector, for instance, developing a generic drug involves huge R&D expenses. But given the time involved in securing approval for new products, revenues typically start flowing in much later, often leading to discrepancies between costs and revenues in any given fiscal year.
Another concern for many firms is that intangible assets hold their secret sauce for success, and hence disclosing their assets may affect their competitive advantage adversely. Considering these challenges, the commitment of firms like Dr. Reddy’s towards systematizing their intangible accounting system is truly commendable.