New Delhi [India], January 22 : The Confederation of Indian Industry (CII) has called for a comprehensive review of the recognition and accounting of intangible assets as India transitions towards a digital economy.
According to CII, intangible assets are crucial for value creation in modern business models, especially in sectors like Software as a Service (SaaS), Platform as a Service (PaaS), blockchain platforms, and advanced manufacturing.
However, the current accounting standards, particularly India's Financial Reporting Standard Ind AS 38, which is based on IAS 38, limit recognition to only acquired intangible assets and prohibit capitalisation of internally generated intangibles.
Emphasising on sharing a comprehensive set of recommendations to harness India's potential of Digital Economy, Chandrajit Banerjee, Director General, CII said "Inability to recognise internally generated intangibles means that such investments are largely excluded from the governance, financial reporting, and auditing ecosystems. Therefore, such investments are less likely to have corresponding disclosures or be included in the management discussion and analysis (MD&A), and are less likely to receive scrutiny from auditors, visibility to investors and comparability of financial statement."
Further, Banerjee stated that there are concerns that at least some of the differences between market capitalisation and book value is due to non-recognition of internally generated assets.
Among the major recommendations, the industry body added that intangible assets related to brand development, such as proprietary algorithms and user engagement, should be capitalized if they have enduring value.
CII recommended that the accounting for SaaS, PaaS, and IaaS should be reviewed, allowing for the capitalization of development costs with long-term economic benefits.
It said intangible assets acquired as part of a basket acquisition in pharma should be recognized based on their economic value.
The industry body said capitalisation of development costs for new automotive platforms should be allowed based on management judgment.
It added that as India moves towards Net Zero, the recognition of Carbon Credits (CERs) as assets should be revisited.
A more flexible approach to revaluation and measurement of intangible assets is needed, especially as the gap between market and book value grows, CII said.
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