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Account Brands Financial

The following decision making steps form the basis of the framework that can assist to assist managers manage and account for brands from the identification to quantification stage. As accountants, we are basically interested in the purely financial approach towards brand valuation.

The brand accounting approach framework can broadly be distinguished via four stages that include: recognition and identification of intangible assets, separation of brand from intangible assets and finally quantification. Figure 2 shows the detailed approach framework from the beginning to the end stage.

Recognition starts with examining background information in order to grasp the elements attributable to intangible assets inherent to the business enterprise. This following are the main considerations:

• General overview: this entails looking at the kind of industry, market and country of operation. Generally, innovative, technology and professionally based enterprises are more into intangible assets relative to manufacturing based counterparts. Level of products differentiation including the firm’s focus on marketing and advertising operations are indicative of the brand capitalization

• Company: marketing activities such as advertising, and other related synergies are key determinants of the company’s level of brand capitalization. Customer relations and collaborative network with supplies are crucial.

• Client information: In today’s business world, client database is a critical intangible asset. In addition forecast future expected benefits from loyal customers less all the cost incurred in attracting and maintaining them.

• Comparable transactions: this includes transactions such as licensing of brands to third parties in exchanges for royalties, mergers and acquisitions, shares traded, joint and shareholding ventures and in debt security

The objectives of the research are stated as:

• To identify how the various contradictory brand accounting practices may be simplified and work in harmony.

• To find out why the brands tend to be subsumed in context of other intangible assets and what can be done about it.

• To come up with a convenient approach framework to assist businesses wholly account for brands in their companies.

With the current trend towards brand capitalization the need to account for brand is becoming a key management decision for both multinationals (MNCs) and also small/medium-sized enterprises (SMEs). This largely depends on the accounting standards inherent to a particular countries as well as the management decision by individual companies on how to approach this issue.

Many researches have been carried out and many articles have been provided regarding to these impacts. Five issues would be extracted from these articles; (1) recognition of brands as intangible assets, (2) concept of branding and brand value, (3) principles regarding brands recognition, (4) brand accounting as evident in various countries, and (5), brand valuation methods after initial recognition.

Has such strong clarification, sealed the fate for goodwill and brand? Well, according to an article Valuing Intangible Assets (Deloitte, 2006), it acknowledged under the International Financial Reporting Standards (IFRS) that items acquired in a firm that match up the definition of an intangible asset should be recognized separately from goodwill, provided that their fair values can be quantified reliably. The article stated that an approach called Purchase Price Allocation (PPA) is the new method to solve the controversy.

Principal driver behind PPA was to bring greater transparency to the acquisition process, by identifying and valuing the assets being acquired and arriving at the net residual amount that ensures that intangible assets are fully identified and accounted for separately from goodwill.

This move is also enlightened in Measuring and Valuing Brands (Corporate Sector Review, May 2007). It highlighted that the International Accounting Standards Board (IASB) established IFRS 3 known as "Business Combinations" which consists of amendments to Intangible Assets (IAS 38) and Impairment Of Assets (IAS 36) to ensure that acquired intangible assets can, for the first time be, independently valued.

Pillsbury and Grand Metropolitan; Price Waterhouse and Coopers & Lybrand; Microsoft and Google; BMW and Rolls-Royce; VW and Bentley; Nestle and Rowntree; and Danone buying Nabisco’s European business are examples of the increasing escalation by many multinational companies into mergers and acquisition. This trend has implications of the responsibilities endowed for accountancy in facilitating relevant, reliable and accuracy in brand valuation.

The identification of the value of acquired brands onto the balance sheet has over the past two decades has prompted the recognition of internally generated brands as valuable assets within an enterprise Interbrand Company (Lindemann, 2004). Due to the challenges facing acquisition Deloitte (2006) stated that a majority of the enterprises involved in acquisitions have often outsourced for external advisors to assist in valuing and accounting for the intangible assets purchased in the process.

IAS 38 stipulates historical record such as the date of acquisition forms the basis for determining the cost of acquisition of an intangible asset which reflects its fair value. A well reasoned approach will be required in order to ascertain the fair value reliably Stolowy and Klockhaus (2000). In this case the market price quoted provides a reliable quantification of the fair value.

The regulations by IAS 38 furthermore stipulate that in case the fair of cannot be quantified then that asset will not be recognized as a separate intangible asset but is subsumed within goodwill. Surprisingly IAS 38 actually leaves it upon companies’ to make choice of whether to separate the brand or to subsume it within goodwill.

Internally generated brand may be tricky and challenging to identify and separate. In fact, many companies have always assumed the importance of internally created brand assets and resulting in them not being recognized Tollington (1999). In addition the regulation governing its recognition seems to be hard to bend. For example IAS 38 stipulates the same regulations for internally generated assets in the case where it may be hard to be recognized. In this case it results into brands being subsumed within goodwill or omitted from the balance sheet.

Activities such as research and development (R&D) can result into internally generated intangible assets and such may be the case of brands that will be associated with future economic benefits. In fact Cañibano et al. (1999) made an interesting observation that in some countries such as the UK there was asymmetrical treatment of internally generated assets.

Accordingly, identifiable internally generated intangibles were capitalized while R&D and internally generated unidentifiable assets were expensed. Hence argued that it did not make sense for a manager to switch from capitalizing of to expensing of R&D yet they were in the same group of internally generated intangible assets.

With the business world heading towards maximization of brand capitalization, the need for a convenient all-round framework for the brand accounting poses a lot of challenge for the accounting professionals. It may appear ironically that in the convergence of this digital era, there seem to be a disharmony regarding brand valuation across country boundaries and among the international bodies involved. In addition, in the era of brand capitalization it seems goodwill has become more of a generalization term, which should be abolished or rather further redefined.

In assessing how brands can be separating from intangible assets, it was discovered that a lot of loopholes still looms under goodwill. As it appeared, whenever there is uncertainty regarding separability of brands from other intangible assets, most of the regulations stipulate that they should be subsumed within goodwill.

However goodwill is only valid for one point in time, that is, the on historical record. There is therefore need to redefinition of goodwill, to accommodate changing needs. In the recognition aspects of brands as intangible assets, relevance and reliability ideologies should be overlapped to fit and reflect brand valuation. Furthermore, the various definitions such a "recognition" and "identification" should be distinguished further.

As it appears during the study, the two are arguably similar, but further analysis shows that recognition precedes identification, since the latter checks the acceptability of the former by subjecting it to some standard or benchmark. Hence if the two terms are used together, recognition should be first used then followed by identification. Or rather the accounting profession should look into a unified way of referring to terms just like accountants and marketers need some form of harmonized terminologies regarding brand equity.

The convenient brand valuation approach framework is highly dependent on documentation and follow-up of the market and financial data across the whole spectrum of the process especially in the computation of brand value which using market-based methodology. To some extent this framework may require some level of accounting experience and management judgment due to the subjectivity of the processes involved. Other notable scenario that may pose a lot of challenge is the tax implication and double counting.

Seetharaman et al. (2001) pinpointed that there existed uncertainty as how to resolve the issue of brand valuation among the professional bodies. On general grounds, Stolowy and Klockhaus (2000) had argued that one underlying reason for the disharmony in standards was because of the tug-of-war between Anglo-American accounting philosophies versus the Continental European accounting. In addition, Seetharaman et al. (2001) adds that it is also because of the lack of understanding and guidance over accounting treatment of brands. Thegreat deal of the uncertainty associated with brands is related to the separability of intangible assets (such as brands in this case) with goodwill. This problem is even further magnified when deciding how to value and report them in the financial statements.

Seetharaman et al. (2001) noticed that there was no particular straightforward procedures for valuing a brand. This created problems that are facing a lot of companies. The scenario in USA appeared to have a lot of confusion and uncertainty. The Financial Accounting Standard Board (FASB) as the rule-making body in USA, however uses three criteria to define an brand as an intangible asset: i) it entails a probable future benefit to contribute to future net cash inflows (directly or indirectly); ii) a particular entity can obtain the benefit and control others over access to it; and iii) transaction or other consequences arising to the enterprise’s right to or control of the benefit, must already have transpired.

In addition the Accounting Principles Board (APB) has no special brand valuation principles issued, and according to Tollington (1998), [APB, 1970] only touched on the separatability of goodwill (as a tangible asset) from tangible assets. From Fernandez (2001) perspective of brand valuation in USA, it appeared that brands seemed to have been subsumed within goodwill. Even the current US accounting standards do not address brand valuation issues specifically Seetharaman et al. (2001).

How strongly does brand value stand out in terms of being separable in the context of goodwill? This is a deep question to ponder since there seems to be a group of scholars who advocate that the separability attributes should be given more weight as compared to the transactional attributes. That transactional attributes basically inclines more into goodwill and submerges the ability of brand to be separately valued and itemized on the balance sheet.

Stolowy and Klockhaus (2000) added that before examining the possibilities for recognizing brands, it is important to first acknowledge that brands should be acquired for valuable concern and need not be reflected under goodwill. This sounds reasonable since Tollington (1998) deeply proposed the issue of "separability" rather than "transaction or event" as the foundation for the recognition of brand assets on the balance sheet that is independent from goodwill. Far fetched in time when brand valuation was not common, Srikanthan, Ward and Neal (1988) emphasized, on legal grounds, that intangible assets (such as brands) can only be reflected in the balance sheet if they were separately identifiable other than goodwill. Interestingly enough, with experience being the best teacher, it appears that this "separability" approach has by default forced business enterprises to embrace it.

Interbrand Company (Lindemann, 2004) brought up to date (on Tollington (1998) and Stolowy and Klockhaus (2000)) and revealed that the prior accounting procedure for supposed goodwill did not deal with the growing essence significance of intangible assets, hence resulting into enterprises being fined for making what they thought to be value enhancing acquisitions. These businesses had to endure substantial amortization charges on their income statements, or the amount allocated as reserves had to written off. In many cases the result was a lesser asset base than before the acquisition.

Ironically, the underlying explanation to this seemed to have answered prior to Interbrand Company (Lindemann, 2004) statement, since Tollington (1998) acknowledges that it may well be that purchased goodwill is hiding previously unrecognized assets (which could be intangible assets such as brand). Over time, brand accounting experiences has made it possible for some countries (Australia, France, and the UK) to recognize the value of acquired brands separately and be reflected on the balance sheet. This has helped to straighten out the problem of goodwill. Apparently this concept of setting aside a separate value on brands is now widely accepted Interbrand Company (Lindemann, 2004).

Wyatt and Abernethy (2003) observed that acquired intangible assets represent some form of primary worthiness that is often summed up into purchased goodwill. The obvious implication to this is that at the point of the supposed acquisition, goodwill is merely as a generalized term. This may perhaps be the reason why; Tollington (1998) went on to argue that goodwill defies definition.

To make it even more controversial for goodwill Tollington (1998) concluded that the supposed purchase goodwill is not even an asset and goes an extra mile to acknowledge the weakness of the supposed purchased goodwill. Reason being: i) its existence and value is entirely reliant on the circumstances of a transaction for the purchase of a business rather than being based on a recognition of its nature and/or resource; ii) the rule driven valuation of purchased goodwill is only valid for one point in time, that is, the on historical record; iii) unlike most assets, goodwill cannot be separately purchase from the other assets of a business. It is unlikely for purchased goodwill to be used to settle debts or used as collateral to raise loans.

In a study conducted by Stolowy and Klockhaus (2000) in Germany and France stated that the Fourth and Seventh European Directives allowed wider platform for the treatment of brands, in relation to their capitalization, their valuation and amortization, and the treatment of the difference arising from merger. As stated, this could partly explain the emergence of differing or even contradictory accounting solutions in different European countries.

With view of self generated brands, German standards have similarities with the IASC stipulations than with leading accounting concepts in France. In consolidated financial statements (in regard to brands), France clearly had no hesitation in breaking away from the focus on the cautiousness principle and moving towards a more economic approach to accounting. As it appeared, IASC stresses the reliability aspect of i) separability; ii) identifiability; and iii) reliable measurement of cost over the relevance aspect in connection with brands. In regard to the notion and period of amortization of brands, the IASC’s position has resemblance to Germany than France.

Seetharaman et al. (2001) identified that in the UK and Australia, accounting regulation did not recognize goodwill as a result of acquisition hence many companies were forced to write off the goodwill obtained. The effect was significant losses for acquiring companies since the money paid in acquisition, which was over and above the fair value, was money lost without a compensating asset being acquired. In a bid to protest this, many companies resulted in enhancing internally generated brands relative to goodwill.

Customer experiences, core values and coherence that are associated with a particular brand have formed the basis of association with customer retentions and positive perception Martin and Hartley (2006). This brings in the main important concept of brands with consumers called brand equity, and as Wood L. (2000) noted, brand equity came about as an attempt to define the relationship between customers and brands.

Brand equity comprises the long-term benefits to an enterprise from customer satisfaction and brand loyalty, resulting from positive brand positioning in the minds of consumers. Cañibano et al. (1999) defined brand equity as the capacity to sustain and encourage economic demand. As compared to the former, the definition from the latter is much convenient to accountancy as it reflects the objective and platform under which the profession performs. The building blocks or drivers for brand equity are: a) brand awareness, b) perceived quality image, and c) perceived loyalty.

This refers to the recall and recognition potential of brand image. Brand awareness is a necessary base for good brand process. Brands with high levels of awareness that possess strong, favorable and unique associations are high equity brands. When brand awareness is low the products are associated with generics or commodities.

The ability to possess a more permanent status that stems from brand awareness is the basis of building a brand. According to Measuring and Valuing Brands (Corporate Sector Review, May 2007) many enterprises claim to have a brand, yet what they really have is some form of name awareness in a specific market which may only be a temporary experience.

This refers to customers’ judgment in reference to the brand's ability to their expectations. A brand that meets and exceeds customer expectations has high perceived quality image. Perceived quality image also entails the likelihood of a buyer to recommend the products to others.

This is the willingness of buyers to continue to use the product or service, despite future marketing forces that may influence the decision to repurchase.

The idea of brand equity has been an issue of constant debated in the accounting and marketing literatures, and has highlighted the importance of having a long-term focus within brand management. This has led to what can be seen as significant move by companies to be strategic in the way they manage their brands, since a lack of harmonized terminology and philosophy within and between disciplines persists and may impede corporate communication. Accountants tend to define brand equity differently from marketers, with the concept being defined both in terms of the relationship between customer and brand i.e. consumer-oriented. By simplifying the variety of accounting descriptions, Wood (2000) provided classification of the different meanings of brand equity. For instance:

• The total value of a brand as a separable intangible asset - that is, when sold or included on a balance sheet. This is often called brand valuation or brand value, whose meaning is generally adopted by financial accountants;

• Measure of the strength of consumers' level of attachment to a brand. This is often called brand strength and is synonymous with brand loyalty;

• Description of the connections and beliefs the consumer possesses about the brand what could be called brand image.

Wood (2000) pointed that of marketers have a tendency to refer brand equity as brand image or brand strength (also known as consumer brand equity) which makes it easier for them to distinguish it from the asset valuation meaning (brand value). The conflicting point of view here is that brand image cannot be quantified, whereas brand strength and brand value are regarded quantifiable.

Brand value may be thought to be distinct as it refers to an actual or hypothetical business transaction, while the other two focus on the consumer. Interbrand Company (Lindemann, 2004) noted that there are two approaches to brand valuation, which depict a clear bias between the marketing and accounting profession. Accountants are merely interested in the purely financial approach while marketers seem to embrace research-based brand equity evaluations.

That is why Tollington (1998) recommended that marketing education and training should include more financial and accounting learning, which in this case can solve the disharmony in terms the interpretation or communication between the two professions.

Considerable effort has been made by IAS 38 to clarify matters by indicating that for brands to be recognized as intangible assets they should be initially meet the definition of an intangible asset. Wyatt and Abernethy (2003) added on that even if these items meet the asset definition criteria they should not appear on the balance sheet if they do not meet the recognition criteria.

Martin and Hartley (2006) identified that even in small/medium-sized enterprises (SMEs), brand value to existing and potential customers consisted of not only the awareness of its image, but the reliability, value for money and other general characteristics. Internationally, there are two recognition criteria set used: i) feasibility that the future economic benefits that attributes to the asset will flow to the business; ii) the cost of the asset to the business can be quantified reliably

The future economic benefits flowing from the useful life of the brand may include proceeds from the sale of products/services, cost cutting and other benefits resulting from the use the entity. This principle is defended by Interbrand Company (Lindemann, 2004) by having affirmed that brand valuation is a powerful practice that captures the present and future value of a brand. Hence an accurate brand valuation would:

• Increase firm’s asset value;

• Improve market rating;

• Save on or reduce the cost of finance;

• Improve benchmarking against competitors;

• Enhance value-added decision making; and

• Aid in valuing acquisitions and disposals accurately and efficiently.

Godfrey et al. (2006) observed the relevance of valuing intangible assets in terms of probability of future economic benefits to equity valuation. The study was carried out to determine if capitalization of intangible assets had relevance to the market valuation of firms in different countries. The research validated the relevance of this principle of recognizing intangible assets on the basis of probability of future economic benefits, by showing that capitalization of intangible assets is relevant to capital market valuation of equity.

The reporting of the value of a brand in the balance sheet principally depends on its compliance to the definition of intangible assets. According to the International Accounting Standards (IAS 38) of IASC (International Accounting Standards Committee) intangible asset can be defined as an "identifiable non-monetary asset without physical substance" for: i) use in the production or supply of goods/services; ii) for rental to others; iii) or for administrative purposes.

From a broader perspective, a brand can be termed as a collection of images and ideas such as a name, symbol, sign, logo, slogan, or design. Brand perception and other reactions related to it are created by the amassed experiences with a specific product or service, either through directly or indirect relation. The simplest distinction between a brand and a product comes from the fact that the former is intangible and the latter tangible.

Brand gives products and services meaning, adds dimension that differentiates it in a certain way from other products and services intended to satisfy the same need. Seetharaman et al. (2001) points that unlike products which are essentially generic, brands are unique since they can be associated with character, consumer experience and other effects that posses certain associations. Since brands add value to a company it has over the years become a crucial element of corporate goals, wealth and success. This also implies the need for brand valuation since today’s business world is faced with a trend towards "brand capitalization".

Even though brand has been is been recognized as a form of intangible asset, there exists reluctance of acceptance on the approach for reporting brands in the balance sheet. This is particularly true between countries that embrace the "Anglo-American accounting philosophy" versus those that have adopted the "Continental European accounting conception". It is often considered that one of the main reasons why countries with other accounting approaches are reluctant to adopt the International Accounting Standards (IAS) is because the process and resulting IASC standard setting are vastly influenced by the Anglo-American accounting approach, which theoretically emphasized on "relevance" Stolowy and Klockhaus (2000).

Countries that belong to the "Continental European conception", supposedly, stress on reliability, objectivity principle and verifiability. Apparently, accounting academics, regulators and other major stakeholders have been skeptic between the relevance of external financial reports versus maintaining the reliability and verifiability of the information provided. Core to this argument is the belief that, without a transaction, there is no accepted market value Tollington (1998).

Wyatt and Abernethy (2003) upheld that intangible assets are typically identified by reference to the transactions between the company and an external party. In the process of defining a brand, Seetharaman et al. (2001) seemed to advocate on the basis of reliability, in that, the value of a brand cannot be determined exactly unless it became the subject of a particular business transaction such as sale or acquisition.

From this observation, brand as an asset has over the years been mostly highlighted from the ‘stemming out’ approach of acquisition, goodwill or in corporate merger scenarios. An interesting point noted is that whereas intangible assets are the key drivers of corporate value, financial statements alone remain insufficient in assessing the performance and value of companies, hence, as Gregory (2007) suggested, the only way to monetize intangibles was to sell the company More surprisingly, the IASC emphasized on the reliability aspect over the relevance aspect in connection with brands, Stolowy and Klockhaus (2000).

This statement may sound overdue as the injury has already been afflicted, since the atmosphere of the absence of an agreeable international brand accounting standard has loomed for years. This situation makes it even challenging and confusing for managers. Tollington (1999) pointed that there is no clear evidence emerging as to whether the decision to account for brands should be made by managers or companies because they fully embraced the brand asset concept, or whether it has to be based entirely upon pragmatic contemplations such as avoiding excessive reserve depletion. Such a stall, calls in for a consistent and harmonized framework for recognition of brands as intangible assests

Seetharaman et al. (2001) observed that in Malaysia for instance, accounting principles associated acknowledged brand valuation, even though, they were generally incapable of being separated from the business as a whole. Brand acquisition as a separate entity has come from far. For example, in Germany, before 1995 it was not possible to sell or acquire a brand separately without the whole enterprise or with the part of an enterprise possessing the brand.

Today, accounting regulations and principles have been revised to accommodate brands to be sold separately without any linkage to the sale of the whole business or portions of it. IAS 38 stipulates that if an intangible asset is acquired separately then its cost can usually be measured reliably, especially when the acquisition consideration is in monetary form. When a brand is acquired by exchange (transaction) with another asset (either tangible or intangible), it must be taken at its fair value which is equivalent to the actual value of the asset given up then adjusted by the sum of any cash (or equivalents) exchanged.

This means that an asset acquired by some of transaction should be recognized through the market value, which is the postulated price paid under normal or prevailing market conditions. More interesting, is the connection that clearly indicates the train-of-thought behind the rational that underlies the principle for recognition of brands.

Stolowy and Klockhaus (2000) pointed this by having noticed that since reliable cost measurement is the predominant requirement for recognition of brands, it builds a prerequisite for acquisition, since acquisition as a purchase cannot take place unless it can be measured.

Brand accounting rules and regulations in China falls are stipulated under the Hong Kong Accounting Standard 38 (HKAS 38). The HKAS 38 dated 2005 recognize brand valuation is vaguely distinguished but classified under the general assumptions of intangible assets. The broader definition and recognition of intangible assets somehow shares a lot of similar to IAS 38.

They include: separate acquisition; acquisition as part of a business combination; acquisition by way of a government grant; exchanges or transaction of assets; internally generated goodwill and intangible assets.

Despite this broad recognition of intangible assets in China, there seems to be some form of laxity or lack of integrity in the legal framework related to brand accounting. The reason behind this owes to this simple question: How legally protected in the brand element?

For Malaysia’s accounting principles associated with the brand names, acknowldesges that even though they are identifiable, they are generally incapable of separation from the business as a whole. Although there is no harmonized accounting treatment for intangible assets (and brand in our case), the conventional practices appear to be as follows: purchased identifiable intangible assets should be recognized in the accounts.

Internally developed identifiable intangible assets may be recognized if they satisfy established recognition criteria. Companies in Malaysia use a diversity of accounting practices on goodwill. The brand issues in Malaysia have not been a popular issue, as the companies prefer not to recognize them in the balance sheet Seetharaman et al. (2001)

The main intention of this paper is to examine the how brands as intangible assets can be recognized, valued and reflected in a company’s balance sheet. Over the last 20 years brands have become progressively important elements of corporate goals, wealth and success. Corporate firms are increasingly competing and striving hard to build strong brand image(s) which reflects an escalation into intangible assets, resulting into the relevance of brand valuing.

With such a trend, more often than not will be the listing of brand names in the balance sheet of certain companies which impact valuation procedures and business decisions. The treatment procedures in brand accounting have been an issue that remains hotly debated in the accounting arena. There still exists disharmony among different accounting bodies worldwide and systems adopted by various countries.

There are various approaches to valuing brands, namely: cost-based method, market-based method, and income-based method and price premium method. This paper explores how business enterprises can utilize brand accounting effectively through the use of a convenient approach framework for brand accounting.

Practically, the accounting policy regarding brand recognition and, in particular, the choice of a valuation method, depends on the way the brands have been obtained by the firm. This could be in form of: i) separate acquisition (including acquisition transaction); ii) acquisition as part of a merger or acquisition of subsidiaries; or iii) internal generation.

The year 2008 was marked by the lucrative Microsoft (MSFT) $31 a share pre-emptive bid worth $44.6 billion for Yahoo (YHOO). Unfortunately, there was a stalemate in the takeover deal. Reason being, that the shareholders felt that the company had been "substantially undervalued" hence demanded higher stakes.

Yahoo has primarily been an intangible asset based company, and has over the years built its empire through reputation, trust and marketing synergies of which its strong brand image owes a lot. Cook (2008) observes that the apparent advantages of Yahoo brands such as the ‘Buzzword’ as a "tangible reason" Microsoft needed to acquire Yahoo. The onset of the recognition of brand accounting seem to have come along with the booming brand culture trend of the 1980s which was experienced with business deals that saw organizations bidding more for the name (brand image) than the tangible assets of a company.

In 1987 Grand Metropolitan acquired Pillsbury for $1.125 billion with approximately 88 percent of it estimated to be exclusively for the Pillsbury brand. Others include Microsoft buying Google, BMW Rolls-Royce, VW buying Bentley, Nestle acquisition of Rowntree and Danone buying Nabisco’s European business. Srikanthan, Ward and Neal (1988) were quick to note of the increased awareness for the brand accountability and other marketing assets which in many cases were formerly unrecognized and rather seen as ambiguous.

Brand accounting in its dawn years of recognition was viewed with doubts of whether it was a myth or reality or if it was in fact proceeds of commercial convenience committed by a few major companies. Seetharaman et al. (2001) highlighted that the amount being paid for the acquisition, especially for the strong branded names, was progressively higher than the value of company’s net tangible assets. Purcell (2001) recognizes the use of brand extension whereby other products can be added to the brand range to exploit on the existing goodwill.

In today’s commercial era, businesses are increasingly finding the need to focus on brand capitalization. Hence, it seems inescapable to assume the importance of valuing brands as intangible assets in all aspects of business. With the trend towards brand capitalization, accountancy holds the key for credible brand valuation. Many investigations have been made to achieve the best out of brand accounting for accounting objectives. The major problems in brand accounting seem to be as follows:

• In addition, there exists disharmony relating to brand accounting standard adopted by various countries as well as the international accounting bodies.

• The process of separating or valuing brand from other intangible assets has been a challenging issue especially where goodwill is involved.

• There exists is no clear decision making framework to assist businesses account for brands from the recognition to quantification stage.

Accounting should be able to be in pace with the changing needs of the business world in order to reliably account for the new changes as they manifest. In addition, accounting is equipped with a abundant, though diverse, regulatory framework and procedures for accounting for whatever assets is entailed to a business.

One approach is to look into the various existing principles and regulations in accountancy in relation to intangible assets such as brand and relate them to the fast paced demands of brand capitalization. Another approach is to simply study brand accounting as evident in various countries. Another way is to determine if a framework can be sampled from the first two considerations to come up with a convenient model.

Valuing Intangible Assets (Deloitte, 2006) highlighted that International Financial Reporting Standards (IFRS) stipulate that items such as brands can only be eventually be recognized into the balance sheet provided that their fair values can be quantified reliably That is, after they complying with the definition of an intangible asset and then detached from goodwill.

Brand value, as a key management responsibility, should be assessed, monitored, maintained and enhanced, for the following reasons: i) maximization of shareholder value; ii) estimation of the value of a company in the context of mergers and acquisitions; iii) determination of royalties for brands and; iv) for accounting purposes Stolowy and Klockhaus (2000). Apart from including brands on balance sheets, companies have been found to be charging royalties for the access to and use of their brands.

Over the years, many companies have been acquired as much for their brands as for their tangible assets (the contentious bid by Microsoft [MSFT] in 2008 to acquire Yahoo [YHOO] was wholly based on the value of brand). Since brands are registered entities they are subject to litigation which facilitates the requirement for them to be valued. Tollington (1998) implicated that as an asset, brands also possess the legal ability to impose costs on others.

The more the perceived value of a brand, the more companies are set to spend to uphold their value(s). In addition to the aspect of brands being identifiable, the key essence to brand valuation is the choice of an appropriate method of valuation. This is based on a subjective process that places emphasis on economic benefits. These methods can be divided into four approaches:

• Market approach - comparison with other transactions;

• Income approach - namely the royalty- relief method, and all types of discounted cash-flow and earnings methods;

• Cost approach - historical cost method or replacement cost method; and

• Price premium approach - indicator of profitability.

With Internally Generated intangible assets being the most difficult to account for, many countries seem to acknowledge it but have adopted their own flexible approaches to account for them. Table 1 captures the large diversity of systems adopted in accounting for internally generated brands.

Treatment of internally generated brands in various countries

Brand valuation methods after initial recognition

After the identification of intangible assets such as brand, follows the procedure for quantifying the fair value of the intangible assetsDeloitte, (2006). Seetharaman et al. (2001) distinctly identified four approaches (market, cost income and price premium methods).the precise valuation methods for brand accounting. Deloitte, (2006) cited only three approaches (same as above except for price premium method) stating that IFRS 3 provided limited guidance on determining fair value. These methods are:

Market-based/ comparable method

This method quantifies intangible assets by reference to transactions that have recently taken place in similar markets, or benchmarking on comparable assets. It provides the best verification of fair values because it depends on verifiable records from actual market transactions. Conversely, direct sales and purchases of intangible assets are uncommon and records of those that take place are not often entirely available.

The difficulty of this methodology is estimation especially where there is absence of an actual market for most brands or exchanges. Market-based method can be difficult to apply in practice [Deloitte, (2006) and Seetharaman et al. (2001)].

One of overcoming the drawback of this method is using the financial markets as a source of real market value since it reflects the real prevailing conditions. Interbrand (Lindemann, 2004) cautioned that even though comparables can provide an interesting cross-check, they should never be entirely relied on for valuing brands

This method values brands on the basis of the resulting future economic benefits from its ownership. The method is based on the following approaches: royalty-relief method, all types of discounted cash-flow and earnings methods. In contemporary terms, this method seeks to identify and quantify the future attributable earnings of the asset. Interbrand (Lindemann, 2004) states that the income-based valuation method of two unique parts:

• Identification, separation and quantification of the cash inflows; and

• Capitalization of those cash inflows.

Seetharaman et al. (2001) highlighted that Relief from Royalty and Excess Earnings as the main income-based method. Relief from Royalty is based on approximating the price premium a business would assumably pay as royalty for the use or access of an intangible asset if it did not possess it, or the cost savings of on the royalty. Excess Earnings method is based of the fact that the worth of an intangible asset is the present value of the cash inflows it generates, net of all returns on other assets practically contributing to that stream of inflows.

This method values brands as the sum of acquiring, building or maintaining the brand. That is, the totality of all historic costs incurred and replacement costs required in bringing the brand to its present position. Though it complies with standard accounting practice for valuing assets, this approach has been deemed most conservative as compared to the other methods and doesn’t facilitate a better scope for future orientation. Additionally, it has been said to fail because there is no direct association between the financial outflows on its investment and the value added by a brand [Interbrand (Lindemann, 2004) and Seetharaman et al. (2001)].

This method serves as an indicator of profitability arising from use or ownership of a brand. This method involves multiple criteria in determining a brand’s value. The approach is suitable for internal management purposes and external financial reporting. This methods emphasizes that there must be an indicator of brand profitability. For computing brand profitability, the factors that need to be considered are the factors that relate directly to the brand’s identity. However, it is difficult because the company may not consider specific functions as separate from the brand Seetharaman et al. (2001).

While carrying out a brand accounting survey to analyze in-depth the valuation of Kellogg and Coca Cola, Fernandez (2001) admitted that there was limitation of the number of the methods proposed for valuing brands especially within the limits imposed by the brand’s awareness.

Recognition of brands as intangible assets, principles regarding brands recognition, brand accounting as evident in various countries and brand valuation methods are related issues that are broadly mentioned in different sources Online resources including EMERALD, and Google-Scholar books databases have been used as well as Google search engine. Related textbooks, articles, and accounting-related websites have also been used during this study. The research framework is shown in the Figure 1 diagram.

• Recognition of brands as intangible assets

• Principles regarding brands recognition

• Brand accounting as evident in various countries

• Brand valuation methods

• Convenient approach model framework for brand accounting

• Building a convenient framework

Brand accounting is here to stay and is indeed a conventional reality. It also implies critical need to focus on valuation in today’s business world where marketing synergies seem to be directed towards brand capitalization. With this kind of trend there is likelihood that company brands will become its most vital assets, even more than the physical counterparts. In addition, more and more companies are embracing the optimization of intangible assets such as intellectual property and brand reputation.

As companies battle for market share, brand value can facilitate a benchmark to use among other competitors. Coupled with digital era such as the use internet and mobile technology, small/medium-sized enterprises (SMEs) are increasingly operating under the idea of ‘briefcase office’ with a lesser amount of tangible assets to account for. To add on, with the increased levels of outsourcing, major companies are concentrating on the core competencies of their business with brand management in the forefront.

The beneficiaries of outsourced businesses also have to strive to build and maintain rapport and reputation partially via brand equity in order to survive. One noticeable impact of this is that brand image trickles down from multinational national companies (MNCs) to small/medium-sized enterprises (SMEs). In spite of this trend, it is unfortunate that there still lacks a harmonized systematic approach in valuing brands. Since the future holds a lot for brand capitalization, it is not only increasingly important for managers to be aware of it, but be equipped with a convenient approach to account for their brands.

Table 2: Brand value indicators

This is stage entails intangible assets verification process of as per the set principles or criteria governing its recognition. It may be arguable here that ‘recognition’ and ‘identification’ could mean more or less the same thing, which may hold true. However, identification here means verifying and ascertaining whatever the entity earlier recognized has passed the situational test scenario of intangible assets acceptability.

That is, subjecting recognized attributes to some form of intangible asset acceptability test. For example internally generated brand as often cannot be fairly ascertained until when referred to some situational aspects are recognized. Identification stage provides an insight into the presence of brand value in context of intangible assets. Depending on the nature of the intangible asset, set of questions in this stage (refer to Figure 2) act like a yard stick for acceptance as intangible asset.

Critical to this stage is the separation of brands from goodwill. Just as Ward and Neal (1988) emphasized that on legal grounds, intangible assets (such as brands) can only be reflected in the balance sheet if they were separately identifiable other than goodwill. Otherwise if this does not take place then brand value will be subsumed within goodwill. Separability of brand is based on the following assumptions:

• The brand should not entirely be reliant on transactional circumstances. It should have attributes of being recognized on its own nature and/or resource.

• The brand should not be based on rule driven valuation that is only valid for on historical record

• The brand has attributes of being separately purchased, can act as a security for loan and other transactional comparables.

This stage involves the selecting of the most reliable methodology for valuing the brand. In addition, there are several considerations which serve as clues for choosing the most significant or appropriate method in context to the situation of the enterprise and the brand. These considerations include:

• Incorporation of financial and market data.

• Approximation of useful life: finite vs. infinite.

• Transactions such as royalty fees.

• Sensitivity analysis on projections or analyses.

For example in the case the presence of royalties, income-based method is the best applicable option. After the computation, the value obtained is the worth of the brand and can be reflected in the balance sheet along other assets.

Table 3 shows a conceptual Comparative Brand Valuation Statement for a fictitious Malaysian company called Selamat-Saya Fruits and Drinks Ltd. Selamat-Saya is a markets leader in fruit drinks and has over the years built benefited from its strong brand. Due to recent developments over the past sic years, the company has sought the need to seriously account for its brand due to the realization of the vital brand capitalization capacity it posses in the market.

Reporting stage basically relates to the reflection of the brand as an intangible asset into the company’s financial statements. In reference to the above company Selamat-Saya Fruits and Drinks Ltd., Table 4 depicts how its brand value is posted into it balance sheet at the end of the period ended June, 2008.

Table 4 how brand value if reflected in the balance sheet

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