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Brands Company Corporate

Brand Accounting: Measuring and valuing brands

Abstract

The main intention of this paper is to examine the how brands as intangible assets can be reflected in a company’s financial statement. 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 is exists disharmony among different accounting bodies worldwide and accounting systems adopted by various countries.

There are various approaches to valuing brands, namely: cost-based method, market-based method, and income-based method and formulatory method. This paper notes how organizations can utilize that valuation in brand accounting is more than just the method but rather management implications such as accounting strategy. Other considerations of brand valuation in terms of relevance to needs of organizations and businesses are briefly mentioned.

Introduction

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 sunset 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. Recent development is of the year 2008 lucrative Microsoft (MSFT) $31 a share pre-emptive bid worth $44.6 billion for Yahoo (YHOO).

The stalemate in the takeover deal was because the shareholders felt that the company had been “substantially undervalued” and demanded higher stakes. Yahoo primarily been an intangible asset based company, has over the years established itself through its brand image and the other related brand synergies. Cook (2008) observes that the apparent advantages of Yahoo brands such as the ‘Buzzword’ as a “tangible reason” Microsoft needed to acquire Yahoo.

Research Problem

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 appropriate brand recognition and 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:

• There exists disharmony in brands recognition of in terms of the reliability and relevance approach.

• It is still difficult for managers to separately identify brands are still not recognized as separable items from other intangible

• There exists is no clear decision making framework for assisting businesses account and value for acquired or internally generated brands as intangible assets.

Objectives of the Research

The objectives of the research are:

• To define a set of major organizational attributes in terms of how they impact choosing the best accounting system development method.

• To identifying parameters influencing the brand’s value

• find a standard segmentation of organizations in order to define each organization’s accounting related attributes.

• To build up a decision making framework to produce relevant and reliable information for brand valuation decisions

Survey of Literature

Digital technology has created another industrial revolution in human history and has greatly influenced all characteristics of business and consequently accounting as the language of business. 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 assets, (2) principles of recognition of brands, (3) brand valuation after initial recognition, (4) brand accounting in various countries, and (5) towards a consistent framework for classification, recognition and reporting of intangibles

Recognition of brands as assets

Brands are recognized and categorized as intangible assets. The reporting of brands in the balance sheet principally depends on their compliance with 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 held” 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 recognition and other reactions 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, and 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 characteristics 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. It also implies need for valuation significance in today’s business world where marketing synergies are directed towards “brand capitalization”.

Even though brand has been is been recognized as a form of intangible asset, there exists reluctance on acceptance in accountancy on the approach mode of reporting brand assets 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 emphasizes 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 are 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) uphold that intangible assets are typically identified by reference to the transactions between the company and an external party.

In defining brand as an asset Seetharaman et al. (2001) seem to advocate on the basis of reliability, in that, the value of a brand cannot be determined exactly unless it becomes 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 merger corporate scenarios.

An interesting point to note 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) suggests, the only way to monetize intangibles is to sell the company.

More surprisingly, the IASC emphasizes on the reliability aspect over the relevance aspect in connection with brands, Stolowy and Klockhaus (2000). This statement does sound overdue as the injury has already been afflicted since the atmosphere of the absence of an agreeable international brand accounting standard looms.

The situation makes it even challenging and confusing for managers. Tollington (1999) points 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 embrace the brand asset concept, or whether it has to be based entirely upon pragmatic contemplations such as avoiding excessive reserve depletion.

This seems to call in for a consistent and harmonized framework for brand accounting, in addition, the definition and recognition of an asset in accounting terms needs broadening to accept in, new limitations for acceptable brand definition.

Concept of branding and brand value

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) notes, 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 appropriate.

It fits into accountancy terms as it reflects the objective and principles under which the profession functions. The underlying building blocks for building brand equity are: a) brand awareness, b) perceived quality image, and c) perceived loyalty.

Brand Awareness

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 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.

The idea of brand equity has been an issue remains 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 moves 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, Feldwick (1996) 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) points out 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. 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 of between the two professions.

Principles regarding the recognition of brands

Considerable effort has been made by IAS 38 to clarify matters by indicating that an intangible item should be recognized as an asset if it matches up the definition of an intangible asset. Wyatt and Abernethy (2003) added on that that even if these items meet the asset definition criteria they will 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

Probability of Future Economic Benefits

The future economic benefits flowing from the useful life of the brand may include proceeds from the sale of products/services, cost savings or reduction and other benefits resulting from the use the entity. 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.

a)Reliable Measurement of Cost

Valuing Intangible Assets (Deloitte, 2006) highlighted that International Financial Reporting Standards (IFRS) stipulates that items such as brands can only be eventually be recognized into the balance sheet provided that their fair values can be measured reliably That is, after they met 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 through maximization of brand 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 subsidiaries 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 three approaches:

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

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

• Market approach - comparison with other transactions.

Practically, the accounting policy followed for brand recognition and, in particular, the choice of a valuation method, depends on the way the brands have been obtained by the enterprise. This could be in form of: i) separate acquisition (including acquisition without charge or by exchange); ii) acquisition as part of a merger or acquisition of subsidiaries; or iii) internal generation.

b)Separate Acquisition

Brand acquisition as a separate entity has come from far. For example, before 1995 it was not possible to sell or acquire a brand separately in Germany 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 connection to the sale of the whole enterprise or parts of it. IAS 38 stipulates that if an intangible asset is acquired separately then its cost can usually be measured reliably, especially when the purchase consideration is in form of cash or other monetary assets.

When a brand is acquired by exchange (transaction) with another asset (either tangible or intangible), it must be measured at its fair value which is equivalent to the fair value of the asset given up adjusted by the amount of any cash or cash equivalents transferred. This means that an asset acquired by some of transaction should be recognized through the market value, which is the price that would have been paid under normal or prevailing market conditions.

There is an interesting 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 notice that since reliable cost measurement is the predominant requirement for recognition of an intangible asset, recognition depends on the acquisition before hand, which gives a reliable indication for measurement and subsequent valuation.

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 (2004) brought up to date (on Tollington (1998) and Stolowy and Klockhaus (2000)) and revealed that the prior accounting procedure for so-called 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 (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. 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 so-called acquisition, goodwill is merely as a generalized term. This may perhaps be the reason why; Tollington (1998) goes on to argue that goodwill defies definition.

To make it even more controversial for goodwill Tollington (1998) concludes that the so-called purchase goodwill is not even an asset and goes an extra mile to acknowledge the weakness of the so-called purchased goodwill. Reason being:

• 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;

• The rule driven valuation of purchased goodwill is only valid for one point in time, that is, the on historical record;

• 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.

Has such strong clarification, sealed the fate for goodwill and brand? Well, according to an article Valuing Intangible Assets by Deloitte, 2006, it acknowledges under the International Financial Reporting Standards (IFRS) that items acquired in a firm that matches up the definition of an intangible asset should be recognized separately from goodwill, provided that their fair values can be measured reliably.

The article stated that a new approach called Purchase Price Allocation (PPA) is a new approach to solve the controversy. The 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 highlights 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. Looks into the framework for measurement and reporting of brand as intangible asset

In specific the American Marketing Association defines a brand as “name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors

Discussion, Findings and Analysis

Brand accounting is here to stay and is indeed a conventional reality. It also implies need for valuation significance in today’s business world where marketing synergies are directed towards “brand capitalization”. Fernández (2001) points out that a company’s brands are often its most vital assets, more important even than the physical counterparts, whose value is included in the accounts. More and more companies are embracing the optimization of intangible assets such as intellectual property and brand reputation.

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. In addition 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 (brand equity) in order to survive. One implication to this is that brand image trickles down from multinational national companies (MNCs) to small/medium-sized enterprises (SMEs).

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