Examining the history and background of intangible assets


In the majority of 20th century, tangible assets is considered to be the main source of the commercial value, which include fixed asset such as buildings, land, manufacturing as well as financial assets such as bonds and their valuation. They were shown in the financial statement after valuation which is based on their cost and/or outstanding value. However, it is not mean that people do not recognize or pay any attention on intangible assets, though the specific value of intangible assets is not clear and recorded in the balance sheet. Even now, the priority company's evaluation on profitability and performance is still focus on those assets excluding intangible assets, for example, predicting return on investment, evaluating the value of fixed assets or equity. Because there are no recording value of intangible assets in the accounting book, they are not included in price relative measurements as well, such as price and book value ratio. But in the last 25 years of this century the awareness of creating value for the shareholders changed dramatically, people start to keep eyes on intangible assets and their valuation.

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Though people do not pay so much attention on the benefit from intangible assets, it is not mean that management of the company are not aware of the importance of such assets. It seems that most of successful businesses are due to successful corporate management of intangible assets such as brands, patents, technology and employees, but still lack of explicit valuation on such assets. Their values are summarized in the whole value of the assets, no any recording Independently. The owners of some major brands, such as Coca-Cola, Procter & Gamble and Nestle did do some actives to protect their intangible assets and recognized the importance of their brand, but there were still not intentions on intangibles on the stock market to substitute for investors' concerned about their assessment of the value develop from tangible assets. We will discuss some important cases below with evidences to support what I have said above.

So this report will trace the history and background of intangible assets(Brands mainly) to look for the answer why intangible assets(Brands mainly) should be recorded Independently in financial report and analysis the benefits by using cases in practice. We will also discuss the manners of brands valuation and the benefits. Those two main contents will be discussed Independently and both are focus on theory and practice. The date and information are researched form internet and some related books. A table will be quoted with proper referencing(see reference).


Structure of the report

The main body of the report is consist of six chapters.

In chapter one, introduction

In chapter two, the theory on reporting brands

In chapter three, Benefit from brands in practice

In chapter four, The social value of the brand

In chapter five, The theory on brand valuation manners

In chapter six, the function of brand valuation in practice

In chapter seven, conclusion

In chapter one, it is about the theory of intangible assets under IAS 38 and

FASB. Including, the definition of intangible assets by IAS 38, manner of recognition and measurement of intangibles, useful life of intangibles. It will illustrate gradually which types of intangibles should be recognized on the financial statement and how to valuate from the basic knowledge point. A brief introduction to the theory of three main valuation approaches (income approach, market approach and cost approach) will be involved.

In chapter two, I will using three UK companies (Coca-Cola, Amazon and Sony Ericsson ) in different sectors as case studies to show the application of theory to practice and also get feedback by compare those company approach of intangible assets. Aiming to find out the what is the effect recording intangibles in the financial statements has on the interpretation of corporate financial performance. Get the manner how to maintain the asset value of companies' brands.

In chapter three, I will try to indicate several recommendations base on above expound. Assuming suggest the historical cost of intangible assets are disclosed on the corporate balance sheets while the fair value of intangible assets to be disclosed in financial statements to enable enterprises to reflect a more complete and realistic accounting information.

Background to the topic

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Acquired the brand in the late 20th century, waves of 80 caused a great deal of goodwill accounting standards, the majority can not be a reasonable approach to handling the economy. Transactions led to the goodwill accounting in the debate on the balance sheet, including Nestle Rowntree, United Biscuits acquisition and divestitures Kebler purchase, the Metropolitan made Pillsbury and Danone's acquisition of Nabisco European business.

The so-called goodwill accounting practice does not involve the growing importance of intangible assets, with the company to make acquisitions they think the punishment is valueenhancing results. They either face the profit and loss account (income statement), or they had to write off the amount of reserves and the end of the acquisition of the asset base than ever before in many cases a large number of lower amortization expense.

In countries such as Britain, France, Australia and New Zealand is still possible to recognize the acquisition of identifiable intangible brand value, and proposed the acquisition of these companies balance sheet. This helps solve the problem in good faith. Then, as the brand recognition of intangible assets used by a gray area of accounting, at least in the United Kingdom and France, so companies do not encourage including a balance sheet on the brand, but not unable to do so. In the mid-80s, Reckitt & Colman, the British firm, to its Airwick brand, which recently acquired the balance sheet value; major metropolitan area and Smirnov did not brand it as part of the acquisition, with Heublein. At the same time, some newspaper groups to its acquisition of the rise of their balance sheet value.

To the late 80s, on the balance sheet was the understanding of brand value within the company led to valuable financial assets, internally generated brands, similar recognition. 1988, Rank Hovis McDougall (RHM), the UK's leading food group, to play their brand of power heavily in the successful defense of Goodman Field Wattie (GFW) hostile takeover bid. RHM's defense strategy includes an exercise to demonstrate the value of RHM's brand portfolio. This is the first to establish an independent brand value, the value of this is possible, not only when they acquired the brand, and when they were created by the company itself. Successfully resisted the bid GFW, RHM in its 1988 financial accounts of the value of all internally generated intangible assets, and get the brand on the balance sheet.

In 1989, the London Stock Exchange approved the concept of brand valuation allowed by the RHM shareholders approved the acquisition of intangible assets included in class test. This proved to be a major wave of consumer products companies to promote brand awareness to their balance sheets as intangible brand value. In the UK, including Cadbury, city (when it is 50 billion purchase of Pillsbury), Guinness, Li Bo (when it acquired the Hilton), and United Biscuits (including Smith's brand).

Theory on reporting brands

The FASB and other accounting bodies have stated that the financial reporting should provide information:

"that is useful to potential investors and creditors and other users in making rational investment, credit, and similar decisions;

that helps current and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts and net cash inflows to the enterprise; and

that describes the economic resources of an enterprise, the claims to those resources, and the effect of transactions, events, and circumstances that change its resources, and claims to those resources" (Nearon, 2003).

Today, including Louis Vuitton, L'Oreal, Gucci, Prada and PPR many companies have recognized the acquisition of their balance sheet brand. Some companies already use the brand value and provide historical performance indicators as a financial brand value, as an investor relations tool, the balance sheet of their brand identity.

In accounting standards, the United Kingdom, Australia and New Zealand have been allowed to acquired range of leading brands in the balance sheet, and provide information on how to deal with detailed guidelines of goodwill acquired the road. In 1999, the UK Accounting Standards Board's FRS 10 and 11 of the acquired goodwill in the balance sheet treatment. International Accounting Standards Board and International Accounting Standard 38, after the suit. In the spring of 2002, the Financial Accounting Standards Board Accounting Standards Board released 141 and 142, giving up centralized accounting and laying about recognition of acquired goodwill in the balance sheet of the detailed rules. There are indications that most of the accounting standards, including international and British Standards, will ultimately converted to the U.S. model. This is because most of the U.S. capital markets to raise capital or business in the United States must abide by international companies with accounting principles generally accepted in the United States (GAAP).

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All the main provisions of these accounting standards, the acquisition of goodwill needs to be used on the balance sheet and amortized in accordance with its service life. However, if the brand can claim unlimited life intangible assets not subject to amortization. Instead, companies need to be tested for impairment annually. If the value is higher than the initial valuation of the same or higher in the balance sheet value of assets remains unchanged. If the impairment of the value of low, need to write the assets down to a lower value. The recommended method of valuation is the discounted cash flow (DCF) and the market value approach. Valuation of the need for business unit (or subsidiary), generated revenue and profit performance.

Once the acquisition accounting treatment of goodwill is to improve financial reporting for intangible assets such as brand an important step. It is still not enough, because only with goodwill recognized and reported in detail down to a minor footnote account. This has led to distortions, McDonald's brand and does not appear in the company's balance sheet, even though it is estimated to be about 70 percent of total stock market value (see Table 2.1), but the Burger King brand recognition of the balance sheet . There is still a quality brand is recognized in the balance sheet valuation. While some companies use a brand specific valuation methods, other less sophisticated valuation techniques, often doubt values. Financial report on the introduction of line is a long-term enterprise value of the real debate is likely to continue, but if there greater consistency, greater brand assessment approaches and the report of the brand values, corporate asset value will become more transparent much.

Benefit from Brands in practice

The growing awareness of the value of intangible assets, with companies in the 'gap between book value and stock market valuations are increasing and the market value of these shares in the merger and acquisitions in the late '80s surge of premium paid.

Now, it may be argued that, in general, mostly from the derived value of corporate intangible assets. Asset Management attention will undoubtedly greatly increased.

The brand is a special kind of intangible assets, in many enterprises is the most important asset. This is because the economic impact of the brand. They affect the choice of customers, employees, investors and government agencies. In the world of abundant choices, this effect is a commercial success and the key to shareholder value creation. Even as a non-profit organizations have begun to embrace receive donations, sponsors and volunteers the key assets of the brand.

Some brands also show a remarkable durability. The world's most valuable brand, a Coca-Cola is more than 118 years, and the world's most valuable brand, the majority of more than 60 years. Compared with surviving a string of different business owners, estimated to be 25 years or so.2 average life expectancy of many brands.

A number of studies attempt to estimate the contribution of brands to shareholder value. In Interbrand and JP Morgan, a correlation (see Table 2.1) concluded that the average brands account for more than a third of shareholder value. Research shows that brand and create significant value both as a consumer or business brand or both.

More than 70 percent of McDonald's shareholder value, brand accounts. Coca-Cola brand accounted for 51 percent of Coca-Cola stock market value. While this is true, the company has other drinks, such as Sprite and Fanta brands of large-scale combinations.

Harvard University researchers and South Carolina3 and the "Best Global Brands" list in the select company Interbrand4 show that companies with strong brand is better than respect for the market in a number of indicators. It also shows that a portfolio from the world's best brand, brand value was significantly higher than the weighted implementation of the MSCI World Index and the Morgan Stanley Capital International to focus on the S & P 500 index better.

Today, the key and leading enterprises in the management of intangible assets. For example, the Ford Motor Company to reduce investment in intangible assets, tangible benefit of its asset base. In the past few years, it has spent more than 12 billion U.S. dollars acquisition of Jaguar and other famous brands

The social value of the brand

The economic value of the brand, its owner is now widely accepted, but their social value is not very clear. Brand building to do any other value than all of them is the value that they create large social costs? 7, the popularity of global brands, so many brands around the world the focus of discontent. They believe that as a brand and exploiting workers in developing countries between the homogenization of culture and other issues directly linked. In addition, the brand has been accused of stifling competition, sully, to encourage monopoly and limit consumer choice of the capitalist system of the United States and Germany. On the contrary argument is that brands create substantial social as well as increasing competition as a result of the economic value of improving product performance and brand owners on the stress behavior of socially responsible way.

The basis of race performance, and price, this is the nature of brand competition, and promote product development and improvement. And there is evidence that the promotion of companies than others in their class to do their own brands more often be more innovative in their respective categories. A European brand Association8 European PIMS study showed that fewer brands of products launched less significant investment in the development of small and less than rival brands of product advantages. Almost all of the "non-branded" half of the sample, compared to product development, nothing more than a "brand" less than a quarter samples. Though 26 percent of non-branded producers of new products have never made an important, a figure far below a collection of seven percent for the brand.

Need to keep the brand relevant R & D promotion, increased investment, leading to product improvement and development of the ongoing process. Brand owners are responsible for their quality and brand products and services, and their moral behavior. As the business from the brand value and sales and stock price, the potential costs of the act is far greater than any benefit directly immoral, than the monitoring costs and business ethics. A number of high profile brands have been accused of unethical behavior. Interestingly, these are already developing voluntary codes of conduct and internal control systems use some of the brand. This is not to say that these brands have been successful elimination of the unethical business practices, but at least show their will to address this issue.

The gap between the company's more honest to admit that they have the moral behavior of the bridge, they will appear more credible. Nike, a number of suppliers in developing countries, the employment system of the criticism of a company, now post the results and factory workers www.nikebiz.com external audit and interview. The concerns of multinational companies is understandable, taking into account a 5% drop in sales of brand value may result in the loss of more than one billion U.S. dollars. It is in their economic interests of the clear moral.

Theory on Brand Valuation Manners

Some have always attached importance to the economic value of the degree of brand and other intangible assets, but it is only established in the late 80s the valuation methods may be fairly claim to understand and assess the specific value of the brand. Of: on a single brand values is now widely accepted. For those concerned with accounting, transfer pricing and licensing agreements, mergers and acquisitions valuebased management, brand valuation plays a key role in business today.

Brand Valuation approach

Unlike such as stocks, bonds, commodities and real estate assets, there is no brand value, will provide similar active market.

Therefore, to reach an authoritative and effective way, to the growing number of brand evaluation model. Most fall into two categories:

• research-based brand equity evaluation, and

• purely financial-driven approach

(1) Research-based approach

There are numerous brand equity model, using consumer research to assess the relative performance of the brand. Not to the brand's financial value, but they measure consumer behavior and attitudes, there is a brand of economic performance. Although these models are complex and complexity vary, they all tried to explain, explain and measure the impact of consumer behavior point of view. They include: 1, such as different levels of knowledge (foreign aid, finance, spiritual), knowledge, familiarity, relevance, specific image attributes, purchase consideration, preference, satisfaction, perceptions and recommendations of the wide range of measures. Some models add, such as market share and relative price behavior measures.

Through different stages and the depth of the statistical model, which measures whether a rank order, to provide from the barrier, leading to a conscious choice and purchase, or relative of their overall consumer concepts, provide an overall score or measure brand equity. A combination of indicators of a change or expected to affect consumer behavior, which in turn would affect the financial value of the brand. However, these methods do not distinguish between, such as other influential factors, design and brand development. Therefore, they did not provide specific sales targets and between the financial performance of the brand a clear link. A strong brand can be the basis of these indicators, but still can not create a financial and shareholder value.

Understanding, interpretation and measure of brand equity is essential to assess the brand's financial value. After all, they are the key to consumer purchase behavior measures, given the success of the brand. However, unless they are an economic model, they are not sufficient to assess the economic value of the brand.

(2) Financial-driven approach

Cost-based approach is defined as all historical or replacement costs incurred, so that the current state of the brand needs a brand value of aggregation: in development costs, marketing costs, advertising and other communications costs combined, and so on. These methods fail because there is no direct correlation between financial investment and increase the brand value. Financial investment is the establishment of an important component of brand value, as long as it is targeted effectively. If not, it may not make a difference in beans. Investment demand significantly exceeded the advertising and promotion, including research and development, employee training, packaging and product design, retail design.

Factors in brand valuation

(1)Comparable. Another method is to reach a whole new thing on the basis of comparison value. However, comparability is difficult in the case of the brand, because, by definition, they should be differentiated, so are not comparable. In addition, in the same category of brand value creation can be very different, even though most other areas, such as the target group's basic business, advertising expenditures, price promotion and distribution channels are similar or identical. Comparable offers an interesting cross-examination, but, even if they can not rely solely on brand valuation.

(2)Premium price. In the premium price method, the value of the net premiums of the present value of future price of a brand without the brand through a common command or equivalent. However, the main purpose of many brands is not necessarily to obtain higher prices, but to ensure the highest level of future demand. The value of these brands is to ensure the future generation, rather than the protection of a premium. This applies to a number of durable and non-durable consumer goods.

This approach is flawed, because one of the few common brands can compare the premium price equivalents. Today, almost everything is brand, and in some cases can serve as a store brand as a brand producers charge the same or similar prices strong. Competition between brands and product price differentials can be indicators of its strength, but it will not be the only and most important value contribution to the basic operations of a brand.

(3)Economic use. This is a driver of brand equity measures or means of financial measures to a complete lack of any financial or marketing component to provide a brand of integrity and strong economic valuation. Economic use method, which in 1988 developed a combination of brand equity and financial measures, and has become the most widely recognized and accepted brand valuation method. It has been used for over 3500 worldwide brand valuation. Economic use is based on the basic marketing and financial principles:

• Marketing principles related to business functions, the implementation of the enterprise brand. First, the brand will help create customer demand. Customers can be individual consumers and businesses under the Consumer

The nature of the business and purchase conditions. Customer demand into income through the purchase quantity, price and frequency. Second, brand loyalty and long-term security by buying customers.

• related to the financial principles for the future expected net profit, widely used in the commercial concept of present value. The brand's future earnings to determine, and then discounted to net present value of the discount rate, reflecting the risk of achieving these gains.

Brands valuation steps

In order to capture a complex brand value creation, take the following five steps:

1. Market segmentation. Customer brand choice, but the influence of different brands in the market determined the operation. Split brand and market access of non-overlapping homogeneous consumer groups, such as by product or service, sales channels, consumption patterns, purchasing maturity, geography, existing and new customers for the standard, and so on. The value of the brand in each segment and the segment of the valuation of the sum constitutes the total value of the brand.

2. Financial analysis. To identify and forecast revenue and generated by the brand established in step 1 for each different part of the intangible benefits. Intangible income is income minus operating costs, the brand, the use of the applicable tax rates and the cost of capital. This concept is similar to the concept of economic profit.

3. Needs analysis. Assess the role of the brand to play in the promotion of products and markets, the demand for business services, and determine what proportion of intangible earnings is measured as an indicator of the brand is called by the brand's target "role." This is done by first identifying the business needs of a variety of brand drivers, and then determine to what extent each driver is directly affected brands. The role of branding index represents the brand produced by the percentage of intangible earnings. Proceeds from the sale multiplied by the brand index of the role of intangible benefits.

4. Competitive benchmarking. Decided competitive advantage and disadvantage in brand specific brand derived discount rate, reflecting the expected future earnings of their risk profile (which is measured by an indicator known as the "brand strength score"). This includes a wide range of competitive benchmarking and market the brand, stable leadership, trends, support, geographic footprint and legal protective structure evaluation.

5. Brand value. Brand value is the net present value of brand earnings, discounted by the brand discount rate forecast (NPV). Net present value calculation includes both the forecast period and a later period, reflect the brand's future ability to continue to generate income. A brand valuation of the market in a hypothetical example is shown in Table 2.2. This calculation is a useful model of brand value in various situations, such as:

• Forecast market and investment strategies;

• Identify and evaluate the communication budget;

• calculate the return on investment on the brand;

• assess the opportunities, lack of new or developing markets; and

• tracking brand value management.

The function of brand valuation in practice

The application of brand valuation has been greatly expanded since its founding in 1988, it is the most strategic use of marketing and financial decisions. There are two main types of applications:

• Strategic brand management, brand valuation focused on the domestic audience the tools and process management to improve the economic value of the brand.

• financial transactions, the brand valuation of brand-related transactions with outside parties, all kinds of help.

Strategic Brand Management

Economic value of brand awareness, increase brand equity for the effective management of demand. In the pursuit of increasing shareholder value, companies are keen to establish the brand in line with other corporate assets, as well as management procedures throughout the company. Simply because the traditional research-based measurements proved to understand and manage the economic value of less than the brand, the company adopted a new management tool brand value. Brand valuation can help them build brand management valuebased system. As creating economic value of brand management and brand of all the key investment decisions. Diverse, including American Express, IBM, Samsung Electronics, Accenture, United States of America, British Petroleum, Duke Energy Corporation and Fujitsu road brand value, to help them re-focus on its branded business, and create a brand decision-making and investment on economic grounds. Many companies are making the brand value of the remuneration of senior marketing managers to create the part of the standard.

Brand valuation of these companies find the following help:

• the decision on business investment decisions. By making the brand assets and other tangible and intangible assets, different asset allocation of resources between the types, you can follow the same economic conditions and reasons, for example, capital allocation and return requirements.

• Measuring the return on investment on the brand based on brand value in the investment rate of return, you can directly reach relative to other investments. Brand management and marketing service providers, measurable performance goals specifically related to the value of brand equity.

• make decisions on brand investment. By priority according to brand, customer base, geographic markets, products or services, their distribution channels, etc., the brand can spread the cost of investment, influence and determine the cause maximum benefit.

• decision making licensing subsidiary of the brand. A subsidiary of the license will be responsible for the management and use of the brand, and asset management to pay more stringent than the one to be free.

• turn into a profit center, from a cost center, connecting brands and brand marketing ROI (from the subsidiary's brand use fee). The relation between investment, the returns from the brand to become transparent and easy to manage. Remuneration and career development of marketing staff can link to the development and brand value measurement.

• allocation of marketing costs in the interests of the various business units from the brand equity.

• Organization and optimization, for example, using different brands in the business (corporate, product and subsidiary brands) according to their contribution to the economic value.

• assess the co-branded initiatives according to their economic benefits and risks to the company's brand value.

• determine the appropriate brand after the merger by a clear economic reasons.

• Manage the brand more successfully migrate to a different value of the brand as a better understanding of the results, therefore, nothing to lose or get, if the brand migration occurred.

• The brand value of building brand value, providing focused, brand performance on the basis of the best understanding of the measures taken action, the driver scorecards.

• managing a brand portfolio across multiple markets. Brand performance and brand investments to assess the basis of comparison with the same combination from brand to improve the overall return.

• the economic value of brand communication as appropriate to create a capital market to support share prices and financial assistance.

Financial transactions

Brand valuation of financial applications include the following:

• assessment of the subsidiary company's brand in the fair trade price. Brand royalty income tax return the way you can to the company headquarters. Brand may authorize the international subsidiaries in the United States, subsidiaries in different countries.

• identify the brand of brand equity through brand licensing to third parties the best use of royalty rates.

• Capital of the brand balance sheet under U.S. GAAP, international accounting standards and accounting standards in many countryspecific. Brand value is used for both initial and periodic valuation of a derivative of the value of impairment testing.

• establish a brand in the mergers and acquisitions, asset prices and the value of clearly defined brand increasing trade.

• determine the contribution of the brand, a joint venture to establish a joint venture distribution of profits, investment demand and stock.

• Use the brand in debt, the economic exploitation of the brand rights for the mortgage securitization facilities.


As global competition is becoming increasingly severe, and many competitive advantages, such as technology and become more transient, the brand's contribution to shareholder value will increase. The brand is a small number of assets that can provide long-term competitive advantages.

Despite the brand's commercial value, which management is still lagging behind in their physical counterparts. Even if the measure has become the mantra of modern management, it is amazing how the number of existing systems and procedures agreed upon by the brand asset management. When it comes to management and measures to measure plant selection is amazing, because it is in complex computer systems, measurement and analysis of investment in the production process of every detail. The same is true of financial control. But, surprisingly, this can not be said for brand asset management. Despite the many brands of measures, can link the value of some brands to create long-term finance. No investment in brand management to a complex control measures or other comparable. The importance of intangible assets of companies as the increase in management will have to install more valuebased brand management system, in conjunction with other company assets, brand assets under management.

A financial report on the results of the company lacks a detailed contribution to a similar brand. Investment and return on tangible assets, a detailed report of the advanced level, but this is not true of intangible assets. For example, Coca-Cola's balance sheet, income statement and cash flow calculations tell us that working capital, fixed assets and financial investment, but few of the most important assets of the company, Coca-Cola brand performance. The same applies to most other brandowning company. The lack of current accounting rules in its treatment of intangible assets. Increasing value placed on intangible assets through mergers and acquisitions over the past 20 years has been forced to recognize and deal with accounting standards on the balance sheet intangible assets. However, the standard deals only with the bare minimum of acquired intangible assets, accounting, formerly known reputation. As a strange result, the value of the acquired brands included in the company's balance sheet, but the value of internally generated brands are still missing.

Overall, an increase in brand value and transactions from a management point of view of the need. With the use of means of economic development, finally has a brand evaluation criteria can be used. This may be the most important brand in the future management tool.