Introduction to ISO 10668, brand valuation
‘ISO 10668: Brand valuation — Requirements for monetary brand valuation’ is the first standard on brand valuation published by a non technical body. This is significant as it opens up both involvement and management of brand valuations to non accountants. The standard is also short, at only 10 pages, and written in plain English.

ISO 10668 is the result of two years participation by brand valuation practitioners and specialists such as Intangible Business from countries throughout the world including Austria, Bulgaria, China, Finland, France, Germany Japan, Korea, Luxembourg, the Netherlands, Spain, Sweden and the UK. The Czech Republic, Denmark, Romania and Switzerland were observers. The US was not involved.

Brand valuation entered a maturity phase in 2005 with the introduction of IFRS 3 and IAS 38 which require all acquired intangible assets which are separable and measurable to be identified and valued individually for inclusion on the acquirers’ balance sheet, separate from goodwill. Previous valuation guidelines issued by bodies such as the International Accounting Standards Board (IASB) and International Valuation Standards Council (IVSC) have mainly approached the issue from a purely accounting perspective.

The new international standard provides a valuation framework which also includes legal requirements and, crucially, ‘behavioural aspects’ of the brand which is usually the domain of the marketing fraternity. Accountants will need to become more familiar with marketing and brand analysis in order to comply fully with the ISO standard.

The brand valuation process
The standard defines a brand as a marketing-related intangible asset such as a name, term, symbol, logo or design, or a combination of these, which identifies goods, services or entities and creates distinctive images and associations in the minds of stakeholders and generates economic benefit.

Before outlining the valuation methodologies it sets out certain criteria that valuers should consider as requisite for a brand valuation. Valuations should be transparent and not use any ‘black box’ methods. They should use sufficient data and analysis, and they should be objective – a point that is expanded on in the final section which highlights that independence is required in reaching an objective valuation opinion.

The standard describes the key brand valuation methodologies which fall into the three main camps: income, market and cost approaches. Valuers should select the most appropriate methodology for the purpose and brand. Generally an income methodology leads the valuation process supported by the market and cost approaches where relevant.

1. Income approach
The standard identifies six income-led brand valuation methodologies:

i. Price premium: a method of valuing a brand based on an analysis of the premium it generates over a generic or unbranded product or brand with the lowest brand strength.
ii. Volume premium: analysis using reference to the impact on market share that is achieved by a brand’s volume increase.
iii. Income-split: calculating the value of a brand by determining its share of the business’ profit over its useful life through an analysis of behavioural research.
iv. Excess earnings: the multi-period excess earnings method calculates the value of the future residual earnings after the value of all other assets that are used in the business are removed.
v. Incremental cash flow: this methodology values the cash flows the brand generates for a business by comparison with a business which operates without a brand.
vi. Royalty relief: the relief-from-royalty methodology calculates the future value of hypothetical royalty payments the business is relieved from paying, because it owns the brand.

There are variants of each valuation methodology and frequently valuers will combine elements of a few to create the most applicable in the particular circumstances.

2. Market approach
The market approach prescribes that valuers should consider the value of similar assets that have been bought or sold and calculate the value of the brand if it were to be acquired. This is carried out by reference to multiples of a brand’s acquisition prices with the most comparable transactions being the most applicable. Adjustments will need to be made for parity for elements such as brand strength, differing products, services or geography.

3. Cost approach
The cost approach is based on an analysis of the amount invested in creating the brand and the amount that would be required to recreate an asset with similar characteristics. This approach is rarely used for established brands but can serve as a useful benchmark of value.

Standard highlights
The key inclusion in ISO 10668 is its focus on the market and behavioural aspects which should be included in all brand valuations and play a key role in each of the valuation methodologies identified.

Market dynamics form an essential component of any valuation as value is future value, thereby requiring an appreciation of what is expected to occur. This can be analysed by reference to market research, looking at market size and growth, trends, competitive activity and macro-economic factors such as potential political, social, economic, technological, environmental and legal changes which could all impact a brand’s ability to operate effectively. This is particularly relevant for forecasting cash flows which is a key component of income methodologies.

Behavioural aspects are what really sets this standard apart and what accountants should take most note of. The standard says that in order to value a brand its key behavioural aspects must be considered. Just looking at spreadsheets is not sufficient. A brand’s core value lies in its ability to communicate with its stakeholders. This emotional engagement should be measured within each stakeholder group by looking at measures of brand strength such as awareness, relevance, perceptual attributes, knowledge, attitude and loyalty.

The strength of a brand will have an impact on consumer buying behaviour and consequently impact demand. This brand strength will alter within different stakeholder groups, markets and territories so a comprehensive brand strength analysis is required to produce a robust valuation.

Conclusion
These measures of brand strength drive the valuation process for each methodology by, for instance, comparing the brand with comparable products and services, forecasting branded earnings and determining the royalty rate. A consideration of legal aspects such as appropriate ownership, registrations and protection criteria is also included which introduces a third profession into the valuation process.

With so many parties involved in creating the standard, compromise and dilution was inevitable but the result is never-the-less an important milestone in the evolution of brand valuation and worthy of attention.