Back in the day, brands were created to represent and add value to what rolled off the production line. Now, for the first time, that value is going to be exposed.

 

New International Financial Reporting Standards (IFRS) state that from 2005 all listed European companies must report acquired intangible assets, such as brands, on their balance sheets. This is already creating a power struggle between financiers and marketers over who should be in control. Round one goes to the financiers who came up with the legislation without consulting the marketers. Round two will be the battlefield.

 

Brand valuation is not a new concept. It has been around for the past ten or so years, used for financial, marketing and litigation purposes. With the introduction of IFRS, brand valuation will be reaching maturity and marketers will have to treat it similarly.

 

Mandatory brand valuations on balance sheets started life in the US. It was noted that intangible assets were accounting for an increasingly large portion of a company's worth - over 80% in the case of leading consumer brands such as Coca-Cola and Marlboro. Upon acquisition all, of this value was shoved into the black hole of goodwill where it was of no use to anybody; there was a complete lack of visibility. Breaking out the measurable and identifiable intangibles from this black hole has a number of advantages:

 

• Royalty rates and transfer prices can be set more accurately from knowing and understanding the value of brands and other intangible assets.
• Knowing the value of a brand can help companies generate positive PR in financial markets which can, in turn, assist in boosting the share price.
• It is a highly effective benchmark of ROI (return on investment). Intangible asset valuation enables brands and other intangibles to be applied to the measure of return on investment, allowing management to be measured appropriately on what they drive through the application of the brands in their management.
• The share price can recognise the true value of brands in acquisitions - which can have the effect of the share price being raised.
• The actual process involved in putting brands on a balance sheet can throw up some useful insights. Among other factors it analyses the brand relative to the competition; it identifies potential opportunities, strengths and weaknesses of the brand; and consumer and market perceptions - an objective opinion can be extremely beneficial.

 

To play a meaningful part in the ongoing management and strategic direction for allocating resource behind brands, marketing directors need to influence and be involved in the brand valuation process. This must be achieved if marketers are to be considered the guardians and stewards of a company's portfolio of brands. They must also have a thorough understanding of brand valuation principles and how it effects shareholder value. If this is done successfully, marketing directors will be in charge of what is usually a company's most valuable asset and the increased power and influence this brings will necessitate boardroom presence.

 

Knowing the nuts and bolts of technical accounting is probably a step too far, but knowing what information is required is important. Brands have to be on the company's balance sheet from the transition date in 2005 on which its financial year starts. You may, however, retrospectively restate acquired intangibles as far back as you like - so long as the relevant information is available. This is highly recommended for companies which have purchased a number of brands over the years. If a company has only made a few relatively minor recent acquisitions then historically restating is not so important, although still recommended as this is the most advantageous route. The important thing to note, however, is that companies can only retrospectively restate the first time they apply IFRS. The following year, historical restatement is not allowed. You only get one chance.

 

IFRS only applies to acquired brands; internally generated brands are not included. This is the apparent incongruity: why can't all brands go on the balance sheet? In theory, this would be ideal. However, until everything has been bedded down there is a fear that putting internally generated brands on the balance sheet could be open to abuse. Internally generated brands can still, nevertheless, be valued and referenced in the director's report, for example, just not on the balance sheet.

 

It's not just brands that have to go on the balance sheet, it's all intangible assets that can be measured and identified. There are dozens of these, the most common of which are: brands, copyrights, contracts, customer lists, computer software, know-how and patents.

 

Every intangible to go on the balance sheet has to given a life-span. This might easily be determined, as in contracts for example, but for others the choices are either a definite life-span - where the value is written off over the lifetime - or indefinite - an assumption that the brand will go on forever. Every year, regardless of whether the intangible has been assigned a definite or indefinite life, the intangibles will have to be tested for impairment to see whether or not value has been lost or gained.

 

Increased accountability can have its pitfalls too: with power and authority comes responsibility. Having brands on the balance sheet will reveal whether the marketing director is building or loosing brand value - there's nowhere to hide. If the brand's increasing in value then they're safe, but if it's decreased in value there is a right off through the P&L - this needs to be explained to the city and shareholder. Marketing directors need to get a grip of this reality.

 

Appreciation of how marketing investment can enhance brand value will allow CEOs, financial directors and financial controllers to more thoroughly understand and measure effective marketing investment. Brands are invariably the main differentiator between products or services and enable premiums to be charged. Investment in brands will therefore become more important as the brands themselves become financially visible. The financiers will love brands from their fat margins and marketers will have to learn to love them the same.

 

Although a step in the right direction, this IFRS is a compromise: a glass half empty that needs topping up. The aim of this legislation is to bring more transparency to the accounting profession in terms of acquisition accounting which so happens to make information on the balance sheet partially better for users of financial statements.

 

Brand valuation methodologies have pretty much been standardised. Most companies use the relief from royalty approach incorporating three main ingredients of income (what the brand is earning), market (comparable transactions), and cost (cost to build a similar brand). And if the workings and assumptions are stated, as is required for pension schemes, then the margin for abuse is reduced.

 

So, the gauntlet has been laid and the battle for the brands is being played. What the marketing community needs to do is get involved in the brand valuations and gain control of their brands. And if the accountants can succeed in making the intangible tangible, then marketers better watch out.