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Brand valuation standard sets challenge to finance

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CIMA members will need to become more familiar with marketing methods and analysis as a result of the new ISO brand valuation standard. Stuart Whitwell, joint managing director of Intangible Business, investigates.

CIMA members will need to become more familiar with marketing methods and analysis as a result of the challenging new international standard on brand valuation. By Stuart Whitwell FCMA, joint managing director at brand valuation specialists Intangible Business and CIMA representative on the panel advising on the new standard.

CIMA, through my participation, has been involved in the development of the new standard on brand valuation from the International Organisation for Standardisation (ISO). This standard has been adopted by the British Standards Institute (BSI) and was launched in October 2010.

Two years of work have resulted in a 10 page document whose short length belies its significance. This brevity is perhaps the standard’s greatest strength – and challenge – to the financial community, which is why understanding it is so important.

The purpose of the standard is to set clear, consistent guidelines as to what a professional brand appraiser should undertake in a brand valuation. For CIMA members who may or may not be familiar with brand valuation, it also provides authoritative guidance of what to expect when they commission a professional brand appraisal, which is encouraged in order to maintain independence and objectivity.

The brand valuation methodologies put forward in ‘ISO 10668, Basic requirements for methods of monetary brand valuation’ corroborate with those of other standards on valuing brands, such as those from the International Valuation Standards Council (IVSC) or the International Accounting Standards Board (IASB). However, what makes ISO 10668 unique and so significant is the inclusion of legal requirements and behavioural aspects. This, and the fact that the standard is so accessible to non-accountants in terms of length and language, sets it apart.

Brand valuation methodologies
The standard identifies a number of recognised methodologies, adhering to the three accepted income, market and cost approaches:

1.Income approach: the objective of the income approach is to calculate the after-tax, discounted present value of future cash flows attributable to the brand. These cash flows are the difference between the cash flows generated by the business with and without the brand. The standard outlines six key ways of doing this: the price premium, volume premium, income split, multi period excess earnings, incremental cash flow and royalty relief methods.
2.Market approach: this methodology compares the brand with comparable transactions, looking at acquisition ratios that can be adjusted to consider the similarity of brand strength, goods and services or economic and legal situation.
3.Cost approach: the cost approach calculates the amount invested in creating the brand and the cost of recreating it.
In practice, a combination of methodologies is generally used, depending on the brand and circumstances in question.

Behavioural aspects
What sets this standard apart and makes it so challenging to accountants is the inclusion of behavioural aspects of the brand related to stakeholders which must be assessed. This should be applied to all three methodologies: income, market and cost. As brand and market analysis is usually the preserve of marketers, valuing brands in accordance to the ISO standard will require the involvement of marketers as well as an understanding of marketing theory and practice by CIMA members and other accountants.

The standard maintains that this brand understanding should underpin the brand valuation process as it is central to the creation of brand value. It highlights stakeholder perception as a key area of consideration as the emotional connection to the brand among relevant stakeholders determines its future success or failure and therefore whether brand value rises, falls or stays the same.

Brand strength analysis should always be undertaken to estimate future sales volumes, margins and risks. Key soft measures of brand strength include brand awareness, perceptual attributes, knowledge, attitude and loyalty. These can be impacted by external forces such as consumer behaviour and trends, competitive activity and market factors, so it is important to have an appreciation of this connection. The relative strength of the brand equity will also alter the value of the brand in a segment or territory as it directly impacts margin (price premium) and market share (volume growth).

The influence the brand exerts on purchase decisions within its target market will determine the effect on demand and is a key consideration for any valuation. Effect on demand is heavily dependent on a brand’s relevance, which is a product of the brand strength and market analysis.

Legal considerations
The standard also sets out the necessary legal requirements, such as the identification of legal rights, brand protection and other factors that could affect brand value. These legal elements overlay the three key components of the valuation – financial information, market situation and brand strength analysis – to provide a rounded, comprehensive standard on brand valuation.

Message to CIMA members
With the introduction of ISO 10668, brand valuation requires rigorous financial analysis underpinned by a detailed understanding of market forces, consumer economic behaviour and legal rights. CIMA members and other accountants should become more familiar with marketing rhetoric and methods as consumer behavioural and brand strength aspects underpin the whole approach, and the same should be expected of appointed valuers.

November 04, 2010 ● Financial

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