Outdated Accounting Standards

Given the importance of brands and branding, a frequent question that arises is why senior management does not pay more attention to the health of brands and why senior managers are not more commonly incentivized to build brands. One reason rests on antiquated accounting standards in the United States. Brands and their value rarely appear on the firm’s balance sheet. The exceptions are brands that were created outside of the firm and were subsequently acquired. The value of brands created internally is not reported at all. Even those acquired brands that do appear on the balance sheet must appear at the value at which they were acquired. These practices lead to what has been called the “moribund effect,” an accounting phenomenon by which the value of a brand that is acquired, measured, and added to the balance sheet by a company remains unchanged no matter how well the brand might perform for that company over time. In fact, the value can change, but only in a negative direction if the firm decides to declare an “impairment,” a reduction in the value of a brand, such as Procter and Gamble did with its Gillette brand in late 2023. Thus, brands, even if they do appear on the balance sheet, can only decline in value; they can never increase in value (absent a sale) under current U. S. accounting standards.

It is difficult to hold management and the board of directors accountable for an asset that cannot increase in value. But things are changing. A number of third-party firms are now in the business of valuing brands because investors find such information useful when making their own investment decisions. The new European Sustainability Reporting Standards include a requirement for reporting on the management of brands and the International Standards Organization (ISO) now has standards for managing and reporting on the management and valuation of brands.

There are real issues associated with putting brands on the balance sheet, which is why accounting standards in the U.S. do not require such reporting. For example, if brands are valued in terms of discounted future cash flows, which is arguably the most defensible method of valuation, the value is influenced by such factors as interest rates over which the firm and its management have no control. However, such problems with the reporting of the value of brands on the balance sheet do not preclude other types of reporting. The Marketing Accountability Standards Board (MASB) has long advocated some form of reporting on brand management and changes in brand value short of placing brands on the balance sheet, not unlike what some firms now do with R&D investments.

The Dawn Of New Accountability

The world is moving toward greater accountability for managing brands and other intangible assets. New, emerging standards will eventually force reporting. Senior management would do well to be proactive in encouraging the development of reporting standards in the firms they manage. The Board of Directors has a fiduciary obligation to do so. Investors will increasingly demand such reporting, and as reporting becomes more routine, it will impact the cost of capital of firms that do not report. Such reporting will make senior managers more accountable, especially if bonuses are made contingent on the successful management of brands. Of course, some managers will not do well when held accountable, but this is another way to ensure managers perform. It may also come to highlight sets of management skills that are undervalued under current practices – like marketing.

Brands and branding are here for the long term. It is time for management accountability to catch up.

Contributed to Branding Strategy Insider by: Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.

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Given the size of the stakes at issue, the failure to report on how a firm’s management of its brands is affecting their value is a serious omission. Of course current U.S. accounting practices do not require the reporting of the value of a firm’s brands or how the value has changed over time. One might assume that in the absence of public reporting firms would at least monitor the health and value of brands as a part of internal management and control. Surprisingly, this is not the case in most firms. A recent study by the Marketing Accountability Standards Board (MASB) found that few firms have any systematic process for the evaluation and valuation of their brands. Such failure to monitor the health and value of a firm’s largest assets is management malpractice.

Excuses Versus Asset Management

The reasons for the absence of such brand evaluation and valuation process are numerous. It’s hard. The numbers are fuzzy. The board and senior management view brands as operational issues and, accounting standards do not require that they report on brands. Marketing, which is usually tasked with managing the brand, does not understand finance. Such excuses are poor reasons for ignoring how well a firm is managing important assets.

It is not hard. All measures of value, even those for tangible assets, are, at best, estimates. When assets represent a significant portion of a firm’s value, they are by definition, strategic. Marketers should be expected to speak the language of the firm, finance and most are trainable.

ISO, the International Organization for Standardization, has recently established standards for both brand evaluation and brand valuation. Ultimately, the value of a brand is the sum of its discounted cash flows over some finite period of time (it’s likely useable life). If cash flows are increasing over time, the value of the brand is increasing, other things being equal. Similarly, if cash flows are declining the value of the brand is decreasing; again, other things being equal. Such an approach is simple, direct, and requires little data.

Some would suggest a more complex approach, arguing that “brand” is but one part of the total product or service offering that also includes such things as the functional product and the quality of that product. This is really a question of the incremental value of a brand relative to a generic product. It is relatively easy to determine the incremental value of a brand using the price premium of the brand relative to its generic product, such as a store brand or unbranded product. But, the incremental value of a brand is not the same as the value of a brand. The brand, and the value of that brand, is inseparable from the way it is delivered to the customer, which includes characteristics of the product. Thus, the value of the brand is still the sum of its discounted cash flows over time.

Marketing Expenditures Are Often Defensive

The incremental value of a brand can be useful for gauging the value of investments in marketing and brand building activities. The return on marketing investments should increase the incremental value of the brand relative to value without the investment. But, even this incremental value can be estimated using changes in discounted cash flow. It is important to remember that marketing actions and expenditures are often defensive, so some marketing expenditures can be justified in terms of maintaining cash flow rather than increasing cash flow.

There are certainly more sophisticated approaches for the evaluation of return on marketing investments and the value of brands. Nevertheless, to be credible and to link marketing to business performance, cash flow represents the ultimate metric. It is also relatively easy to compute, is understood by financial managers, and is consistent with the way firms are required to report on their performance.

Contributed to Branding Strategy Insider by: David Stewart, President’s Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.

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“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you.” ~ John Stuart, Chairman of the Quaker Oats Company

While great brands are often household names with substantial brand-building budgets — and score high in “sex appeal” —the real secret behind a great brand is that it does something very simple. Great brands are single-minded and clear about what they promise. Great brands then deliver on that promise.

The implication is that any organization can create a great brand, regardless of its size and its resources. In fact, the larger, more complex and global an organization is, the harder it becomes to stay true to knowing what that promise is, and ensuring its delivery.

When you look at a list of “great brands” that have significant emotional and financial value, invariably you will see businesses that are crystal clear on delivering on their promise and unwavering in their focus on it. The phrase “ruthless consistency” applies. When these brands falter, it is almost always when they lose focus on their promise and ensuring its delivery.

If brands that stand the test of time establish emotional and financial value, how can they assess and measure that value? And if the following could be seen as some foundation, the question is—to what degree have recent advances in analytics, AI, and social media been accounted for in the quest for getting an accurate and relevant read on the value of a brand?

Here is a brief “brand valuation 101” primer:

Brands have financial value — depending on your industry, anywhere from 10 percent to upward of 50 percent or more of the value of the enterprise. The London Stock Exchange endorsed the concept of brand valuation in 1989 by allowing the inclusion of intangible assets when seeking shareholder approval in acquisitions. Brands will be major drivers of corporate value in the 21st century — investors and business leaders have recognized this. Financial managers and planners are increasingly using brand equity tracking models to facilitate business planning.

There are many approaches to brand valuation, here are 6:

1. Assessing Attributes

This subjective means of assessment assigns values to attributes such as satisfaction, loyalty, awareness and market share that are either tracked separately or weighted according to industry. Young & Rubicam has also developed a “Brand Asset Valuator” — an attribute assessment approach based on differentiation, relevance, esteem and knowledge. Other approaches no doubt exist, but the concept remains the same. Such methods often use an assigned value, rather than a measured value, and thus are subject to challenge.

2. Brand Equity

This approach combines three elements — effective market share, the sum of market shares in all segments, weighted by each segment’s proportion of total sales; relative price, a ratio of the price of goods sold under a given brand, divided by the average price of comparable goods in the market; and durability, the percentage of customers who will buy that brand in the following year.

3. Brand Valuation

Brand valuation methods seek to take the most robust financial data available to the model in order to arrive at a plausible valuation of a brand. While these methods are also subject to challenge, they at least strive to create an objective-as-possible marker or view of a brand’s strength.

4. Algorithmic

WPP performs an annual valuation published as “The Brand Z Top 100 Most Valuable Brands” report. This uses a company’s financial data as well as market dynamics and an assessment of the role of a brand in income generation, and then forecasts the future on the basis of brand strength and risk. There are other similar “blended” formulas that can be developed or used to assess what is, through a particular lens, most important in a brand.

5. Royalty Relief

Brand Finance publishes its own Global 500 study annually using a “royalty relief” approach that calculates the net present value of the hypothetical royalty payments an organization would receive if it licensed its brand to a third party.

6. Net Promoter Score

A popular measure is “net promoter score” or NPS. NPS is a metric developed by Fred Reichheld, Bain & Company, and Satmetrix. Its power is its simplicity. Customers are asked “How likely are you to recommend company/brand/product X to a friend/colleague/relative?” and score their response from 0 to 10. “Promoters” give a 9 or 10 score, “passives” a 7 or 8, and “detractors” a 0 to 6 score. The NPS score is the percentage of promoters less the percentage of detractors, and ranges from −100 to +100.

All of these methods have strengths and weaknesses, but the important thing is to establish an organization’s brand as an intangible asset that is worth a significant amount of money — and it should be respected and managed accordingly.

What’s Next?

This is a high-level summary, but as measurability continues to emerge, it’s interesting to think about how brand value can be assessed in the age of a “fourth industrial revolution.” I’d suggest that in addition to the above approaches, brand value may need to reflect social media sentiment, online reviews and customer experience sentiment — perhaps measured and reported in near real time.

Where is brand valuation headed? Does data, AI, automation, analytics, social media have a role to play? I believe this topic has not had ample discussion. What do you think? Let’s continue the conversation.

Contributed to Branding Strategy Insider by: Kevin Keohane, director of brand and talent strategy, PartnersCreative

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Why Variation Supports The Need For Brand Valuation

“The suggestion that public brand valuations studies are ‘crap’ and worthless, simply because value opinions differ, is ill-informed nonsense. No-one is surprised that valuation opinions for other assets vary widely, so why should brand valuers be expected to come to identical conclusions?

Compare this with share prices. Looking at Bloomberg today I find that 67 equity analysts follow Apple. The current Apple share price is $130. The lowest target price among analysts is $65 and the highest is $185. The 12 month consensus target price is $143. So there is a 300% high: low variance in valuation opinions. 66% say buy, 30% say hold and 4% say sell.

Brand Finance, Interbrand and Millward Brown all agree that Apple is the most valuable brand in the world. In 2014 Brand Finance valued the Apple brand at $104 billion. Interbrand said £119 billion. Millward Brown said $148 billion. That is a variance of only 42%, which is hardly surprising in my view. For other brands the variance may be much greater, but that is no surprise either.

There are many reasons for the variance: assumptions about long term market growth, specific brand growth, the proportion of revenue attributable to the brand, the useful economic life of the brand and the implied cost of capital. We inevitably have different opinions on many valuation assumptions, which results in quite different valuation opinions.

There has been a global brand valuation standard (ISO 10668) for 5 years, which lists several acceptable valuation approaches and methods. The Income approach is widely recognized as the best approach to brand valuation and all three major firms use it in their league tables.

We differ in the specific methods used for estimating what income is attributable to the brand. Interbrand and Millward Brown use the Income Split method. Brand Finance uses the Royalty Relief method. Otherwise we agree on how to value the brands. This is unlikely to be the main reason for the variance in our opinions.

Ironically the Royalty Relief method is the most frequently used by accountants to value brands for balance sheet purposes, post acquisition. But most accountants are very conservative and habitually under estimate the level of income attributable to brands they value. They also tend to assume very short useful economic lives, low growth rates and high discount rates. It is therefore no surprise that an analysis of brand values calculated for balance sheet purposes tends to undervalue brands.

The assertion that purchase price allocations necessarily represent a fair value of brands is therefore deeply flawed. In addition, several brands that form part of Markables’ analysis have been transferred internally, making the figure highly unlikely to represent the true market value. Brand Finance will be conducting an analysis over the coming days and weeks to thoroughly unpick Markables’ research and set the record straight.

I prefer to rely on the opinions of people who genuinely understand brands and their true value. But in my view clients need full transparency and disclosure so that brand valuation opinions, and the reasons for them, can be understood and reconciled. We have always argued for this and ISO 10668 makes it compulsory.

Rather than being a symptom of an unhealthy brand valuation industry, differences in value opinions are a sign of its health and vitality. A public discussion on this subject is long overdue and I challenge Mark Ritson, Markables and any other interested parties to a debate in London when the newly convened ISO brand valuation committee reconvenes in London between the 9^th and 12^th June.”

See the debate on the value and accuracy of brand valuations

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To be fair, I pointed out that there was no way of knowing if one of these firms was actually more accurate than the other two because we lacked any Archimedean point of comparison. Perhaps we would have to wait for examples of brand acquisition to come along, I concluded, before we could find out which, if any, was on the money.

Trademark specialists Markables has called my bluff and those of the big valuation firms. It has found 68 examples of big brands that have been valued using a purchase price allocation approach or, in layman’s terms, instances where a real financial transaction of a brand was conducted. Markables was able to compare a valuation firm’s estimates of brand equity versus the actual price paid for the brands in the year the transaction took place. The difference between the two figures gives a fascinating insight into the general accuracy of brand valuation and a clue as to who does it better.

So how did the valuations stack up? Terribly is the short answer. The overall difference between the actual prices paid and the estimated values of the brands was a whopping 254%, meaning that if a brand was sold for $200m, it was likely, on average, to have been valued at about $500m. That’s pretty crap, even if you allow for some understandable variance.

If you asked me how tall our Branding Strategy Insider editor Derrick Daye is and I told you he was about 15 feet, you’d be quite disappointed to discover that he is 6ft 02 inches.

For the most part, as you can see above, there was a greater chance of overestimation taking place – at an astonishing level. The average valuation was as likely to overstate a brand’s value by more than 500% than it was to get within 20% of the actual price paid. Intriguingly, and perhaps provocatively given the number of big banks and telecommunications companies that pay top dollar to have their brands valued, these two sectors showed the greatest disparity between estimated value and actual price paid. So while consumer retail brands and consumer brands only varied by 39% and 60% from the estimated brand value respectively, the average telecoms brand or bank was overstated by almost 400% by the valuation firms.

So which of the three firms had the most accurate valuation? Or perhaps that should be least inaccurate one. The clear winner was Millward Brown, which managed to overstate its valuation by only 119% more than reality. Interbrand, which was 261% off target and Brand Finance, which overvalued by 301%, were well behind. A clear justification, if ever one was needed, for using large amounts of global consumer data – as Millward Brown do – to drive their valuations.

It’s a pyrrhic victory. With such huge disparities between each other and the stated prices sometimes paid for these brands, it’s difficult not to conclude that the entire brand valuation game is unfortunately another example of ‘fluffy marketing’. Sadly, most marketers reading this column and, indeed the original report from Markables, won’t even understand what I am talking about. They will look at the league tables, accept the inane explanations for why one brand is bigger than another and take everything at face value.

Not good enough. I would argue that if you can’t agree on the value of something within a $100bn of your peers and if your estimates are shown to be 250% inflated over reality, it’s time to declare the value of valuation to be nil.

See the debate on the value and accuracy of brand valuations.

This thought piece is featured courtesy of Marketing Week, the United Kingdom’s leading marketing publication.

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