Introduction
The term ‘brand’ has been used to distinguish ones’ product from those of others. “the word ‘brand’ is derived from the word brandr” (Sen, 2001), which was used by early Norse tribesman. They meant the term as ‘to burn’, in branding livestock to declare ownership. According to the American Marketing Association (AMA), the brand is a “name, term, sign, symbol, or design, or a combination of them, intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competition” (Keller, 2005).
In fact, ‘brand’ can be defined as “[a] name, term, sign, symbol, or design, or a combination of these, that identifies the maker or seller of a product or service” (Kotler and Armstrong, 2001). Virtually speaking, branding refers not just to a symbol or sign but also of its quality. In the London telecom market, buyers choose Nokia because of its quality through the brand mark. This is because the producer produced better quality of mobile; such as, better talk time hour, better camera; better-using condition or shorter journey to the telecom market.
Nowadays there is a considerable amount of arguments and counter-arguments as regards ‘brand’. The brand valuation has been a source of intense debate for the accounting profession. The core term of this debate is whether the value of the brands would be on the balance sheet or not. Some argue that the value should be put on the balance sheet when the accounts are represented. They consider both acquired brands and internally generated brands.
Benefits of Branding
In marketing, branding benefits both to the company and to the customers as well. The benefits of companies and consumers derived from the branding can be summed up as such:
Benefits of companies and consumers
Usually the companies, as well as the consumers, enjoy the following benefits from branding:
“Due to branding:
- a certain product can be differentiated from those of other competitors;
- New products can be launched easily because of the trust and relationships the customer feel toward brand;
- High price of the product can be charged;
- Though copying every aspect of a product is feasible, attributes of a strong brand cannot be copied and that makes the product different” (Is4Profit, March 2008, p.3).
“Again, the benefits of consumers derived from the branding include following things:
- the consumers can recognize quickly as ones that they can trust;
- It reduces the uncertainty regarding purchasing;
- It saves their time regarding purchase decision making” (Is4Profit, March 2008, p.3).
The issue of branding can be exemplified by making a practical instance. Let us suppose that a consumer wants to purchase a television and has heard about Sony. He or she found that the television manufactured locally worth £ 1000 and the price of the Sony with same features is £ 1300. Then mostly the consumer would go with Sony because of its brand value. Here we can estimate the brand value of Sony:- £ 1300-£ 1000 = £ 300. Hence, the deducted value of £ 300 is the brand value of Sony in this purchase.
Brand value on the balance sheet
Earlier, intangible assets were considered on the balance sheet under goodwill. But now the goodwill is considered as a measurable and identifiable intangible asset that includes brands, copyrights and patents. “This must be done for all acquisitions post 31 March 2004 for the balance sheet in 2005”. (Whitwell, 28 February 2005). The companies included under IFRS are entitled to report their acquired brands once only as against doing the same thing again.
It is recommended that though internally brands can be valued later, can not be put on the balance sheet. There is a continuous debate whether the brand value would be affixed on the balance sheet or not. “Ever since the late1980s, when some companies started putting brands on their balance sheets, accountants and finance directors have been arguing the pros and cons of the issue” (Management Today, December 1994).
To tell it precisely, brand value is an intangible asset and the valuation of brands originated from two considerations: One is the financial treatment of brands and the other is marketing evaluation of brand equity. It is used to recognize the financial treatment of brands on the balance sheet. But the problem is with the accountant because there is an uncertainty to treat with the type of benefit linked with brands. It is logical to investigate the point as to why a given organization or company should consider the brand value as an asset. Reilly and Schweihs (1999) identified the attributes that affect the value of brands.
Criteria in Determining the Value of Brand
Every company or organization is required to measure the value of its brand as it is so necessary for scheming the value of brand and help in dealing with their commercial transaction smoothly. There are five major criteria in doing this:-
- Considering and determining the extra cost premium that the product can charge over a generic.
- Considering the extra market share that can be achieved.
- Determining the costs that can be saved from implementing the improved control over the channel.
- Calculating the additional returns that can be earned through brand extensions.
- The additional marketing costs needed to be incurred.
Advantages of Brand Value on the Balance Sheet
According to the New International Financial Reporting Standards (IFRS), “from 2005 all listed European companies must report acquired intangible assets, such as brands, on their balance sheets.” (Whitwell, 29 November 2004). This has created a struggle for financiers with the marketers. The first time it goes on behalf of the financiers. But the consequence of it is completely uncertain. IFRS only applies to ‘acquired brands’, not the ’internally generated brands’. An attempt of evaluating the brand value on the balance sheet can ascertain a number of advantages that may be categorized as:-
If the value of brands and other intangible assets are understood and properly estimated, it would be easy to set the royalty rates and transfer prices more accurately.
The companies can generate positive PR in financial markets which can, in turn, assist in boosting the share price.
It helps the management to evaluate correctly through the application of brands in their decision-making.
It helps the management to get a clear idea about the return on investment.
As there is an effect of share price in exchange for acquisition, the value of brand is important to be recognized.
“It helps to develop a long-range and competitive strategy for the product” (Kotler, 2003).
It helps to make an annual marketing and sales forecast.
“Monitoring progress and effectiveness of performance according to pre-established standards” (Wind, 1985).
Arguments for “brand value on the balance sheet”
In 1980, as it is mentioned earlier that, a number of firms were bought by the asset strippers and corporate raiders. Regarding that exchange the net asset value was less than what actually was paid for. Cardoso and Laruccia (n.d.) show that “[t]he need for brand valuation exists to (p.2):
- Accounting reasons:
- Balance sheet reporting
- Tax planning
- Licensing and franchising
- Merger and acquisition
- Litigation support
- Investors relations
- Securitized borrowing”.
Again, Cardoso and Laruccia (n.d.) explains the “[m]anagerial reasons (p.2) [as follows:]
- Portfolio reviews
- Budget determination
- Resource allocation
- Performance tracking
- Internal communication
- New product development
- Strategic planning”
The brand signifies itself as an asset and the organization can control and in future they can get some benefits. “There has been a failure of industrial companies to recognize that brands do have a value, including the possibility that they also have a value on the balance sheet” (Business-to-Business). The valuation of brand is raised when the business is sold and unless it happens the value of brand is not included in the balance sheet.
But now this becomes a contentious issue whether the brand value would be on the balance sheet or not. Nowadays the brands are increasingly recognized as an asset and included in the balance sheet. “In the case of Coca-Cola or Microsoft Company, the balance sheet provides less than 5% of the total value” (Best Global Brands, 2007). It means it provides unclear information to the shareholders to make them understood the underlying value of the business. So, day by day the pressures are more growing to show the brand value on the balance sheet.
Arguments against brand value on the balance sheet
To measure the brand value cash flow, purchase profiles and such types of tools can be used. Actually brand value is just an indication for the consumers. If the brand Nokia is pulled off from the shop, then it would lose all its metrics, but it is quite impossible to remove the want of this product or brand from the mind of the consumer. It should be mentioned that the marketers and the advertisers define their success in the business on the basis of the brand image.
But the scenario is not as same as it thought. In regarding investing in new market it is quite impossible to measure the brand value. The cause behind this is that in newmarket the customers’ perception is not same as the customers of old market. The weak point is that the valuation of Brand can not in being dependent on such intangibles as people’s perceptions of them. The consumer may show no interest in the others brand. If the consumer shows this type of preference, then the company will get no advantages and as a result, there would be no way to measure the brand value. “Building these perceptions can take many years as reputations are earned by repeated proof that a brand justifies its position” (Business-to-Business).
There is no certainty that the market would grow. The market may collapse suddenly and then how you can measure the brand value. “Lord Leverhulme, of Lever Bros, once said “I know half of my advertising money is wasted but I don’t know which half” (Fanning, August 2006). The same thing is applicable for measuring and putting the brand value on the balance sheet. It is possible to measure the revenue or profits, but not the brand value.
Measuring the brand is simple and possible; but is it possible to measure the impact of the brand? It is all about the customers’ perception towards the brand. It is needed to get help from the financial statements of the organization to measure the financial contribution by the brand to profit. Brand value only affects the sales, profits and the return of the investment. The measurement of brand value should be in the sales that can be measured and recorded in the balance sheet.
Brand Management Organisation
Companies that offer variety of products and brands, often establish a brand management organization. The brand management organizations play an important role by concentrating on making a cost-effective marketing mix for the product in the organization. However, in dealing with brand management schemes, the organization may also face some problems. “Pearson and Wilson have suggested five steps to make the brand-management system work better” (Pearson and Wilson, 1967, pp 8-13). The recommended steps as prescribed by them in making successful brand management organizations are:-
- Describing or defining the boundary of the brand manager’s roles and responsibilities.
- Creating a strategy development and review process to provide a framework for the brand managers’ operations.
- Taking into account the areas of potential conflicts between brand managers and functional specialists.
- Setting some processes for the proper management of the ‘top all conflict-of-interest’ situations between product management and functional line management.
- Establishing a system for measuring results consistent with the product manager’s responsibilities.
Brand Accounting
Regarding the brand accounting there are many debates and discussions about the complexity of reaching international harmonization. “The debate on brand accounting has caused controversy and raised voices in many countries, particularly in the United Kingdom and Australia” (Ekram and Eriksson, 2006). “From 1 January 2005, Australian companies are required to adopt International Accounting Standards and comply with International Financial Reporting Standards” (Haskins and Rathie, Summer 2004). There are two particular terms of assets as including impairment of assets and intangible assets.
It is recommended that by these standards as produced in this paper, intangible assets, brands, mastheads and other forms of intellectual property can be identified and at the same time their valuations can be determined as well. Notably, it is applicable for those intangible assets which are acquired rather than those of internally generated.
“Several accounting standards; such as, International Accounting Standards (IAS) 36 and 38, US GAAP, FASB 141, UK FRS 10- allow and/or require the recognition of acquired goodwill, including brands on the balance sheet” (Best Global Brands 2007, p.56). It is necessary to mention that an intangible item can be termed as an asset if the right of entry is controlled by the reporting body. Putting a closer attention on the statements of the IAS, it is found; “An intangible asset should be accepted initially at cost in the financial statements, if, and only if (essay samples, 2003-2008):
- There are some features by which intangible assets can be recognized and met these requirements. In fact, the assets need to be identified which are controlled and distinguished from an enterprise goodwill.
- There is a possibility of future economic benefits which are attributable to the asset will flow to the enterprise and
- It has the feasibility to measure the cost of asset”.
An Analysis
It is needless to say that brands have always been termed as an intangible assets. The brands cannot be seen or touched like a car or a book or a paper (Roll, 2005). Actually, there is nothing more tangible than the cash flows generated from the company’s brands. These cash flows are reliable and sustainable on the basis of the brand image. Robbin (1991) highlighted reasons why an organization should recognize brands as an asset (p.56).
These include the fact that it decreases the firm’s gearing ratio as a result of the larger asset base. It is also an internally generated asset and thus increases shareholder equity. In addition, a large premium for mergers and acquisitions can be justified. However, he also highlights reasons for keeping brands off the balance sheet. It decreases the return on assets as the firm now has a larger capital base. Companies that have adopted Economic Value Added (EVA) would have to raise a capital charge against the asset. The issue of brand value or measurement also is a negative until acceptable methods can be found” (Kottolli, 2006).
Undeniably, a brand is a very valuable asset for an organization or company whether it is small or large entity. It is difficult to determine the exact value of the brand. However, “the brand equity of Coca-Cola is $67 billion, Microsoft is $ 56.5 billion, IBM is $ 56, Nokia is $ 30 billion and BMW is $ 19.6 billion” (Frampton, 2006, pp.4-28). So brand plays an important role in running the business successfully for the organization. “The Role of Branding is a % – thus if it is 50%, then 50% ratio of given intangible earnings can be considered as Brand Earnings. If it is 10%, we take only 10% of the earnings” (Interbrand, 2006).
When the brand value is known, it becomes easier for the customer to rightly evaluate the products or services. So, it has to make clear that to do so the brand value is recommended to put on the balance sheet. “Brands as assets mean a single number on the balance sheet” (Sinclair, n.d.).
It should be mentioned that there are specific inferences of the brand value putting on the balance sheet. Putting the brand value on the balance sheet helps the organization to incorporate that value in decision-making. Financial managers are greatly responsible to ensure that such information is sufficiently communicated to investors and agencies and help the investors always looking for greater disclosure of brand values.
Concluding Remarks
With the growing expansion of trade and commerce, business policies are getting more developed. The concepts and ideas corresponding to marketing policies are also getting special dimensions that warrant particular concentration in the business world. The concept of “brand’ is of vital importance. This helps both the customers and the producers in getting their due rights and establishing propriety over the manufactured products.
Earlier, it meant the valuation of the goodwill. But, the concept is no longer existent; rather it indicates the valuation of the given manufactured products. As the success of an organization or company depends on the brand value of it and the potentials of the investment also rely on this, intensive efforts should be undertaken to make a working change in advancing and promoting the businesses and commercial transactions. This is also necessary for making an effective and better change in the balance sheet.
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