A case for brands as assets: Acquired and internally developed

• Published in: The journal of brand management 2014-05, Vol.21 (4), p.286-302
• Main Authors: Sinclair, Roger Neville, Lane Keller, Kevin
• Format: Article
• Language: English
• Subjects: Accounting; Accounting standards; Balance sheets; Brands; Business and Management; Business combinations; Costs; Customer retention; Fair value; Goodwill; Intangible assets; International finance; Investments; Management; Marketing; Original Article; Stock prices; Studies
• ISSN: 1350-231X; 1479-1803
• DOI: 10.1057/bm.2014.8

An unacceptable dichotomy hides important information from investors and masks the full contribution brands make to enterprise wealth. Under conditions of merger and acquisition brands are mandated as assets, but when they are internally created they are forbidden to be described as such. The sources of this contradiction are the global accounting standard setting bodies: the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB), and the accounting standards developed to deal with how intangibles are dealt with under different conditions (IASB: IFRS 3 Business combinations and IAS 38 Intangible Assets . FASB: SFAS 141 Business Combinations and FSAS 142 Goodwill and Other Intangible Assets ). In this article we explain the nature of this contradiction and show that the authorities are aware of it. Since 2001 there have been several attempts to update the standards that created it. However, these have never been seen as a priority and have been aborted before completion. We show that the conflict is caused by a technical anomaly and demonstrate that, by the accountants’ own evaluative criteria, the conflict should be resolved. We admit that if this happens there is, at present time, no single acceptable method of valuating brands but we suggest that the foundation is firmly laid for such an approach to be developed. Finally, we make the suggestion that if this financial distortion is resolved it might require the standard setters to acknowledge that asset accretion ranks in importance with impairment . Our argument is mostly based on an unintended conflict: the change accountants made some time ago from an historical cost perspective to a forward looking current cost and, in this case, fair value measurement approach, is at the heart of the contradiction. The business combination standards feature the new approach; the intangible assets standards feature the old approach. Until this conflict is rectified the investment community will continue to miss out on a major source of enterprise value. This extends to boards of directors and their marketing departments being deprived of a key financial metric; one that measures the mediating source of much of the company’s revenue and one of the most valuable assets, or sets of assets, any company owns. We intend to show that this situation is easily rectified and that an increase in important financial information instantly justifies the resources needed to bring about this