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ISSN 1939-2648
3 : 1 February 2009

Board of Editors

S. Andrews, M.Sc., Editor-in-Chief

S. Lalitha, Ph.D.
Poornavalli Mathiaparnam, M.A., M.Phil.
M. S. Thirumalai, Ph.D., Managing Editor

BRAND ACCOUNTING
ISSUES AND CHALLENGES

RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani.Raja, Ph.D.

College Science in India www.collegescienceinindia.com 31

3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
 BRAND ACCOUNTING: ISSUES AND CHALLENGES
RamaIyer .Subramanian
Faculty of Business and Law
Multimedia University,
Melaka campus, Malaysia.
e-mail: ramaiyer.subramaaniam@mmu.edu.my

M. Kalyanasundaram, Ph.D.
Department of commerce
Urumu Dhanalakhsmi College
Trichirapalli 620 014
Tamilnadu, India

John Bumani.Raja, Ph.D.

Faculty of Business and Law
Multimedia University,
Melaka campus, Malaysia.
e-mail: john.raja@mmu.edu.my

Abstract combines the accountants and marketers

approaches into an integrated model that provides
The valuation of brand assets has significant
a financial value for brands in line with current
implications for business organizations and their
corporate finance theory.
shareholders. In a public listed company, the
Key words: Brand accounting, Replacement
overstatement of brand values will result in higher
method, Historical method, Future income method,
value of companies in the capital market. The
objectives of this paper is to analyze current brand
valuation techniques The marketing method views Introduction
brand value from the consumer perspective and Brand accounting was first pushed to the limelight
the variables in this approach are generally in 1988 when Ranks Hovis McDougall (RHM)
qualitative in nature such as brand loyalty, Company employed the valuation services of
associations, preferences and satisfaction. The Interbrand plc to value and incorporated the
financial method, on the other hand, views brand company‟s brands as assets in the balance sheet in
value from the company‟s perspective and an attempt to fight a hostile takeover bid. Despite
quantitative variables like profits, market share many researches carried out and journals written
and cost are used. The economic use approach by academic scholars on the subject, brand
College Science in India www.collegescienceinindia.com 32
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
accounting remains a subject with many grey organizations do not yet have the methodologies
areas to be addressed. to measure brand value, most turn to specialist
The incorporation of brand as an asset in the brand consultants in international audit firms and
balance sheet gives rise to the concept of brand management consultants to carry out the exercise.
equity/asset. The major problems identified for this research
This emerging view stems from the recognition of are:
the strong role of brands in driving benefits to the Lack of uniformity in the brand valuation
organizations bottom line. Aaker (1991) defines techniques causes inefficient valuation of brand
brand equity as: assets and reduces the usefulness of brand
A set of brand assets and liabilities accounting information;
linked to a brand, its name and symbol, Inconsistent and insufficient accounting
that adds to or detracts from the value regulations to guide and govern the full disclosure
provided by a product or service to a of quality information on brand assets in
firm and/or to the firm’s customers. accounting reports.
Accounting, on the other hand, is the information
system that measures business activities,
Objectives of the Research
processes that information into reports, and
The objectives of the research are:
communicates the results to decision makers
To analyze current brand valuation techniques;
(Horngren, 2002). Brand accounting is then, an
To identify issues contributing to the inefficient
information system that measures brand equity,
valuation of brand assets; and
processes and incorporates it into financial reports
To reinforce the importance of international
and communicates these values to the users of
accounting standards to standardize and govern
accounting information.. With the current trend in
brand valuation techniques.
globalization and technological advances, it is
believed that intangible assets like intellectual
Review of Literature
capital, knowledge systems, patents, registered
Srikanthan, S., Ward, K. and Neal, R. (1989)1
designs, brand asset and trademark are going to be
carried out the research on brand and other
the key drivers to market capitalization in the
marketing assets accounting. According to the
twenty first century.
authors, intangible assets are becoming
Due to the increased importance of
brands as assets in business organizations, there is 1
Sri Srikanthan, Keith Ward and Richard Neal
a growing trend of business organizations
(1989), “Brand accounting: myth or
initiating the valuation of their brands for internal
reality?”, Financial Management, April,
or external reporting purposes. And because most
Vol. 67 No. 4, pp. 220-22.
College Science in India www.collegescienceinindia.com 33
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
increasingly important, as product differentiation
is getting lower in the marketplace creating a need
for companies to find other alternatives like
branding to create brand differentiation and
competitive advantage. Hence, marketers need to
make market related investments decisions to
ensure future generation of profit. The authors
argue that an expense of this nature should be
capitalized in the balance sheet because it is an
investment for the future.
2
Oasterland, A. (2001) states that companies are
eager and willing to measure their intangible
assets but are not too keen on sharing the results.
The first argument relates to the introduction of
FAS 142, which requires annual impairment test
for capitalized intangible assets. If it is
determined that the book value has been impaired,
a write-down will be required. The general
perception is these potential write-downs are a lot
riskier as compared to the previous amortization
charges. The author concludes that the number of
companies willing to reveal their intangible assets
is few and is limited to companies who believed
the market undervalues them.
3
Schultz, D.E. (2002) gives a wake-up call to all
marketers on the issue of brand valuation.
According to the author, the accountants are now
2
Andrew Osterland (2001), “Decoding
intangibles”, CFO, Magazine for Senior
Financial Executives”, April.
3
Don E. Schultz (2002), “The new brand value”,
Marketing Management, Jul/Aug, Vol.
11 Iss. 4, p. 8.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
moving away from the traditional approach of
using historical data to a „value based‟ accounting
approach. This new value based approach looks
into the future potential income and consumers,
market share, brand investments and returns
which marketers, brand and sales people are
responsible for at this point of time determine
cash flow in valuation of an organization.And
future income of an organization.
Calderón, H., Cervera, A. and Mollá, A.
(1997)4 identify two different approaches to brand
valuation namely the consumer-oriented approach
and asset-oriented approach. The authors reason
that brand as a business asset generates value for
the company and therefore it is important to
quantify brand value in the context of strategic
management and financial significance. The
marketing method views brand value from the
consumer perspective and the variables in this
approach are generally qualitative in nature such
as associations, preferences and satisfaction. The
financial method, on the other hand, views brand
value from the company‟s perspective and
quantitative variables like profits, market share
and cost are measured.
The different techniques discussed under the two
methods are as follows:
4
Haydeé Calderón, Amparo Cervera and
Alejandro Mollá (1997), “Brand
assessment: a key element of marketing
strategy”, Journal of Product and Brand
Management, Vol. 6 No. 5, pp. 293-304.
34

Replacement costs method (financial)
involves estimating the cost of launching a
brand with similar success to the brand to be
evaluated.
 Stock exchange movement analysis (financial)
derives brand value from share price by
eliminating irrelevant factors from current
market price.
 Primed prices method (marketing) assumes
that brand assets like awareness, perceived
quality and customer loyalty generate an
above average pricing and therefore allow the
brand‟s benefit to be calculated.
5
Motameni, R. and Shahrokhi, M. (1998)
present two different perspectives in looking at
brand equity. The marketing perspective is seen
from the marketers‟ point of view whose objective
is to create value for the brand using various
components. The financial perspective aims to
put a financial value to brand via different
valuation methods i.e. premium pricing, market
value, future earning potential, cost based,
consumer factors and replacement costs.
A combined approach is known as „geocentric
approach‟ and according to the author, represents
a proper balance of consistency and economy on

 Future income method (marketing) involves one hand and of regional or local relevance on the

estimating the present value of potential other. To cater to the current globalization trend,

income generated by the brand. the authors identified the need for global

 Conjoint analysis (marketing) separates perspective and introduced the „Global Brand

consumer product utility into three Equity Valuation Model‟(GBE).The GBE model

components and conducts an analysis of is similar to the Interbrand approach but differs by

exchange to obtain a monetary value to each incorporating global factors affecting brands in its

component. brand strength measurement. On top of

 Hierarchical integration of information estimating the value of a brand, the model also

method (marketing) is derived from conjoint reveals the sources of value, which have

analysis and enables simultaneous study of significant impact on the brand. Despite the

brand attributes and brand constructs on convincing presentation, the article does not

consumer preferences. provide any case study to support the application

of the proposed brand valuation model.
 Client preference method (marketing) utilizes
market research techniques to measure the
impact of brand name on preferences,
5
attitudes and purchase intentions. Reza Motameni and Manuchehr Shahrokhi

The authors reject purely financial brand (1998), “Brand equity valuation: a global

valuation methods, as the authors believe that perspective”, Journal of Product and

consumers are the ultimate decision makers who Brand Management, Vol. 7 No. 4, pp.

determine the value of a brand. 275-290.

College Science in India www.collegescienceinindia.com 35
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
Tollington, T. (1999) 6 notes that brand asset
normally exists within the context of purchased
goodwill only when a business is acquired.
Brand asset is treated as a subheading of goodwill
and in the UK, it is usually written off
immediately against reserves upon business
acquisition. However, with the introduction of
FRS 10 in 1997, purchased goodwill, for example
brand asset, is now capitalized and accounted for
as a fixed asset with finite life in the balance sheet.
Internally created brands however, may be
capitalized only if there is a readily ascertainable
market value (RAMV). Both are subjected to
amortization on a systematic basis.The author also
opines that brand assets should be separated from
goodwill and recognized independently.The
author concludes that there is a further need to
fine-tune the FRS 10 to increase the incidence of
brand asset accounting and calls for consistency in
brand accounting practices. There is also a
serious need for the accounting profession to
relook at the current regulations to ensure that
financial data truly reflects market value.
7
Wood, L. (1999) addresses the importance of
brands in the creation of market power. The
author believes firms seek to be in a powerful
situation and adopts Bannock et al.‟s (1992)
6
Tony Tollington (1999), “The brand accounting
side-show”, Journal of Product & Brand
Management, Vol. 8 No. 3, pp. 204-215.
7
Lisa Wood (1999), “Market power and its
measurement”, European Journal of
Marketing, Vol. 33 No. 5/6, pp. 612-631.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
definition of market power as „The degree to
which a firm exercises influence over the price
and output of a market‟, as a basis for discussion.
Current traditional market power measurement
techniques are based on the industrial
concentration measures developed by economists
and have many shortfalls as they ignore the power
of brands. The author introduces a third
alternative, the brand valuation method, which
takes into account both fundamental marketing
and financial principles. The three measurements
of market power discussed are: National turnover
method, Global turnover method and Interbrand
brand valuation methodThe author highlights that
currently there is no single best approach to brand
valuation. However, the author acknowledges
that brand value presents crucial information on
market power when considered together with
traditional measures of market power. To
summarize, the article is well written with the UK
beer market being used as an illustration and a
basis for comparison. It would be an interesting
read if the author had provided further insight
how brand value and market power could affect
the position of a firm in a specific market.
8
Cravens, K.S. and Guilding, C. (2000)
investigate the relationship between market
8
Karen S.Cravens and Chris Guilding (2000),
“Measuring customer focus: an
examination of the relationship between
market orientation and brand valuation”,
Journal of Strategic Marketing, Vol. 8,
pp. 27-45.
36
orientation and brand valuation in strongly
branded firms. The authors begin by surveying
various definitions of market orientation and
identify six dimensions of market orientation
namely customer focus, external orientation,
customer responsiveness, focus on customers and
competition, industry foresight and quality of
orientation process. To relate market orientation
to brand valuation, the authors consider two
comprehensive formulary methods which are the
Interbrand approach and Aaker‟s „brand equity
ten‟. Both approaches assess future potential
earnings and discount them to the present. The
multiplier in Interbrand approach consists of
seven factors: brand leadership, market structure,
degree of internationality, consistency in customer
perception, brand support and legal protection.
Likewise, Aaker‟s „brand equity ten‟ measures in
ten categories: price premium, satisfaction or
loyalty, perceived quality, leadership or popularity,
perceived value, brand personality, organizational
associations, brand awareness, market share and
market price and distribution coverage. To
conclude, the study provides support for a
relationship between market orientation and brand
valuation in strongly branded companies. These
results also imply that brand valuation may also
be used as a performance measurement indicator
or a tool for internal management decisions. All
in all, this detailed research indicates the potential
usage of brand valuation beyond the financial
balance sheet boundary.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
Chevron, J. (2000)9 presents a short write up on
brand evaluation methods and their respective
weaknesses. The author interprets brand as „a
covenant with the consumer, a promise that the
brand and the product it names will conform to
the expectations that have been created over time‟.
According to the author, a brand exists only
because of its commitment to its internal values.
Without that commitment, brand is nothing but a
glorified product name.The interpretation relates
to commitment and commitment cannot actually
be measured! The author reasons that
measurement of brand value required two
different approaches – direct and indirect. Direct
approach captures investment made on brands
whereas indirect approach measures the potential
of the brand to generate future income To
conclude, the author identifies two crucial
determinants of brand value – brand strategy and
an effective business organization. Without these
in place, the brand will not succeed. The author,
having identified these two factors as
determinants of brand value, does not attempt to
incorporate them into valuation methods.
Rattray, A (2002) 10 believes brand value is a
relative measure that depends on a number of
9
Jacques Chevron (2000), “Valuing brands, on
paper and in truth”, Brandweek, Jan, Vol.
41 Iss. 3, pp. 24-25.
10
Alec Rattray (2002), “Measure for measure
Brand value may be relative but it is
measurable, either from a company or a
37
dynamic variables, contingent on circumstances determine brand value. Among the key ideas
and perspective. The author proposes two presented by Shafer are:
approaches to brand valuation namely shareholder  Shareholder‟s equity formula can only
value and brand equity. The right approach account for approximately one third of
depends on what and why the companies want to Fortune 500 company market value. The
measure. balance consists of goodwill and other
The shareholder value approach represents the intangible assets. P&G balance sheet value,
„corporate perspective‟ and it measures the future for example, represents only 1.25% of its
growth potential of a company. The four factors total market value, Dell Computer‟s 7.13%
affecting shareholder‟s value are tangible assets, and Pfizer‟s 11.18%.
intangible assets, strategic robustness and  Only 5% of these intangible assets are
managerial capability. These measures are then measurable. The balance consists of
factored through an analysis of brand saliency in a subjective components like perceptions and
specific category using databases such as Y&R‟s expectations.
BAV data or BrandEconomics. The brand equity  Shafer believes that high value of intangible
approach represents the „consumer perspective‟ assets is one of the most leverageable
and it measures the historical and present value opportunities of a company.
that a brand commands in shaping trial,  Shafer‟s proposed brand valuation formula is:
preference and loyalty. This approach is based on B=(R+M+V) C where R=Reputation,
the fundamentals of brand building and it analyses M=Momentum, V=Vision and C=Connection.
how particular brands perform relatively better These four components are further broken
than their competitors do. down to twenty-four subcomponents that
This article presents new approaches to brand relate to past performance, current
valuation performance, future expectation and
Lamons, B. (2003) 11 interviewed Chip Shafer, familiarity with brand.
CEO of Trajectories Group in Irvine, California, a The author reasons that companies would be able
company that has recently developed a formula to to manage their brand assets better if they view
their brand assets in component terms. In addition,
progress of brand values should be tracked from
consumer point of view: (Surveys year to year..
edition)”, Financial Times, Jul 9, p. 12.
11
Bob Lamons (2003), “Leverage intangible
assets to up value of brand”, Marketing
News, Vol. 37 Iss. 18, p. 6.
College Science in India www.collegescienceinindia.com 38
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
Pahud De Mortanges, C. and Van Riel, A.C.R.
12
(2003) conduct a study to investigate the
relationship between brand equity and shareholder
value. The authors reason that many companies
categorized brands as intangible assets and brands
are able to generate profits for shareholders. As
such, the value of brands should somehow be
reflected in the market value of the companies and
any changes to the value of brands would have an
impact on shareholder values. The authors employ
the Brand Asset Valuator ® model to measure
brand equity whereas shareholder value is
measured using Total Shareholder Return,
Earnings Per Share and Market to Book ratio.
The final sample consists of forty-three Dutch
corporate companies listed on the Amsterdam
Stock Exchange in the year 1993 to 1997 and the
brand analyzed has to contribute at least ten
percent to total company revenue. The authors
then plot the directional changes of these brands
and associate them with changes in shareholder
value using the chi-square contingency tables.
The findings indicate that it is indeed possible to
track changes in brand equity and relate this
performance to shareholder value. Although the
relationship between brand equity and shareholder
value established in this study is positive, it is
inconsistent, relatively weak and asymmetrical
12
Charles Pahud De Mortanges and Allard C.R.
Van Riel (2003), “Brand equity and
shareholder value”, European
Management Journal, Vol. 21 No. 4,
pp.521-527.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
due to a number of limitations discussed in the
paper. However, the study would provide a
platform for further studies and researches to
investigate the correlations between these two
variables.
García-Ayuso, M. (2003) 13 puts forward a few
ideas to explain the inefficient valuation of
intangible assets. According to the author,
inefficiency of this nature will increase stock price
volatility, cost of capital, risk of hostile takeover
and opportunities for insider gains.
Overstatement of intangible assets could also
result in significant losses for investors during
market corrections period.The author details four
possible factors: quality of financial information,
market imperfection, limited capability of
financial analysts and ethics having influence on
brand valuation.
Chatzkel, J. (2003)14 reviews the perspective of
six leaders in the field of intellectual capital who
share their views on critical issues raised by the
Enron collapse. First, according to various
contributors to this paper, Enron‟s failure is not
due to its intangible intensive business model.
13
Manuel García-Ayuso (2003), “Factors
explaining the inefficient valuation of
intangibles”, Accounting, Auditing &
Accountability Journal, Vol. 16 No. 1,
pp. 57-69.
14
Jay Chatzkel (2003), “The collapse of Enron
and the role of intellectual capital”,
Journal of Intellectual Capital, Vol. 4
No. 2, pp. 127-143.
39
When a company like Enron moves from a
traditional trading model to an
intensive trading model, it needs to bring along a
similar ground of core values and practices to
manage and operate the new business model.
the case of Enron, the absence of a concrete and
comprehensive framework for operating an
intangible intensive enterprise partly contributed
to its failure. Second, the current versions of
accounting standards are more tailored to address
transactions involving physical and financial
assets and are not relevant in dealing with the
emergence of intangible intensive
models. Accounting should no longer look at
only past performance but also project future
performance in this rapidly changing business
environment. In the US, FASB 142 is the initial
step taken to address how goodwill and other
intangible assets are to be accounted for and
treated in the balance sheet. The framework for
understanding and accounting for goodwill and
intangibles must therefore allow
complexity of what is being measured and
evaluated. Others see it as a convergence of
different initiatives to capture and portray the
value of an organization accurately
effectively. The Enron crisis highlights the
importance of intangibles and demonstrates that
their value can be manipulated and destroyed as
there are insufficient standards and guidelines
available for references.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
Mouritsen, J. (2003) 15 argues that intellectual
intangible capital is a drama in that the value created cannot
be accounted for by traditional accounting method
as the production function of the knowledge
In society is in the unknown. This results in a large
value gap between the market value in the capital
market and its traditional book value.
Eustace (2001) model divides capital assets into
three categories:
Tangible assets recognized in the
contemporary balance sheet
„New‟ intellectual assets recognized (brand
business and patent value)
Intangible competencies (innovation,
structural, market and human resources).
The firm‟s market value is the sum of all the three
factors. Likewise, the finance perspective
focuses on the possible net present value of the
firm‟s cash flows and is dependent on a justified
forecast of earning capabilities. On the contrary,
the author argues that the value of intellectual
for the capital is a process by which it is in construction
and remoulding all the time. It is a process of
value creation and as such, it is impossible to
arrive at one finite and set value.
and Discussion of International Accounting
Standards on Intangible Assets
15
Jan Mouritsen (2003), “Overview Intellectual
capital and the capital market: the
circulability of intellectual capital”,
Accounting, Auditing & Accountability
Journal, Vol. 16 No. 1, pp. 18-30.
40
Leo, K. (1999)16 analyses selected sections of IAS
38 „Intangible Assets‟ which have not been well
received by accounting profession and business
organizations. The International Accounting
Standards Committee (IASC), in principle, agrees
that there should be no difference between
intangible assets acquired from external sources
and those generated internally. However, the gaps
in terms of accounting treatment for these two
assets as per detailed in IAS 38 are obvious. The
author is of the opinion that if these gaps are
narrowed or eliminated, it would address the
many criticisms raised by accounting and business
organizations on IAS 38.The first area of
inconsistency is in the measurement of initial
recognition. IAS 38 states that an intangible asset
should be measured initially at cost. However, if
the intangible asset is acquired as part of business
combination and can be identified separately from
goodwill, it can be recognized by the business
organization at fair value. Hence, initial
recognition at fair value is an additional option for
acquired intangible assets but not for internally
generated intangibles.
Second, IASC reasons that it is difficult to
determine the fair value of intangible assets in the
absence of an active market. Nevertheless, for
acquired intangible assets, acquirers have the
option of measuring fair values using various
16
Ken Leo (1999), “Intangible assets: seeking
consistency”, Australian CPA, Nov, Vol.
69 No. 10, pp. 30-32.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
measurement techniques offered by accounting
firms and consultancy groups. Measurement of
fair value of internally generated intangibles is
practically impossible, as technically there is no
active market for these assets.
Stolowy, H. and Jeny-Cazavan, A. (2001) 17
examine the disharmony in the approach to
intangibles with the publication of IAS 38 in mid
1998. International Accounting Standards (IAS)
is developed in response to the need for global
harmonization of financial reporting services..The
article studies the different approaches taken by
twenty-one national and two international
accounting standards in both definition and
treatment of intangibles – specifically of R&D
costs, goodwill and other intangible assets. The
twenty-one countries include all the European
Union members, Australia, Canada, Japan,
Norway, Switzerland and the US whereas the
accounting standards consist of IASC and the
European Union. The study focus on two main
areas namely recognition and accounting for
changes in value. The authors conclude that
there is a lack of overall homogeneity in both
recognition and accounting treatment of intangible
assets in the study. In order to move towards
global harmonization of financial accounting,
diversity within and between countries and
17
Hervé Stolowy and Anne Jeny-Cazavan (2001),
“International accounting disharmony:
the case of intangibles”, Accounting,
Auditing & Accountability Journal, Vol.
14 No. 4, pp. 477-496.
41
organization needs to be reduced. However, it is
noted that the authors make the conclusion based
on the discussion of IAS 38 alone. The success of
International Accounting Standard should be
evaluated in totality and not on just one single
regulation.
Research Methodology
The analysis and findings presented in this article
are mostly derived from secondary sources. The
information is gathered from business magazines,
academic journals and books. In order to update
the information for the findings, the Internet is
used as an important source.
The research framework for discussion, analysis
and finding is as per detailed in Figure 1:

College Science in India www.collegescienceinindia.com 42

3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
 Ethics

Market Accounting
Imperfections Economic use Standards
Approach

Brand
Valuation
Techniques
Financial Marketing
Approach Approach

Cooperation Between Availability and Quality of

Accountants and Marketers Financial Information

Figure 1 Research Framework

Discussion, Analysis and Finding

Motameni and Shahrokhi (1998) also introduce an
Brand Valuation Techniques
alternative combined approach known as
Brand valuation techniques first became popular
„geocentric approach‟, which represents a proper
in the late 1980‟s. A realization that the full value
balance of consistency and economy on one hand
of brand owning companies is not explicitly
and of regional or local relevance on the other, to
shown in the accounts or reflected in stock market
cater to the current globalization trend. Motameni
values led to a reappraisal of how brands should
and Shahrokhi refer to this as the global
be valued and disclosed. There are currently three
perspective and introduce the „Global Brand
approaches to brand valuation. The first two are
Equity Valuation Model‟. Although Wood (1999)
the „marketing approach‟ and „financial approach‟
also uses similar approach to the measurement of
(Calderon et al., 1997 and Motameni and
market power, not much literature along this line
Shahrokhi, 1998). The third approach is quoted
of thinking is available for evaluation and
by both Brand Finance and Interbrand websites as
comment.
the „economic use approach‟.

College Science in India www.collegescienceinindia.com 43

3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
The marketing approach views brand value from
the consumer related aspects and the variables in
this approach are generally qualitative in nature
such as brand loyalty, associations, preferences
and satisfactions. It refers to how brand could
contribute to the bottom-line of business
organizations. . Some of the popular brand
valuation methods that utilize this approach are as
follows:
Price Premium Method assumes that
brand assets like awareness, perceived quality and
customer loyalty generate an above average
pricing. An observation is made on the market
price level of different brands over a period of
time. To establish the price premium, revenues of
an unbranded or relatively unknown brand are
deducted from the branded product. Alternately,
consumer research could be carried out to
determine how much more consumers are willing
to pay for certain brand characteristics and
attributes. Weaknesses of this method include
difficulty in identifying an unbranded product for
comparison purpose and the subjectivity of brand
characteristics and attributes.
Future income method involves estimating the
potential income generated by the brand and
discounting to the present value using a
predetermined discount rate. Cravens and
Guilding (1999) identify two methods to estimate
potential revenue. The first method, also known
as the royalty payments method, involves
estimating potential royalty income if the brand is
being licensed out to a second party. A market research expenditure.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
discounted cash flow method or a multiplier could
then be applied to determine the brand value. In
the second method, actual consumer brand sales
compared to total sales to supply the product
through retailers are computed. However, two
questions remain unanswered here. First, how do
we establish a relationship between royalty
income and brand value or difference in
consumer/retail sales and brand value? Second, is
the difficulty in defining the multiplier. The
factors and underlying assumptions of a multiplier
could differ from one brand to another.
Market value method estimates the worth of
the brand if it could be sold in the market. The
absence of a ready market for a brand is the major
concern and therefore the value could be
unrealistic. In addition, the brand value will also
depend on the circumstances of the transaction i.e.
desperate sale will command lower price despite
the potential earning power of the brand.
The financial approach views brand value from
quantitative variables like profit and cost.
Traditionally, this is the approach favored by
accountants due to its reliability of measurement.
Historic costs and replacement costs for example,
are available within the organizations and could
be easily verified. The three methods used are
. Historic costs method, which is the most
conservative method of brand valuation and it
complies with standard accounting practice. This
method requires the compilation of all costs
relating to a brand to be summed up for valuation
i.e. research and development, product testing and
However, this
44
method has many shortfalls. First, although it is
possible to identify these expenditures from past
records, it is difficult to segregate and allocate
these costs to a specific brand. Second, is the
time horizon for data collection. Many consumer
brands have existed for decades and to trace back
expenditures pertaining to these brands could be
quite an impossible task. In addition, historical
cost is not reflective of the actual brand value as it
ignores the value-added component in the value
creation process.
Replacement costs method, which involves
the estimation of cost of establishing a brand valuations. They are:
comparable brand. It assumes that a comparable
brand could be established with similar success
and estimates the probabilities of success at
predicted costs. This is a very subjective
approach as it entails estimation at all levels of
analysis. Furthermore, this method will appeal to
a brand which is relatively new in the market as
compared to matured brands.
Stock exchange movement analysis calls for a
comparison between the actual assets value of a
business organization and its share prices. It
assumes that share prices reflect future brand
value. The value of brand is derived by deducting
tangible assets and irrelevant intangibles from the
actual assets value. The use of this method is
limited to business organizations listed in the
stock exchange only. Problems will also arise if
one business organization has multiple brands in
its business portfolios.
Both the marketing and financial perspective
adopts a tunnel vision approach in their methods
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
of valuation. In other words, the financial
approach ignores the marketing components like
brand loyalty and brand preference in their
valuation whereas the marketing approach lacks
the financial components to provide a complete
assessment of the economic value of brands. This
gives rise to the economic use approach that
combines the first two approaches into an
integrated model and provides a financial value
for brands in line with current corporate finance
theory. Most of these valuation methodologies
are devised by consultancy firms specializing in
Interbrand method, which is based on a
brand‟s future potential. It requires the
computation of future earnings discounted back to
a net present value. A multiplier, representing
brand strength, which factors in brand leadership,
stability, market, support, protection, international
image and trend, is then attached to the brand
profitability to determine the final brand value.
Although the problems of subjectivity and
difficulty in profit segregation are still present,
this method is comprehensive and applicable to
both external financial reporting and internal
management purposes.
Brand Finance method is a marketing orientated
valuation. Its methodology comprises four major
elements namely market analysis to understand
market and competitive situation, brand financial
analysis to understand branded business revenues,
driver analysis to determine the proportion of
revenues attributable to the brand and brand risk
45
analysis to assess security of brand franchise with process within the firm and value drivers
customers. contributing to its growth.
Issues in the valuation of brand assets Second, marketers must realize the significance of

The valuation of brand assets has significant brand valuation and understand the needs of

implications for business organizations and their incorporating them as assets in the financial

shareholders. In a public listed company, the statements. In addition, brand valuation

overstatement of brand values will result in higher information could also assist marketers to assess

value of companies in the capital market. When the effect of advertising and promotion

stock prices adjust downwards to revert to their expenditures on attributes of brand equity.

fundamental values, it will result in losses for Marketers must also be aware that it is no longer

shareholders. Similarly, an undervaluation of relevant to say that marketing variables are not

brand values will reflect a lower value of measurable as these are the same variables going

companies in the capital market. Undervaluation into the valuation of brands. Accountants must

will reduce the ability of the firm to raise accept the need to include the marketing

additional capital and increase the risk of hostile components in brand valuation techniques. Many

take over. methodologies developed for brand valuation

First, is the availability and quality of financial originate from marketing definitions of brand

information. Financial information is a significant equity. Progressive accounting firms are now

input in any type of valuation, including brand looking at value based accounting where

valuation. Financial information is normally corporate value is determined by what it might be

sourced from the annual reports and accounting worth in the future and not what it was worth in

journals of business organizations. Capitalization the past. This is done by discounting the future

of research and development, product testing and cashflows.

market research expenditures in historic cost Third, it is practically impossible to derive brand

method for example, will require information on value on consensus basis because there is no so-

costs incurred probably decades ago and no longer called active market for buying and selling of

traceable. Quality of financial information refers brand assets. The very limited transactions that

to the accuracy of forecasting. Almost every have taken place have also very much depended

method calls for a reconstruction of cash flows, on the circumstances of the sale. Desperate sales,

and this process is in itself very subjective. For for example, will normally command low

example, future cash flow projections should premium and possibly negative premium and are

reflect management prospects for future financial not reflective of the true brand value. Popular

position taking into account the value creation brands however, will attract bidding from various
potential buyers and force price premiums up.

College Science in India www.collegescienceinindia.com 46

3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
Another aspect of market imperfections is the
absence of standard brand valuation models.
Each of the brand valuation models discussed
above would most likely result in figures that vary
from one to the other.
Ethics could also be an important factor in
determining the efficiency of brand assets
valuation. For example, during the initial public
offering period, managers may have the tendency
to disclose a higher goodwill figure to reflect a
higher market capitalization value. The last factor
but not the least, is the lack of international
harmonization of accounting standards in
standardizing and governing brand valuation
exercise, which we will discuss in greater detail in
the next segment.
Role of international accounting
standards in standardizing and governing
brand valuation
If IASB is serious in its objective to move towards
global accounting harmonization, it should start
addressing and solving issues at macro level i.e.
intangible assets and subsequently move into
micro level i.e. publishing titles, brands and
customer lists, to analyze and understand their
unique requirements. It is evident that changing
requirements and experiments are underway to
establish frameworks for intangible assets at
macro level. The next logical step then would be
for the inclusion of a statement of brand assets,
including both acquired and internally generated
brands, as a separate part of the annual financial
statements.
College Science in India www.collegescienceinindia.com
3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
Conclusion
A realization that the full value of brand owning
companies is not explicitly shown in the accounts
or reflected in stock market values led to a
reappraisal of how brands should be valued and
disclosed. There are currently three approaches to
brand valuation – marketing approach, financial
approach and economic use approach. The
marketing approach views brand value from the
consumer related aspects and the variables in this
approach are generally qualitative in nature such
as brand loyalty, associations, preferences and
satisfactions. The financial approach views brand
value from quantitative variables like profit and
cost and this approach is favored by accountants
due to its reliability of measurement. Both the
marketing and financial perspective adopts a
tunnel vision approach in their methods of
valuation. This gives rise to the economic use
approach that combines the first two approaches
into an integrated model and provides a financial
value for brands in line with current corporate
finance theory.
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M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.
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Websites
http://www.brandfinance.com
http://www.poolonline.com
http://www.interbrand.com
http://www.iasplus.com

College Science in India www.collegescienceinindia.com 49

3 : 1 February 2009
Brand Accounting – Issues and Challenges
RamaIyer Subramanian
M. Kalyanasundaram, Ph.D.
John Bumani Raja, Ph.D.