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

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brand financial method.collegescienceinindia. Ph. Melaka campus. the combines the accountants and marketers approaches into an integrated model that provides a financial value for brands in line with current corporate finance theory.BRAND ACCOUNTING: ISSUES AND CHALLENGES RamaIyer . The objectives of this paper is to analyze current brand valuation techniques The marketing method views brand value from the consumer perspective and the variables in this approach are generally qualitative in nature such as brand loyalty. Kalyanasundaram. e-mail: ramaiyer.my Abstract The valuation of brand assets has significant implications for business organizations and their shareholders. Ph.raja@mmu. In a public listed company. India John Bumani. e-mail: john.D. Kalyanasundaram. Faculty of Business and Law Multimedia University.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M.D. Future income method. 32 . preferences and satisfaction. The economic use approach College Science in India www. associations. Ph. on the other hand. Key words: Brand accounting. Ph.edu.edu. overstatement of brand values will result in higher value of companies in the capital market. Despite many researches carried out and journals written by academic scholars on the subject. Malaysia. Melaka campus.my M.D.D. views brand value from the company‟s perspective and quantitative variables like profits. Department of commerce Urumu Dhanalakhsmi College Trichirapalli 620 014 Tamilnadu. John Bumani Raja. The Introduction Brand accounting was first pushed to the limelight in 1988 when Ranks Hovis McDougall (RHM) Company employed the valuation services of Interbrand plc to value and incorporated the company‟s brands as assets in the balance sheet in an attempt to fight a hostile takeover bid.Raja. Historical method.Subramanian Faculty of Business and Law Multimedia University.subramaaniam@mmu. Malaysia. Replacement method. market share and cost are used.

an information system that measures brand equity. there is a growing trend of business organizations initiating the valuation of their brands for internal or external reporting purposes. is the information system that measures business activities. Financial Management. With the current trend in globalization and technological advances. pp. And because most Review of Literature Srikanthan.D. The incorporation of brand as an asset in the balance sheet gives rise to the concept of brand equity/asset. 33 .accounting remains a subject with many grey areas to be addressed. Inconsistent and insufficient accounting regulations to guide and govern the full disclosure of quality information on brand assets in accounting reports. knowledge systems. April. 1 intangible assets Sri Srikanthan. it is believed that intangible assets like intellectual capital. Vol.D. Ph. and To reinforce the importance of international accounting standards to standardize and govern brand valuation techniques. “Brand accounting: myth or reality?”. Ph. S. John Bumani Raja.collegescienceinindia. To identify issues contributing to the inefficient valuation of brand assets. Kalyanasundaram. This emerging view stems from the recognition of the strong role of brands in driving benefits to the organizations bottom line. Keith Ward and Richard Neal (1989). R. brand asset and trademark are going to be the key drivers to market capitalization in the twenty first century. its name and symbol. 220-22. 4. on the other hand. processes that information into reports. most turn to specialist brand consultants in international audit firms and management consultants to carry out the exercise. organizations do not yet have the methodologies to measure brand value. and communicates the results to decision makers (Horngren.. registered designs. processes and incorporates it into financial reports and communicates these values to the users of accounting information. 67 No. (1989)1 carried out the research on brand and other According to the are becoming marketing assets accounting. Objectives of the Research The objectives of the research are: To analyze current brand valuation techniques. The major problems identified for this research are: Lack of uniformity in the brand valuation techniques causes inefficient valuation of brand assets and reduces the usefulness of brand accounting information.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. College Science in India www. Aaker (1991) defines brand equity as: A set of brand assets and liabilities linked to a brand. Ward. authors. that adds to or detracts from the value provided by a product or service to a firm and/or to the firm’s customers. patents. K. 2002). Due to the increased importance of brands as assets in business organizations.. Accounting. and Neal. Brand accounting is then.

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. 3 Don E. p. market share and cost are measured. “Decoding intangibles”. Schultz. The financial method. Vol. The different techniques discussed under the two methods are as follows: perception is these potential write-downs are a lot riskier as compared to the previous amortization charges. 5. 6 No. April. 4.E. “Brand assessment: a key element of marketing strategy”. A. The first argument relates to the introduction of FAS 142. Amparo Cervera and Alejandro Mollá (1997). Journal of Product and Brand Management. Hence. A. Kalyanasundaram. the accountants are now 2 3 Andrew Osterland (2001).. (2002) gives a wake-up call to all marketers on the issue of brand valuation. According to the author. Jul/Aug. 11 Iss. D. The determined that the book value has been impaired. Ph. 34 . H.And future income of an organization. “The new brand value”. Schultz (2002).collegescienceinindia. which requires annual impairment test for capitalized intangible assets. preferences and satisfaction.D. (1997)4 identify two different approaches to brand valuation namely the consumer-oriented approach and asset-oriented approach. 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. The general marketing method views brand value from the consumer perspective and the variables in this approach are generally qualitative in nature such as associations. 8. Oasterland. CFO. Vol. Ph. A. John Bumani Raja. Marketing Management. Calderón. 4 Haydeé Calderón.D. 293-304. market share. (2001) states that companies are eager and willing to measure their intangible assets but are not too keen on sharing the results. on the other hand. Cervera. a write-down will be required. marketers need to make market related investments decisions to ensure future generation of profit. brand and sales people are responsible for at this point of time determine cash flow in valuation of an organization. views brand value from the company‟s perspective and quantitative variables like profits. pp. 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. Magazine for Senior Financial Executives”.increasingly important. brand investments and returns which marketers. If it is 2 moving away from the traditional approach of using historical data to a „value based‟ accounting approach. College Science in India www. The authors argue that an expense of this nature should be capitalized in the balance sheet because it is an investment for the future. This new value based approach looks into the future potential income and consumers.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. and Mollá.

perceived quality and customer loyalty generate an above average pricing and therefore allow the brand‟s benefit to be calculated. Replacement costs method (financial) Motameni. Vol. consumer factors and replacement costs.  Conjoint consumer analysis product (marketing) utility separates three present two different perspectives in looking at brand equity. 5 Reza Motameni and Manuchehr Shahrokhi (1998). 4. valuation methods.  Hierarchical integration of information estimating the value of a brand. Despite the method (marketing) is derived from conjoint analysis and enables simultaneous study of brand attributes and brand constructs on consumer preferences. Kalyanasundaram. future earning potential. Ph. “Brand equity valuation: a global perspective”. John Bumani Raja. cost based.  Primed prices method (marketing) assumes that brand assets like awareness. College Science in India www.The GBE model is similar to the Interbrand approach but differs by incorporating global factors affecting brands in its brand strength measurement. as the authors believe that consumers are the ultimate decision makers who determine the value of a brand. The authors reject purely financial brand convincing presentation. 35 . The marketing perspective is seen from the marketers‟ point of view whose objective is to create value for the brand using various components. attitudes and purchase intentions.D. the model also reveals the sources of value. M. which have significant impact on the brand.  Stock exchange movement analysis (financial) derives brand value from share price by eliminating irrelevant factors from current market price. A combined approach is known as „geocentric approach‟ and according to the author. Journal of Product and Brand Management. represents a proper balance of consistency and economy on one hand and of regional or local relevance on the other. premium pricing.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M.  Client preference method (marketing) utilizes market research techniques to measure the impact of brand name on preferences. the authors identified the need for global perspective and introduced the „Global Brand Equity Valuation Model‟(GBE). 275-290. The financial perspective aims to put a financial value to brand via different valuation methods i. To cater to the current globalization trend.D.  Future income method (marketing) involves estimating the present value of potential income generated by the brand. (1998) 5 involves estimating the cost of launching a brand with similar success to the brand to be evaluated. and Shahrokhi.collegescienceinindia. 7 No. On top of into components and conducts an analysis of exchange to obtain a monetary value to each component. the article does not provide any case study to support the application of the proposed brand valuation model.e. Ph. R. pp. market value.

“Market power and its measurement”.collegescienceinindia. John Bumani Raja. which takes into account both fundamental marketing and financial principles. purchased goodwill. and Guilding. Vol. Brand asset is treated as a subheading of goodwill and in the UK. pp. 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. Wood. The 7 author believes firms seek to be in a powerful situation and adopts Bannock et al.Cravens and Chris Guilding (2000). with the introduction of FRS 10 in 1997. 27-45. Global turnover method and Interbrand brand valuation methodThe author highlights that currently there is no single best approach to brand valuation. (1999) 6 notes that brand asset normally exists within the context of purchased goodwill only when a business is acquired. for example brand asset. College Science in India www. 36 . To summarize. it is usually written off immediately against reserves upon business acquisition. Journal of Strategic Marketing.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. 33 No. 8. pp. “The brand accounting side-show”. However.D. “Measuring customer focus: an examination of the relationship between market orientation and brand valuation”. (1999) addresses the importance of brands in the creation of market power. Cravens. may be capitalized only if there is a readily ascertainable market value (RAMV).com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. Ph. 204-215. L.S. the brand valuation method. There is also a that brand value presents crucial information on market power when considered together with traditional measures of market power. Karen S. Both are subjected to definition of market power as „The degree to which a firm exercises influence over the price and output of a market‟. C. the author acknowledges amortization on a systematic basis.‟s (1992) 6 investigate the relationship between market 8 Tony Tollington (1999). 8 No. Journal of Product & Brand Management.D. pp. 5/6. is now capitalized and accounted for as a fixed asset with finite life in the balance sheet. Kalyanasundaram.Tollington. Vol. Ph. Internally created brands however. as a basis for discussion. The author introduces a third alternative. 3. 612-631. However. European Journal of Marketing. The three measurements of market power discussed are: National turnover method. (2000) 8 serious need for the accounting profession to relook at the current regulations to ensure that financial data truly reflects market value. K. 7 Lisa Wood (1999). 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. T.The author also opines that brand assets should be separated from goodwill and recognized independently. the article is well written with the UK beer market being used as an illustration and a basis for comparison. Vol.

37 . Direct approach captures investment made on brands whereas indirect approach measures the potential of the brand to generate future income To conclude. The multiplier in Interbrand approach consists of seven factors: brand leadership.orientation and brand valuation in strongly branded firms.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. the author identifies two crucial determinants of brand value – brand strategy and an effective business organization. the authors consider two comprehensive formulary methods which are the Interbrand approach and Aaker‟s „brand equity ten‟. Ph. J. 41 Iss. To conclude. These results also imply that brand valuation may also be used as a performance measurement indicator or a tool for internal management decisions.D. The author. customer responsiveness. pp. Vol. All in all. brand support and legal protection. leadership or popularity. “Valuing brands. external orientation. The author interprets brand as „a covenant with the consumer.D. John Bumani Raja. market share and market price and distribution coverage. The authors begin by surveying various definitions of market orientation and identify six dimensions of market orientation namely customer focus.The interpretation relates to commitment and commitment cannot actually be measured! The author reasons that earnings and discount them to the present. organizational associations. Without that commitment. (2000)9 presents a short write up on brand evaluation methods and their respective weaknesses. perceived value. Rattray. does not attempt to incorporate them into valuation methods. focus on customers and competition. market structure. 3. a promise that the brand and the product it names will conform to the expectations that have been created over time‟.collegescienceinindia. either from a company or a College Science in India www. consistency in customer perception. A (2002) 10 believes brand value is a relative measure that depends on a number of 9 Jacques Chevron (2000). To relate market orientation to brand valuation. Likewise. 24-25. Aaker‟s „brand equity ten‟ measures in ten categories: price premium. having identified these two factors as determinants of brand value. 10 Alec Rattray (2002). Both approaches assess future potential Chevron. the study provides support for a relationship between market orientation and brand valuation in strongly branded companies. According to the author. Ph. Kalyanasundaram. this detailed research indicates the potential usage of brand valuation beyond the financial balance sheet boundary. perceived quality. Without these in place. satisfaction or loyalty. Jan. brand awareness. Brandweek. “Measure for measure Brand value may be relative but it is measurable. a brand exists only because of its commitment to its internal values. degree of internationality. on paper and in truth”. brand personality. the brand will not succeed. measurement of brand value required two different approaches – direct and indirect. brand is nothing but a glorified product name. industry foresight and quality of orientation process.

D. 6. p.collegescienceinindia. Vol. The depends on what and why the companies want to measure. The four factors affecting shareholder‟s value are tangible assets. College Science in India www. represents only 1.13% and Pfizer‟s 11. Marketing News.   subjective components like perceptions and expectations. progress of brand values should be tracked from consumer point of view: (Surveys edition)”. The balance consists of managerial capability. Jul 9. Ph. P&G balance sheet value. strategic robustness and  balance consists of goodwill and other intangible assets.. intangible assets. V=Vision and C=Connection. The brand equity approach represents the „consumer perspective‟ and it measures the historical and present value that a brand commands in shaping trial. The author reasons that companies would be able to manage their brand assets better if they view their brand assets in component terms. (2003) 11 interviewed Chip Shafer. California.D. In addition. Financial Times. Shafer believes that high value of intangible assets is one of the most leverageable opportunities of a company. Kalyanasundaram. Dell Computer‟s 7. 12. CEO of Trajectories Group in Irvine. These measures are then factored through an analysis of brand saliency in a specific category using databases such as Y&R‟s BAV data or BrandEconomics. This article presents new approaches to brand valuation Lamons. Only 5% of these intangible assets are measurable.25% of its total market value. future familiarity with brand.18%. contingent on circumstances and perspective. presented by Shafer are:  Shareholder‟s equity Among the key ideas formula can only approaches to brand valuation namely shareholder value and brand equity. p. preference and loyalty. The author proposes two determine brand value. These four components are further broken down to twenty-four subcomponents that relate to past performance. “Leverage intangible assets to up value of brand”. expectation current and performance. a company that has recently developed a formula to M=Momentum.dynamic variables. Shafer‟s proposed brand valuation formula is: B=(R+M+V) C where R=Reputation. 37 Iss. Ph.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. John Bumani Raja. The shareholder value approach represents the „corporate perspective‟ and it measures the future growth potential of a company. Bob Lamons (2003). 38 . This approach is based on the fundamentals of brand building and it analyses how particular brands perform relatively better than their competitors do. 18. The right approach account for approximately one third of Fortune 500 company market value. B. for example. 11 year to year.

127-143. relatively weak and asymmetrical 12 financial analysts and ethics having influence on brand valuation. inefficiency of this nature will increase stock price volatility. Jay Chatzkel (2003). Ph. Kalyanasundaram.Pahud De Mortanges.The author details four possible factors: quality of financial information. 14 pp. 2. 16 No.D. Accounting. platform for further studies and researches to investigate the correlations between these two variables. “Brand equity and shareholder value”.521-527. Enron‟s failure is not due to its intangible intensive business model. M. College Science in India www. First.C. 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. Although the relationship between brand equity and shareholder value established in this study is positive. Vol. 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. 57-69. Ph. pp. John Bumani Raja. According to the author.R. The authors employ the Brand Asset Valuator ® model to measure brand equity whereas shareholder value is measured using Total Shareholder Return. 1. Auditing & Accountability Journal.collegescienceinindia. the study would provide a conduct a study to investigate the relationship between brand equity and shareholder value. 39 . García-Ayuso. limited capability of Earnings Per Share and Market to Book ratio. Charles Pahud De Mortanges and Allard C. according to various contributors to this paper.R. European Management Journal. Vol. “The collapse of Enron and the role of intellectual capital”. A. The authors then plot the directional changes of these brands and associate them with changes in shareholder value using the chi-square contingency tables. Overstatement of intangible assets could also result in significant losses for investors during market corrections period. pp. (2003) 13 puts forward a few ideas to explain the inefficient valuation of intangible assets. 21 No. and Van Riel. J. The authors reason that many companies categorized brands as intangible assets and brands are able to generate profits for shareholders. “Factors explaining the inefficient valuation of intangibles”.D. risk of hostile takeover and opportunities for insider gains. Chatzkel. 4 No. C. it is inconsistent. 13 Manuel García-Ayuso (2003). Journal of Intellectual Capital. Van Riel (2003).com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. 4. (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. (2003) 12 due to a number of limitations discussed in the paper. market imperfection. As such. The findings indicate that it is indeed possible to track changes in brand equity and relate this performance to shareholder value. Vol. However. cost of capital.

In the case of Enron. the author argues that the value of intellectual capital is a process by which it is in construction and remoulding all the time.D. it needs to bring along a similar ground of core values and practices to manage and operate the new business model. This results in a large value gap between the market value in the capital market and its traditional book value. Kalyanasundaram.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. of intangible intensive business contemporary balance sheet „New‟ intellectual assets recognized (brand and patent value) Intangible competencies (innovation.D. The framework for understanding and accounting for goodwill and intangibles must therefore allow for the structural. the absence of a concrete and comprehensive framework for operating an intangible intensive enterprise partly contributed to its failure. complexity of what is being measured and evaluated. 16 No. Eustace (2001) model divides capital assets into three categories: Tangible assets recognized in the intensive trading model. 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. market and human resources). On the contrary. College Science in India www. Vol.When a company like Enron moves from a traditional trading model to an intangible Mouritsen. 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 models. it is impossible to arrive at one finite and set value. “Overview Intellectual capital and the capital market: the circulability of intellectual capital”.collegescienceinindia. Accounting should no longer look at only past performance but also project future performance in this rapidly changing business environment. Accounting. pp. Second. 1. Likewise. Ph. Auditing & Accountability Journal. (2003) 15 argues that intellectual capital is a drama in that the value created cannot be accounted for by traditional accounting method as the production function of the knowledge society is in the unknown. 15 Jan Mouritsen (2003). 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. 18-30. J. John Bumani Raja. In the US. Others see it as a convergence of different initiatives to capture and portray the value of an organization accurately and Discussion of International Accounting Standards on Intangible Assets effectively. It is a process of value creation and as such. The firm‟s market value is the sum of all the three factors. 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. Ph. 40 .

pp. the gaps in terms of accounting treatment for these two assets as per detailed in IAS 38 are obvious. pp. (2001) 17 examine the disharmony in the approach to intangibles with the publication of IAS 38 in mid 1998. Kalyanasundaram. However. K. there is a lack of overall homogeneity in both recognition and accounting treatment of intangible Second. The authors conclude that recognition at fair value is an additional option for acquired intangible assets but not for internally generated intangibles.collegescienceinindia. The International Accounting measurement techniques offered by accounting firms and consultancy groups. Ph. and Jeny-Cazavan. acquirers have the option of measuring fair values using various 16 assets in the study. it would address the many criticisms raised by accounting and business organizations on IAS 38. Canada. IASC reasons that it is difficult to determine the fair value of intangible assets in the absence of an active market. Switzerland and the US whereas the accounting standards consist of IASC and the European Union. The twenty-one countries include all the European Union members. it can be recognized by the business organization at fair value. agrees that there should be no difference between intangible assets acquired from external sources and those generated internally. Japan. “Intangible assets: seeking consistency”. 14 No. Auditing & Accountability Journal. 477-496. Ph. College Science in India www. IAS 38 states that an intangible asset should be measured initially at cost. In order to move towards global harmonization of financial accounting. Stolowy.D. Ken Leo (1999). John Bumani Raja. “International accounting disharmony: the case of intangibles”.The first area of inconsistency is in the measurement of initial recognition. 30-32. (1999)16 analyses selected sections of IAS 38 „Intangible Assets‟ which have not been well received by accounting profession and business organizations. goodwill and other intangible assets. Nov.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. Australian CPA.Leo. A. Norway. Nevertheless. Vol. in principle. Measurement of fair value of internally generated intangibles is practically impossible. The author is of the opinion that if these gaps are narrowed or eliminated. if the intangible asset is acquired as part of business combination and can be identified separately from goodwill. However. Australia. The study focus on two main areas namely recognition and accounting for changes in value. Accounting. 41 . Hence. 10. as technically there is no active market for these assets. International Accounting Standards (IAS) is developed in response to the need for global harmonization of financial reporting services.D. Vol. initial accounting standards in both definition and treatment of intangibles – specifically of R&D costs.. 4.The article studies the different approaches taken by twenty-one national and two international Standards Committee (IASC). diversity within and between countries and 17 Hervé Stolowy and Anne Jeny-Cazavan (2001). 69 No. H. for acquired intangible assets.

analysis and finding is as per detailed in Figure 1: College Science in India www. Kalyanasundaram. the Internet is used as an important source. John Bumani Raja. The research framework for discussion. The success of International Accounting Standard should be evaluated in totality and not on just one single regulation. However. Research Methodology The analysis and findings presented in this article are mostly derived from secondary sources. 42 . In order to update the information for the findings.organization needs to be reduced. Ph.D. Ph. it is noted that the authors make the conclusion based on the discussion of IAS 38 alone.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M.D. The information is gathered from business magazines. academic journals and books.collegescienceinindia.

alternative combined approach known as „geocentric approach‟.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. College Science in India www.. 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. 1998). 43 . John Bumani Raja. Ph.D. not much literature along this line of thinking is available for evaluation and comment. Although Wood (1999) also uses similar approach to the measurement of market power.collegescienceinindia.Ethics Market Imperfections Economic use Approach Accounting Standards Brand Valuation Techniques Financial Approach Marketing Approach Cooperation Between Accountants and Marketers Availability and Quality of Financial Information Figure 1 Research Framework Discussion. which represents a proper balance of consistency and economy on one hand and of regional or local relevance on the other. There are currently three approaches to brand valuation. The third approach is quoted by both Brand Finance and Interbrand websites as the „economic use approach‟. Ph. Analysis and Finding Motameni and Shahrokhi (1998) also introduce an Brand Valuation Techniques Brand valuation techniques first became popular in the late 1980‟s. 1997 and Motameni and Shahrokhi. The first two are the „marketing approach‟ and „financial approach‟ (Calderon et al. Motameni and Shahrokhi refer to this as the global perspective and introduce the „Global Brand Equity Valuation Model‟. to cater to the current globalization trend. Kalyanasundaram.D.

44 . perceived quality and customer loyalty generate an above average pricing. Kalyanasundaram. product testing and market research expenditure. The financial approach views brand value from quantitative variables like profit and cost. revenues of an unbranded or relatively unknown brand are deducted from the branded product. two questions remain unanswered here. associations.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. involves estimating potential royalty income if the brand is being licensed out to a second party. The factors and underlying assumptions of a multiplier could differ from one brand to another. is organizations.D. Market value method estimates the worth of the brand if it could be sold in the market.D.e. difficulty in identifying an unbranded product for comparison purpose and the subjectivity of brand characteristics and attributes. The first method. this Cravens and Guilding (1999) identify two methods to estimate potential revenue.e. Weaknesses of this method include the difficulty in defining the multiplier. The absence of a ready market for a brand is the major concern and therefore the value could be unrealistic. Ph. Traditionally. actual consumer brand sales compared to total sales to supply the product through retailers are computed. Historic costs method. preferences and satisfactions.collegescienceinindia. First. In addition. research and development. Alternately. the brand value will also depend on the circumstances of the transaction i. This method requires the compilation of all costs relating to a brand to be summed up for valuation i. However. this is the approach favored by accountants due to its reliability of measurement. Some of the popular brand valuation methods that utilize this approach are as follows: Price Premium Method assumes that brand assets like awareness. It refers to how brand could contribute to the . desperate sale will command lower price despite the potential earning power of the brand. also known as the royalty payments method. A College Science in India www. John Bumani Raja. However. how do we establish a relationship between royalty income and brand value or difference in consumer/retail sales and brand value? Second. consumer research could be carried out to determine how much more consumers are willing to pay for certain brand characteristics and attributes. Ph.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. bottom-line of business discounted cash flow method or a multiplier could then be applied to determine the brand value. Historic costs and replacement costs for example. which is the most conservative method of brand valuation and it complies with standard accounting practice. The three methods used are . An observation is made on the market price level of different brands over a period of time. using a are available within the organizations and could be easily verified. In the second method. Future income method involves estimating the potential income generated by the brand and discounting to the present value predetermined discount rate. To establish the price premium.

D. 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. which involves the estimation of cost of establishing a of valuation. Its methodology comprises four major elements namely market analysis to understand market and competitive situation. Brand Finance method is a marketing orientated valuation. It requires the comparable brand. First. It assumes that a comparable brand could be established with similar success and estimates the probabilities of success at predicted costs.collegescienceinindia. Second. historical cost is not reflective of the actual brand value as it ignores the value-added component in the value creation process. which is based on a brand‟s future potential. Ph. Replacement costs method. The use of this method is limited to business organizations listed in the stock exchange only. A multiplier. Kalyanasundaram. this method will appeal to a brand which is relatively new in the market as compared to matured brands. it is difficult to segregate and allocate these costs to a specific brand. support. In addition.method has many shortfalls.D.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. this method is comprehensive and applicable to both external financial reporting and internal management purposes. Both the marketing and financial perspective adopts a tunnel vision approach in their methods College Science in India www. market. representing brand strength. This is a very subjective computation of future earnings discounted back to a net present value. although it is possible to identify these expenditures from past records. Furthermore. Ph. In other words. They are: Interbrand method. John Bumani Raja. Stock exchange movement analysis calls for a comparison between the actual assets value of a business organization and its share prices. is then attached to the brand profitability to determine the final brand value. international image and trend. which factors in brand leadership. Many consumer brands have existed for decades and to trace back expenditures pertaining to these brands could be quite an impossible task. Most of these valuation methodologies are devised by consultancy firms specializing in brand valuations. It assumes that share prices reflect future brand value. brand financial analysis to understand branded business revenues. 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. The value of brand is derived by deducting tangible assets and irrelevant intangibles from the actual assets value. is the time horizon for data collection. 45 . protection. Although the problems of subjectivity and difficulty in profit segregation are still present. driver analysis to determine the proportion of revenues attributable to the brand and brand risk approach as it entails estimation at all levels of analysis. stability. Problems will also arise if one business organization has multiple brands in its business portfolios.

Popular brands however.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. and this process is in itself very subjective.D. brand valuation Issues in the valuation of brand assets The valuation of brand assets has significant implications for business organizations and their shareholders. Second. it is practically impossible to derive brand value on consensus basis because there is no socalled active market for buying and selling of brand assets. Third. Financial information is a significant input in any type of valuation. is the availability and quality of financial information. sourced from the annual reports and accounting journals of business organizations. Ph. John Bumani Raja. Many methodologies developed for brand valuation originate from marketing definitions of brand equity. This is done by discounting the future cashflows. Quality of financial information refers to the accuracy of forecasting. process within the firm and value drivers contributing to its growth. For example. the overstatement of brand values will result in higher value of companies in the capital market. Desperate sales. Marketers must also be aware that it is no longer relevant to say that marketing variables are not measurable as these are the same variables going into the valuation of brands. for example. In a public listed company. Undervaluation will reduce the ability of the firm to raise additional capital and increase the risk of hostile take over. Financial information is normally corporate value is determined by what it might be worth in the future and not what it was worth in the past. future cash flow projections should reflect management prospects for future financial position taking into account the value creation College Science in India www. 46 . an undervaluation of information could also assist marketers to assess the effect of advertising and promotion expenditures on attributes of brand equity. it will result in losses for shareholders. marketers must realize the significance of brand valuation and understand the needs of incorporating them as assets in the financial statements. Capitalization of research and development. Similarly. will require information on costs incurred probably decades ago and no longer traceable. will normally command low premium and possibly negative premium and are not reflective of the true brand value. Accountants must accept the need to include the marketing components in brand valuation techniques. The very limited transactions that have taken place have also very much depended on the circumstances of the sale. When stock prices adjust downwards to revert to their fundamental values. Almost every method calls for a reconstruction of cash flows. Ph. will attract bidding from various potential buyers and force price premiums up.D.collegescienceinindia.analysis to assess security of brand franchise with customers. product testing and market research expenditures in historic cost method for example. In addition. including brand valuation. First. looking Progressive accounting firms are now at value based accounting where brand values will reflect a lower value of companies in the capital market. Kalyanasundaram.

and Mollá. is the lack of international harmonization of accounting standards in 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. Both the standardizing and governing brand valuation exercise. preferences and satisfactions.D. including both acquired and internally generated brands. publishing titles. 293-304. brands and customer lists. 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. 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. 6 No.e. For example. to analyze and understand their unique requirements. “The collapse of Enron and the role of intellectual capital”. pp.com 3 : 1 February 2009 Brand Accounting – Issues and Challenges RamaIyer Subramanian M. Role of international accounting marketing and financial perspective adopts a tunnel vision approach in their methods of valuation. it should start addressing and solving issues at macro level i. H.. Vol. financial approach and economic use approach. intangible assets and subsequently move into micro level i. Vol. “Brand assessment: a key element of marketing strategy”. College Science in India www. 47 . managers may have the tendency to disclose a higher goodwill figure to reflect a higher market capitalization value. standards in standardizing and governing brand valuation If IASB is serious in its objective to move towards global accounting harmonization. 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. A. J.e. as a separate part of the annual financial statements. Cervera. associations. pp. 127-143. References Calderón. 4 No. 2. Journal of Intellectual Capital. Ethics could also be an important factor in determining the efficiency of brand assets valuation. Each of the brand valuation models discussed above would most likely result in figures that vary from one to the other. Journal of Product and Brand Management. 5. Kalyanasundaram. (2003). The last factor but not the least. A. The next logical step then would be for the inclusion of a statement of brand assets. Chatzkel.collegescienceinindia. There are currently three approaches to brand valuation – marketing approach. John Bumani Raja. Ph.Another aspect of market imperfections is the absence of standard brand valuation models. It is evident that changing requirements and experiments are underway to establish frameworks for intangible assets at macro level. (1997). which we will discuss in greater detail in the next segment.D. Ph. during the initial public offering period.

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