This research paper is focused on establishing the importance of valuation of intangible assets and brands. The paper analyses the methods applied in brand valuation and valuation of intangible assets. The paper focuses on the international accounting standards that prescribe the procedures to be followed while valuing intangible assets and brands. The main accounting standards applied include IFRS 3, IAS 38, and IAS 36. The above standards prescribe the procedures to be followed while presenting the value of brands and other intangible assets in financial statements. The paper also focuses on the various approaches of brand valuation such as cost-based approaches, economic use approaches, special situation valuation and market based valuation (Stenson 2003, pg 86). The paper also contains a case study which provides information concerning companies that have taken the initiative to value their brands and other intangible assets (Stenson 2003, pg 86).. The paper states the benefits accrued to the companies which value their brands and other intangible assets.
Introduction
A brand is a non monetary and a physically nonexistent asset, a brand is mainly associated with the name or the emblem of a given entity. The brand normally gives the consumer a reasonable assurance that the products produced under the brand are up to the expectations of the customer and nothing less (Roos 1997, pd33). The consumer expectations are normally cumulative i.e. they build up over time. A brand cannot exist in the event that the product does not commit itself to the internally developed values (Roos 1997, pg 52). The brand of a given entity is like an ultimate creation which ahs a value in thee market and the values at which the brand is traded is not mechanically calculated. In order to determine the monetary value of a given brand there are some series of processes which are carried out the processes are both direct and indirect. An indirect process will try to give the value of the brand considering what the brand gives in addition to the current bottom line (Roos 1997, pg 52).
A brand is very valuable asset for a given business (Baruch 2004, pg 126). The brand is an emblem or name that is associated with the attitude of the buyers towards the goods and services of a given trader (Baruch 2004, pg 126). The brand identifies the services and goods of a particular business man and sets them aside from the services and goods presented by the competitor (Baruch 2004, pg 126). The brand gives the products and services a unique nature which sets them aside from those of the competitor (Baruch 2004, pg 126). The brand does this by pointing out certain qualities in the products that are not the same as the competitors' (Baruch 2004, pg 126). A brand is very important to a given business since it can be termed as an ultimate marketing tool that can be used to fight competition and maintain the position of a given product in the market (Baruch 2004, pg 126).
The issue of brand valuation came up in the late 1980s' when the "wave of brand acquisitions" and led to the realization of the value held by some of the branded entities in the society (Lev 2001, pg 66). One of the main acquisitions that took place was the taking over of Rowntree by Nestle and the acquisition of Nabisco's European businesses by Danone (Lev 2001, pg117). The amount of acquiring a company whose brand is high was very high compared to those low branded companies. The high acquisition amount led to the increase in goodwill at acquisition (Lev 2001, pg117). This goodwill constituted intangible assets which included brands, intellectual property, Patents and distribution agreements (Lev 2001, pg117).
More and more companies are discovering the importance of valuing their intangible assets. The companies are also discovering the vitality of protecting their brands (Accounting principles board 1970). The companies use the brand to inform the consumers of the quality attached to their products (Accounting principles board 1970). This is very important since consumers need a product that they are familiar with and one which they trust and can rely upon to maximize their utility. a business with a strong brand will enjoy such an environment since their revenue is expected to rise and are also expected to maintain a certain market share due to consumer loyalty created by the brand (Accounting principles board 1970).
Objectives and research questions
This research is mainly based on the valuation and disclosure of information with regard to intangible assets and brands. The main objectives of the research include
To establish the need for valuation and presentation of information concerning intangible assets. This objective aimed at giving the ultimate reason for valuing and presentation brands and other intangible assets such as intellectual property in the financial statements of an entity.
To establish the need for valuation and presentation of information concerning intangible assets. This objective aimed at giving the ultimate reason for valuing and presentation of intangible assets including brands, patents and intellectual
To analyze the most effective brand valuation methods
To ensure that companies present their financial position in a true and fair manner by ensuring all assets which bring benefits to the company are included in the financial statement of the company. This is to ensure that the financial statements reflect the correct financial position of the company
This research paper seeks to answer questions surrounding the accounting concepts with regard to development, importance, limitations, and impacts of valuation of intangible assets and brands. The main research questions that are answered in this paper include. Is there any benefit that a particular entity gets in valuing its brand and other intangible assets? The research paper also seeks to answer the question, what are the various obstacles surrounding the process of valuation and presentation of financial information concerning brands and intangible assets? Other research questions which the paper seeks to answer include
Who are the users of information generated after the valuation of brands and intangible assets?
What are the main reasons for valuing brands and other intangible assets?
What are the most commonly used intangible assets and valuation methods?
Methodology and methods
The main intention of this paper is to present information with regard to valuation and presentation of information regarding brands and intangible assts. In the paper we are going to analyze the methods used to value brands and intangible assets. The paper is going to use discussion methods to answer the above stated research questions. Each question will be discussed in detail and information required disclosed.
The research is carried out using both qualitative and quantitative data collection methods. The information collected will be analyzed so as to sync with r\the research objectives hence answering the research questions. The research paper will also employ the use of practical information and examples by use of case studies. The research paper will use the following companies as practical examples since they are known for recognizing the value of their brands and intangible assets while presenting financial statements.
Lougborough University
Osem investments
Next gen group PLC
The above companies present financial information about their intangible assets and brands. The companies value all their assets according to the standards prescribed by IAS 38, IAS 36, and IFRS 3. Lougborough University is a nonprofit making institution. The university has of late displayed financial position and performance which go hand in hand with the aims and objectives of the institution. If we take a look at the institution's 2010 financial statements they show the ability of the institute to meet its long term maturing objectives. The company shows the net book value of intangible assets such as goodwill. The university has a strong brand name and enjoys good financial and operation position.
An Osem investment is not a publicly listed company; therefore it has no any statutory requirement directing it to publish its financial statement for public scrutiny. However, due to its brand position in the market the company finds it necessary to produce the statements for public scrutiny. The financial statements presented therefore do not reflect the statutory prescriptions of presenting financial statements. Next gen group PLC is a company concerned with the manufacturing of a biomarker
Accounting standards for valuation of Brands and intangible Assets
The main accounting policies concerned with recording and valuation of brands and intangible assets are IAS 36, IFRS 3 and IAS 38.The development of accounting standards with regard to valuation and recording of brands and intangible assets can be traced back in the year 1977 in the month of February (Accounting standards board 1996). This is the year which the exposure Draft E9 which addressed Accounting for Research and Development activities was formed. The draft evolved over the years until the year 1998 when it was referred to as IAS 38 intangible assets (Accounting standards board 1996). IAS 38 was revised in the year 2004 and in the year 2008 it was amended in order to incorporate standards for annual accounting, it was then recognized as IFRS 2007. In the year 2009 it was revised for Annual improvements to IFRS 2009 (Accounting standards committee 2010).
The main objective of IAS 36 is to provide procedures to be followed by a given business entity with regard to the valuation of an asset (Accounting standards committee 2010). The Standard ensures that an asset is not recognized at a value that is higher than the value which if sold will be recovered i.e. the asset's recoverable amount. The standard states that any impairment in a given asset should be recognized by the entity (Olson 1998, pr 2). The standard also emphasizes on disclosure with regard to asset impairment and any form of reverse done on an impaired asset. To facilitate the above, the standard prescribes ways to; discover an impaired asset, reverse impairment of a particular asset, and measuring impairment loss (Olson 1998, pr 2).
The main objective of IAS 38 is to give the way intangible assets such as goodwill and intellectual property can be recorded in financial statements (International Financial Standards board 2010). The standard states the way intangible assets not catered for in other financial reporting standards can be treated when it comes to presentation of accounting information (International Financial Standards board 2010). The standard prescribes the conditions which a given asset must meet so as to be recognized by a given entity (International Financial Standards board 2010). The standard states that, such an intangible asset should be recognized y the business at the event that all the conditions are met. The standard also prescribes the procedures to be followed when it comes to valuation of a given intangible asset so as to reveal the current amount International Financial Standards board 2010). The standard also states the forms of disclosure that need to be done with regard to a given intangible asset (International Financial Standards board 2010). The standard defines an intangible asset as a non monetary asset which does not exist physically (International Financial Standards board 2010). The standard further provides the characteristics of an intangible asset as one which is expected to bring economic benefits to the business in future, can be identified and one which the business entity can exercise control and the entity have the ability to harvest the economic benefits from the asset at any time (International Financial Standards board 2010).
IFRS 3, business combination, the main objective of this Financial Reporting Standard is to prescribe the accounting procedures to be followed by an entity when it decides to take up business combination (International Financial Standards board 2010). Business combination is the consolidation of several separate business entities in order to come up with one entity giving presenting the financial information i.e. reporting entity (International Financial Standards board 2010). The person acquiring the business assumes control of the acquired business (International Financial Standards board 2010). However, if the person acquires an entity which is not a business such cannot be deemed as a business combination (International Financial Standards board 2010).
Valuation Approaches
People have very different standpoints with regard to the definition of the term 'value' this makes it hard to understand the concept f value. The valuation applied is greatly dependent on the main aim of carrying out the valuation (Stenson 2003, pg 251). The main aim of a valuation is decided by the final use of the information obtained from the valuation (Stenson 2003, 243). The following are examples of some of the most commonly used approaches to valuation
Cost-based approaches
Formulary approaches
Market-based approaches
Special situation approaches
Economic use approaches
Cost based approaches
The cost based approaches are mainly concerned with the costs that the entity will incur when it comes to brand creation or substitution (Stenson 2003, pg 251). The costs include the costs incurred with regard to research and development, promotion of the products associated with the new brand, testing the new brand in the market and improvement of the product so as to suit the new brand (Aakar 199, pg 86). This form of approach sums up all the cost incurred to acquire the new brand or replace the existing one and uses it as the value of the existing brand or the brand that is yet to be implemented. This is one of the easiest forms of brand valuation since all the data required to carry out the operation is available (Stenson 2003, pg 86). However, this form of valuation does not pose any likeliness to the actual economic value (Stenson 2003, pg 86). The replacement cost approach determines the cost that would be incurred in replacing the existing brand with another brand, this can be done in the event that the entity realizes the current brand has been damaged (Stenson 2003, pg 86). This method is more advantageous since it gives the actual value of the brand (Stenson 2003, pg 86). However, the value generated in this approach does not give the prevailing market value (Stenson 2003, pg 86).This may mislead investors since the value if the asset were sold it may have a higher value or lower value compared to the amount depicted by the approach (Stenson 2003, pg 86).The main advantage of this approach is that the manager responsible has the full knowledge of the money used with regard to creation of the new brand or replacement of the existing brand (Stenson 2003, pg 86).
Market-based approaches
The market based approach is mainly concerned with the prevailing market value of the brand or intangible asset (Stenson 2003). This is the actual amount which the asset would be sold for if the entity decides to do so. The open market value is defined as the highest amount which a given buyer who is willing to acquire the intangible asset will pay. This definition does not include a buyer with other objectives (Stenson 2003, pg 86). This valuation approach is much effective when one is at the verge of selling the brand or intangible asset. The prevailing market value of the intangible asset or brand should contain other uses for the asset, future economic benefits of the asset. The value should also include the value of the intangible asset with regard to the current activities. According to Stenson (2003), "modern financial theory states that one should sell off the assets if the value that the buyer is willing to pay exceeds the discounted benefits of the brand or intangible asset", (Stenson 2003, pg 86).
Economic Use approaches
The economic use approach tends to uses the future benefits of the asset so as to determine the current value of the intangible asset (Guilding 2002, pg 42). This approach evaluates the future incomes to the entity which can be directly identified with the asset so as to determine the current value of the asset (Guilding 2002, pg. 43). This form of approach is very effective when it comes to valuation of assets which are not intended to be sold in the near future. This approach depicts the future importance of the brand or intangible asset that the entity is currently enjoying (Guilding 2002, pg. 48). The value generated by this approach can be important to the entity if it is compared with the prevailing open market value the entity is able to know, what future potential of the asset is being foregone by choosing to utilize the asset at the moment (Guilding 2002, pg. 59). Formulary approaches apply several conditions so as to come up with the value of the intangible asset (Guilding 2002, pg. 59).
The special situation approaches put into account a particular situation related to the brand valuation, the situation does not have to be consistent with the current valuations that affect the brand internally and externally (Bradley and Vishwatahan 2006, pg 451).). In this approach a willing buyer will always have the intention to purchase the asset at a higher price than the market value of the asset (Bradley and Vishwatahan 2006, pg 451). While valuing the intangible asset or brand using the special approach, it is important to put into consideration the rules and guidelines set forth by the authorities, some of the special purposes for valuing an asset include income tax (Bradley and Vishwatahan 2006, pg 451).
Obstacles to brand and intangible assets valuation
A past conducted study with regard to valuation of brands shows that one of the main problems associated with brand valuation is the availability of many brand valuation methods. The application of different valuation methods may result to presentation of different outcomes (Robbin 1991, p 56). The variance with regard to such outcomes can be material (Robbin 1991, p 56). Another problem with regard to the valuation of brands is the lack of a way to determine the number of years the brand can exist before it fully depreciates i.e. the useful life (Robbin 1991, p 56). The rand value cannot also be determined by introducing a given brand in the market (Robbin 1991, p 56). Another obstacle with regard to brand valuation is that, there are many models which have presented by scholars to be debated upon (Robbin 1991, p 56). Another problem with regard to brand valuation is that, the intangible asset of a given entity are treated as whole hence it is difficult to separate the brand capital from the other assets in the same category such as goodwill (Robbin 1991, p 56). There is no universally accepted brand valuation method (Marsh 2001, pg 7)
From the above we are able to realize that it is important for a given entity to closely examine its intangible assets. The valuers should be able to evaluate all the intangible assets so as to get the opportunity to deduce the impact which the brand has on the current position of the entity in the market (Marsh 2001, pg7). This is also because there is many intangible assets in an organization which impact on the entity's market position (Marsh 2001, pg7).
Importance of Brand Valuation
More and more companies are discovering the importance of valuing their intangible assets. The companies are also discovering the vitality of protecting their brands. The companies use the brand to inform the consumers of the quality attached to their products. This is very important since consumers need a product that they are familiar with and one which they trust and can rely upon to maximize their utility (Andrews 2006, pg 34). A business with a strong brand will enjoy such an environment since their revenue is expected to rise and are also expected to maintain a certain market share due to consumer loyalty created by the brand (Andrews 2006, pg 34).
It is important to compute the value of assets contributed by the brand. It is also important to value other intangible assets being held by the company such as goodwill and intellectual property (Andrews 2006, pg 34). It is important to value intangible assets such as brands by a company since it helps the company determine its position with regard to competition in the industry which the company is operating. The valuation of the brand will give the company the knowledge whether to improve its brand or not so as to fit in the competition. The valuation of the brand also gives the company the ability to weigh their competitors' potential to substitute them in the market share they occupy (Andrews 2006, pg 34).
There are several criticisms pointed towards brand valuation mainly by private companies. Financial information presented without the inclusion of the intangible assets of the company is misleading since they don't reveal the truthful financial position of the company (Andrews 2006, pg 34). This means that brand valuation is very important since it gives the correct financial position of the company (Andrews 2006, pg 34).The valuation of intangible assets is very vital since the company is able to assess its current liquidity and decide whether it is a going concern or not (Andrews 2006, pg 34). The valuation of a particular brand is very important since the company is able to know its level of consumer loyalty (Andrews 2006, pg 34).
Methods of Brand and Intangible Assets Valuation
Many authors have come up with brand and intangible assets valuation methods. The mostly used brand valuation methods include; the brand value of a company can be valued by measuring the prevailing market price of the company's shares (Chan 2001, pg 163). The brand value can also be determined by calculating the difference between the market value of the entity's shares and the net book value of the company's shares. The outcome is referred to as goodwill (Chan 2001, pg 163). The company can also establish its intellectual property by subtracting the management expertise from the difference between the prevailing market value and the net book value of the business's shares (Chan 2001, pg 163).
The value of the brand can be determined by calculating the costs that the company will incur if the latter chooses to replace the existing brand with a new brand (Chan 2001, pg 163).The costs incurred during brand replacement may include the advertisement of the new brand so as to enable the brand acquire its initial market position (Chan 2001, pg 163).The costs incurred during brand replacement or acquiring of a new brand can be deemed as the value of the brand (Chan 2001, pg 163).
The Purpose of Brand Valuation The need to value brands is rising by day. The company may have different reasons as to why to value the intangible assets of the company (Aboody 2004, pg. 57). The company may value its intangible assets with the intention of selling them. It is important to value the assets before selling them so as to realize the market value of the asset (Aboody 2004, pg. 58). The company should also value the assets before selling so as to establish the future benefits of the asset. The company may also choose to value the intangible assets so as to display the assets in the statement of financial position of the company (Aboody 2004, pg. 58). The company needs to value the intangible assets so as to calculate the accumulated depreciation so as to decide the current net book value of the intangible asset. The figure below shows a diagram of a company valuing assets for the purpose of selling
Source (Bradley and Vishwatahan 2006, pg 450).
The figure above shows a business with the intention of selling its intentional asset. The figure shows the valuation of the intangible equity of Consumer Goods Company. The company's management computed the value of the company's prevailing market share and found out the value to be 838 million Euros (Bradley and Vishwatahan 2006, pg 451).The company buying the securities considering the future benefits of the securities and found out the value to be 1.3411 billion Euros, the difference between the two companies' prices occurred due the brand's current good position in the market and other production, sales and distribution overheads ((Bradley and Vishwatahan 2006, pg 451). After subtracting all overheads associated with the shares the goodwill and intangible assets of the company turned out to be 337 million Euros However, after the valuation the brand , it was apparent that the brand value depended on the person who is going to benefit from the high brand value i.e. for whom (Bradley and Vishwatahan 2006, pg 451).
Who uses the valuation information?
The information generated after the valuation of intangible assets and brands have a wide range of users. The information can be used by persons willing to buy the shares of the company (Ulrich 2004, pr 10). The buyers will need this information so as to evaluate the future position of the company so as to decide whether to buy the shares or not. This information is also very vital to the buyer since it enables him to know what economic benefits will accrue to him in the future if he acquires the shares (Ulrich 2004, pr 10). The purpose of valuing intangible assets is greatly related to the persons who need the financial information (Ulrich 2004, pr 10). The other group of persons who need the information generated after valuation is the management of the organization since them to evaluate the liquidity and future position of the company (Ulrich 2004, pr 10). The information is also important to the management since it gives them the ability to analyze the level of consumer loyalty (Ulrich 2004, pr 10). The information is also used by the general public in the case of a company listed in the stock exchange; the public is able to access the current financial position and future financial position of the company. In order for the public to use the financial information presented by the company, it is important to ensure that all the information with regard to the wealth of the company is disclosed (Ulrich 2004, pr 10). Finally, the information is important to the whole company since it give them the opportunity to analyze their position in the market and current position since it gives them the ability to determine the value of the intellectual property, goodwill and brand that the company enjoys (Ulrich 2004, pr 10).
Analysis of companies that value their brands and intangible assets
Nextgen group PLC
The company is an investments company (Bradley and Vishwatahan 2006, pg 451). The company presents its financial information giving comprehensive coverage about its position with regard to the intangible assets it controls, the company presents the information after thorough valuation of the value of the intangible assets it controls, and this includes the goodwill and other intellectual property being controlled by the company (Bradley and Vishwatahan 2006, pg 451). The goodwill is represented in the consolidated statement of financial position and has the following effects on the position of the company (Bradley and Vishwatahan 2006, pg 451).
Presents a truthful position of the assets being controlled by the company
The company is able to evaluate the current consumer loyalty level by knowing the value of its brands
By valuation of the brand the company is able to know its position with regard to competition and the unique characteristics that the company's product has that the products offered by the competitors does not have
Gives the company the prevailing market value of the intangible assets being controlled by the business, this is very important since the company has enough knowledge about the market value of the brand and other intangible assets hence making it easy for the company to sell its shares whenever it feels necessary
Source (Thomas 2004).
The following is the statement of financial position of nextgen group PLC, the company ensures a thorough valuation of its intangible assets and presents it in form of goodwill (Thomas 2004).
Osem investments limited
The company is an investments company (Damodaran 1996). The company presents its financial information giving comprehensive coverage about its position with regard to the intangible assets it controls, the company presents the information after thorough valuation of the value of the intangible assets it controls, and this includes the goodwill and other intellectual property being controlled by the company (Damodaran 1996). The goodwill is represented in the consolidated statement of financial position and has the following effects on the position of the company (Damodaran 1998)
Presents a truthful position of the assets being controlled by the company
The company is able to evaluate the current consumer loyalty level by knowing the value of its brands
By valuation of the brand the company is able to know its position with regard to competition and the unique characteristics that the company's product has that the products offered by the competitors does not have
Source (Bradley and Vishwatahan 2006, pg 455).
The above statement of financial position recognizes the full financial position of the company since it recognizes the full value of the assets controlled by the company through recognition and valuation of intangible assets (Bradley and Vishwatahan 2006, pg 451).
Lougborough University
The university has a very strong brand name and enjoys a good financial position (Damodaran 1996). However, the presented statement of financial position does not reflect the actual value of the business assets this is because the statements do not include the value of intangible assets controlled by the business. This company therefore does not enjoy the benefits which accrue due to valuation of intangible assets (Damodaran 1994, pg 24).
Source (Damodaran 1994, pg 24)
Conclusion and future works
The issue of valuation of intangible assets has greatly evolved since its inception in the year 1980. It is important to value the intangible assets and brands of a given entity so as to come up with the actual value of the assets controlled by the business (Damodaran 1994, pg 24). There is still much to be done in the future with regard to the methods used in carrying out the process of brand valuation. Standards should be developed so as to ensure that there is a more conventional manner of carrying out the process of brand valuation (Damodaran 1994, pg 24). Valuation of brands and intangible assets of a company is very important since it gives the actual financial position of the company. The company uses the information generated from the valuation of its brands to judge its position with regard to consumer level and competition in the industry within which it is operating (Damodaran 1994, pg 24). Therefore the importance of brand valuation cannot be underestimated since a company needs to value its brand so as to decide what the next step is with regard to promotion of its products. Therefore it is safe to say that brand valuation also affects the marketing strategies to be employed by the company.
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