Both sides of the debate concerning increased disclosure have equally persuasive arguments. On the one hand there is the need to protect commercially sensitive information from competitors. On the other, there is a need to give investors a more thorough understanding of key business drivers – with more data, investors will be able to place a more realistic value on the stock.
The continuing debate over financial disclosure also applies to how companies plan to report brand value to an increasingly sophisticated investor audience. But there are some specific factors which influence brand value reporting. These include the development of international accounting standards relating to corporate brand reporting practices and the changing role of brands in the merger and acquisitions process.
Brands impact future performance and value. According to Marcel Knobil, chairperson of the Superbrands Organisation, ‘Branding contributes significantly to the value of a product or service. A brand distinguishes a product or service from competitors, ensuring that it is the first to come to mind. Brands reassure potential customers, provide strong reasons for usage and ultimately generate increased sales.’
Apart from the role they play in value creation, brands have also driven consolidation in many industries. Acquiring world-class brands is a major goal in many consumer-facing industries.
For companies without a balance sheet figure or narrative information on the role and contribution of the brand, it is often difficult for investors to gauge whether the amount offered is fair and takes into account the brand values and contribution to future value.
The current international accounting standard relating to brand reporting, IAS38, requires companies to capitalize acquired goodwill on the balance sheet. However, there are no obligations to separate goodwill categories and in practice, few companies do. There are also strict regulations ensuring internally generated intangible assets are not capitalized on the balance sheet. This results in bizarre anomalies: companies like drinks group Diageo can capitalize an acquired brand such as Smirnoff but not an equally valuable, internally generated brand like Bailey’s.
Anthony Carey, head of the Centre for Business Performance at the Institute of Chartered Accountants in England & Wales (ICAEW) believes ‘there is now a need to get reliable information on the value of marketing assets including brands.’ However, while Carey supports greater disclosure in the narrative section of annual reports he is reluctant to support the idea of placing actual brand values on the balance sheet. He points out that a lone brand value figure in the accounts could generate mistrust amongst investors, particularly when it appears without supporting methodology.
Sir David Cairns, former secretary-general of the International Accounting Standards Board, agrees that intangible assets are becoming more important to listed companies. ‘Additional narrative information is the immediate way forward,’ Cairns maintains.
This would provide analysts with the information they need when calculating company values,’ he suggests. ‘Segmented information on sales revenue per brand, marketing expenditure per brand and profit per brand would be useful,’ he adds.
Cairns believes that research and experimentation are necessary if brands are to be effectively communicated on the balance sheet, including the development of a standardized methodology for accounting for brands.
One controversial feature of international accounting rules is the presumption that intangible assets depreciate in value just as tangibles do. ‘In reality brand values may increase over time and certainly are likely in many cases to have an economic value beyond the 20 year maximum allowed by the standards,’ says Tony Tollington of Middlesex Business School’s accounting and finance faculty. He believes these standards are slowing the growth of brand value reporting; and calls the former GlaxoWellcome’s failure to include internally generated brands and patents in its balance sheet ‘nonsensical’, given that these intangible assets represent the mainstay of its business.
Tollington’s views are echoed in a report from accountancy group Arthur Andersen called In the beginning – Corporate reporting in the new economy. It states that ‘for many companies, brands are one of the most visible intangible assets. The study indicates that companies are using the narrative section of the report to emphasize their brands.’ However, the report continues, ‘Despite the importance placed on brands in the narrative section, very few companies have capitalized their brands as intangible assets.’ Only three of the 50 companies in the Arthur Andersen study separately identified brands on their balance sheet.
A seven-year rolling study by Middlesex Business School and reporting consultancy Brand Finance backs up Arthur Andersen’s findings, revealing that not only do very few UK companies capitalize brands, but that the number is actually decreasing. While in 1993 eight companies out of a total of 227 disclosed brand values, by 1999 this number had decreased to six. Conversely, the number of companies disclosing goodwill increased from five to 131, with the values involved increasing from £113 mn to £40.87 bn.
According to Tollington, ‘While there is argument concerning what goodwill actually is, the fact remains that it has become a major element within the balance sheet.’ This, he believes, harms investors by attaching a large amount of value to an asset that is indescribable and often not accountable to management. Instead, Tollington believes goodwill should be separated into its constituent parts to give investors a greater understanding of the assets.
Accounts bypass
In late 1999 Inside Out – Reporting on shareholder value, an ICAEW report, stated that ‘in its present form, the annual report includes too little strategic and other future orientated information to retain its importance as a source of information for investors.’ It suggests that traditional accounts are being bypassed by investors hungry for information on the drivers of business, including factors such as marketing information.
‘Intangible assets such as brands are becoming increasingly important in gaining an understanding of future profitability,’ claims Neil Ryder, senior partner of London-based IR agency Sage Partners. In his opinion many companies have misunderstood what investors are looking for and that the ‘accountancy mindset’ inherent within companies is still focused on cash flows, in contrast to the forward-looking data required by investors and fund managers. ‘Fund managers are demanding [intangible asset data] and this has encouraged sell-side analysts to increasingly call upon companies to increase disclosure in this area, but it is still not enough at present,’ asserts Ryder.
The case for brand value reporting, a report published last year by Brand Finance, argues that increased disclosure is not the evil many companies believe, and value can be enhanced by giving investors additional information. The report, which investigated the views of 292 City of London-based analysts and 47 IR professionals, focused on whether analysts believe companies should disclose more information on their marketing and branding strategies. It revealed that 73 percent of City analysts and 72 percent of companies would like brand values to be disclosed in the annual report. This compared to 53 percent of analysts in the first study back in 1997. The report concludes that the growth in demand for information on intangibles is testament not only to the growing importance of brands and the values they represent but also to an increasing frustration with companies’ secretive attitude towards disclosure.
Ben McClure, an equity analyst at Old Mutual Securities, echoes the sentiments expressed in the report. ‘Brands play a big role in the process of analyzing where the company is and what its long-term prospects are,’ he says. And Malcolm Gilbert, IR director at UK insurer Royal & Sun Alliance, agrees: ‘Investors do not get enough general product and marketing information.’ However, he believes such information ‘would be in supporting literature, not in any part of the financial information. While investors need to know our market position and standing to help their investment case, that issue is wider than the brand.’ McClure is also reluctant to support compulsory use of brand values in the balance sheet, but insists that companies need to increase their ‘narrative or presentation of brands and their values to investors through other means’
Pressure from investors, analysts, listed companies and even accounting bodies to increase reporting of brand information is mounting. Though there is still some skepticism about the validity of brands on the balance sheet, the majority of analysts and investors would be interested in seeing the values presented.
Brands are key to corporate value and it seems that despite the restrictive accountancy regulations, brands – and their value – will become more central to investor communication in the future. It’s time companies took action to keep up with demands and increased disclosure in this area.
David Haigh is chief executive of Brand Finance plc, an independent brand valuation and evaluation consultancy in the UK with experience in brand valuations for investor communications
