The International Brand Valuation Manual

A complete overview and analysis of brand valuation techniques, methodologies and applications

Gabriela Salinas

• Publisher: Wiley
• Year: 2011
• ISBN:
  9780470685501
• Edition: 1
• Topic: Commerce
• Subtopic: Marketing international

The International Brand Valuation Manual is a detailed and extensive review of the main brand valuation models. The book reveals the state of the art in the field of brand valuation and coherently relates major trends in the theory and practice of brand valuation. This "one-stop" source is for valuation professionals as well as financial and marketing specialists who need to have an understanding of the principal valuation methods. Salinas also analyses the respective efficacy, advantages, disadvantages, and prospects for the future for each method.

The book:

- Provides a thorough overview of all the tools available for the brand valuation practitioner.

- Offers an informed view on which methodologies are most suitable for different types of applications, and explains why.

- Acts as an all-in-one source of reference for specialists who advise clients on which methodology to employ, or who are considering adopting one themselves.

- Features case studies and examples from Guinness, PwC, Rolls-Royce, Santander, Shell, Telefonica, Unilever, BMW, Hanson Trust, Cadbury-Schweppes, Kellogg, Coco-Cola, Mercedes, Rolex, among others.

Gabriella Salinas is the Global Brand Manager at Deloitte Touche Tohmatsu, Madrid, Spain.

1
The Concept and Relevance of Brand

IN THIS CHAPTER, WE WILL EXAMINE VARIOUS CONCEPTS OF the term brand and discuss its economic value. Before analyzing different methodologies, we will need to clearly define brand and the economic value of brands, as well as explore how these relate to the associated concepts of corporate reputation, intellectual capital and intangible assets.

We shall also look at the economic significance that these notions have acquired in recent decades, both on a national and a global level, and discuss the various accounting, legal, institutional and business developments that have resulted from this growing importance.

1.1 The Concept of Brand

Before valuing any asset, we must first define it. This is particularly essential when dealing with brands. The word brand is used quite frequently and has consequentially assumed multiple and at times very different meanings. Defining an asset before valuing it helps limit the scope of the valuation model to be applied. Therefore, familiarity with the various concepts of brand, as well as a good understanding of the circumstances in which each concept is relevant, is absolutely essential for any valuation expert.

In this section, we will review three concepts of brand based on accounting, economic and management-oriented perspectives, respectively. Each one is relevant and applicable to particular circumstances.

1.1.1 The Accounting Perspective

1.1.1.1 The Brand As an Intangible Asset

IFRS Framework defines an asset as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.” International Accounting Standard 38 Intangible assets (issued 2004, amended 2008, para. 8) defines intangible asset as an “identifiable non-monetary asset without physical substance” and establishes that an asset is identifiable if it either arises from contractual or other legal rights or is separable (able to be sold individually or among other related assets).

IAS 38 (para. 21) indicates that “an intangible asset shall be recognized if and only if, (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably.”

Later we will evaluate some specific questions relating internally generated intangible assets, but we will now outline some examples of recognizable intangible assets acquired separately by the entity:

• Marketing-related assets: Trademarks, trade names, internet domain names, trade dress, etc.
• Contractual assets: Licensing agreements, contracts for advertising, construction, management, service or supply, lease agreements, franchise agreements.
• Technology-based assets: Patented technology, software, databases, trade secrets.
• Customer-related assets: Customer lists, customer relations and contracts, production orders.
• Art-related assets: Plays, operas, ballets, books, magazines, newspapers, musical works, films.

Clearly, this catalog omits several concepts popularly referred to as assets. Corporate reputation, human resources, and employee motivation do not constitute recognizable intangible assets because they are not identifiable (they may not be bought or sold), nor are they controlled by the company itself (its reputation is a consequence of its actions; employees have the right to end their contracts at any time). Later on we will evaluate whether these concepts can be considered non-recognizable assets, or intangible resources; or if they should be excluded from both classifications.

1.1.1.2 Non-Recognizable Intangible Assets: Internally Generated Brands

Internally generated brands fall into the category of non- recognizable intangible assets. IAS 38 (para. 63) states: “Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.” These expenses are not distinguishable from the cost of developing the business activity as a whole. Although they do not meet the three requirements established in IAS 38 for tax and accounting-related recognition, they are still controlled by the firm, and do represent a source of future economic benefits. They therefore qualify as assets, despite their non-recognizability for tax and accounting purposes.

If the brand were acquired in the context of a business combination, the accounting conclusion could be different.

IAS 38 (para. 33) indicates that in accordance with IFRS3, “… The probability recognition criterion in paragraph 21 (a) is always considered to be satisfied for intangible assets acquired in business combinations. If an asset acquired in a business combination is separable or arises from contractual or other legal rights, sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable measurement criterion in paragraph 21 (b) is always considered to be satisfied for intangible assets acquired in business combinations.” Paragraph 34 also states that “an acquirer recognizes at the acquisition date, separately from goodwill, an intangible asset of the acquiree, irrespective of whether the asset had been recognized by the acquiree before the business combination.”

Finally, the International Financial Reporting Standard 3 Business Combinations (IFRS 3, issued 2008, para. 13) comments regarding the recognition of intangible as distinct from goodwill, “… For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognize as assets in its financial statements because it developed them internally and charged the related costs to expense.”

Thus, resources that are controllable by the company and that constitute a source of future economic benefits, such as internally generated brands, are considered assets though they are non-recognizable for accounting purposes (with the potential abovementioned exception when acquired in a business combination). From a pure “economic” perspective, these two features, together with the aforementioned non-monetary and non-substantial qualities, are the only ones truly relevant for the definition of intangible assets.

1.1.1.3 Trademark, Brand and Branded Business

In various contexts and circumstances, brand is used to refer to three different concepts (Haigh and Knowles, 2004):

1. A name, a logo and other associated visual elements: This is the most specific definition, as it focuses on legally protectable verbal and visual elements that may be used to differentiate the products and services of one company from those of another. The principal legal elements at work in this definition are trade names, logos and trade symbols. According to Haigh and Knowles (2004) trademarks are valuable when they carry “associated goodwill.” Valuations based on this definition are referred to as “trademark valuations.”

2. A broader scope of elements including name, logo, other verbal and visual elements, and associated intellectual property rights: Under this definition, the concept of brand is stretched to include a broader scope of intellectual property rights, such as domain names, product design rights, trade dress, packaging, copyrights on associated logotypes, descriptors, sounds, colours, smells, etc.¹ For example, under this definition, Guinness’ valuation would not only have to look at its name and logo, but also consider its formula. This more holistic vision reflects the notion that a brand is an experience that transcends logo and related visual elements. This definition is generally applied in marketing-oriented brand valuations. But it may also apply to valuations for accounting purposes, as IAS 38 (para. 37) allows for the aggregation of acquired intangible assets when they have similar useful lives or their fair values cannot be reliably measured on an individual basis. In this case, the acquirer could combine the trademark and related intangible assets into a single group (“brand”).

3. A holistic company or organizational brand. The term brand is frequently used to refer to the business unit that operates under that brand. For example, when Unilever speaks of having 1600 brands, and is hoping to reduce that number to 400, what it means that it has 1600 individual branded businesses in its corporate business portfolio, and it needs to value and discard 1200 non-basic “brands.” Both verbal and visual elements are taken into account in this definition, as well as associated intellectual property rights, along with the company’s culture, personnel and programs, which provide the basis for the company’s differentiation and value creation. Considered jointly, they represent a rather specific proposition of value, and lay the groundwork for building close relationships with consumers, providers and personnel. In this book, we will refer to this concept as “branded business.”

English has two different terms for referring to the first two definitions: trademark (name, logo and other associated visual and verbal elements) and brand (formulas, know-how and other intellectual property assets). But in English, brand and trademark are often used synonymously. Certain authors, such as Smith (1997), distinguish between the two concepts, characterizing brand as a marketing concept referring to a set of assets includin...