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Brands may be a company's most valuable asset, but how beneficial
is it to list their worth on the balance sheet? Jane Simms investigates
Intangibles - knowledge, systems, data, R&D, people, intellectual property, brands and market relationships --are now estimated to account for 75 % of a company's worth.
For some companies, the figure is even higher. Coca-Cola attributes only 7% of its value to its plants and machinery; its real value lies in its intangible assets, not least its brand.
And Intel, the microprocessor comany that makes more profit than the world's ten biggest PC manufacturers combined, says that 85 % of its worth lies in its brand equity and intellectual capital - its brand name, patents, know-how, staff and processes.
Yet current accounting practice and standards don't reflect this new Business reality. While Nestle paid L2.5bn for Rowntree in 1988, the later's balance-sheet value stood at just L400m. While the premium Nestle paid reflected the potential value of Rowntree's distribution, customer relationships and branding know-- how, the lion's share was made up of Rowntree's confectionery brands -- Kit Kat, After Eight and Polo.
Thirteen years on, brand value still isn't accurately reflected on balance sheets. Since 1998, companies have been required by law to list acquired goodwill (intangibles) on their balance sheet. But this figure does not have to be broken down into its constituent parts - including brands.
Moreover, companies can only list acquired brands: homegrown brands cannot be put on the balance sheet. And even acquired brands can only be listed at acquisition price- despite the fact that in well-run companies, their value should rise every year.
Standard-setters such as the Accounting Standards Board (ASB) insist that this state of affairs remains the same as they believe valuation is subjective,and could lead to inconsistencies and potential abuse.
If a company wants to keep an acquired brand on its balance sheet,it has to subject it to an annual `impairment review' to prove that the value hasn't fallen. If it has, it must be reflected on the balance sheet, in stark contrast to the lack of provision for the value to be revised upward.
If a company chooses not to keep the brand on the balance sheet following the first compulsory...