An asset, ill-defined
In October 2015 Anheuser-Busch InBev, the multinational brewing and beverage company, agreed to buy its rival, SABMiller, for US$104bn. If the deal is approved, it will make AB InBev the biggest beer company in the world. Roger Sinclair, a fellow of the Marketing Accountability Standards Board (MASB), estimates that the value of SABMiller’s brands could be assessed as high as US$30bn. That dollar value will end up on AB InBev’s balance sheet as a permanent asset. However, owing to a glaring gap in global accounting standards, AB InBev’s own home-grown portfolio brands—which include Budweiser, speculated to be worth US$22.3bn on its own— cannot be included on the balance sheet.
International Financial Reporting Standards(IFRS) and the US Financial Accounting Standards Board (FASB) both require companies going through mergers or acquisitions to assign a financial value to brands being acquired based on what the buyer is willing to pay, yet these same accounting boards insist that if an intangible asset is home-grown, it cannot be considered as a financial asset. Moreover, brands that are acquired can never increase in value, because no standard exists to assess their growth. Mr Sinclair refers to this as the “moribund effect”. As he explains: “Any gain that the acquiring company achieves through good marketing will be hidden due to the current requirements of the accounting standards—and value ignored is value lost.”
So Coca-Cola—the world’s most recognised soft drink—is worth nothing to the company’s balance sheet because it is a “heritage brand”, yet Vitaminwater, the mid-market line of “enhanced waters”, is worth US$4.1bn, because that’s what Coke paid for it in 2007. “It’s absurd,” says Kevin Lane Keller, professor of marketing at the Tuck School of Business, Dartmouth College, and author of Strategic Brand Management, a widely referenced text on brand management. “For many companies, their most valuable asset is their brand, but there are no agreed upon methods to measure it.” This lack of standards leads most CFOs to shy away from measuring the value of their brands—even off the record.
The valuation conundrum
AXA, the French multinational insurance company, relies on the annual Best Global Brands report published by Interbrand, a brand consultancy, to track the financial value of its brand, says Frédéric Tardy, chief marketing and distribution officer. AXA closely watches the Interbrand ranking, which evaluates the influence and strength of a brand based on company financial performance, brand influence on purchase decision, its weight on its market and an estimate of its future earnings, and announces the ranking to the press and investors every year. In 2015 AXA was ranked 48th (out of 100), with a brand value of over US$9bn, a 14% increase on 2014. “Having a strong and influential brand is key for us as it…gives visibility in a more competitive and rapidly evolving world,” Mr Tardy says. However, despite the emphasis AXA places on its brand ranking and the value that ranking brings to the business, its own executives do not assess their brand’s value and have no plans to do so, he adds.
Other leading global brands understand the immense value this brings to their businesses, and they love to talk about the importance of brand awareness or engagement, but that’s where measurement ends for most of them, says Rita Clifton, chairman of the branding firm BrandCap and former CEO of Interbrand. “They know it is important, but they will not tie a hard economic number to it because classic accounting is not designed to measure the value of intangible assets.” Ms Clifton notes that brand valuation methodologies vary and that they all produce different results. “Demonstrating the value of the brand as an asset can be important, even if few CFOs are able to put them on the balance sheet. What’s critically important is understanding and demonstrating how a brand generates value across all the activities of a business.”
A breath of change?
While external financial reporting need not limit the internal metrics used to plan business activities, in practice this tends to happen. Lacking a set standard, the finance function tends to avoid assigning value to its brands, at least publicly, and companies tend to focus instead on qualitative assessments, such as brand awareness, customer engagement and perception of quality.
While these metrics can inform growth expectations, they do not assess the true value that the company might have created by growing its brands. But things are changing, according to Mr Sinclair, who has spent years fighting for a formal measure to account for financial reporting for brand value. In 2014 the International Accounting Standards Board (IASB), which is the standard-setting body of IFRS, completed a review of feedback from investors and regulators on a potential process to conduct fair-value measurements of intangible assets, including customer relationships and brand names.
“Most users said the proposed measure was useful, but that it was complicated and expensive,” Mr Sinclair says. This suggests that it is a tool they would like to have if it could be integrated more easily into their accounting practices. The IASB has made establishing a standard to account for brand value a medium priority for its research agenda over the next three years.
Yahoo’s CFO Ken Goldman may take great pride in the fact that the search engine and news source has global recognition, but he has no plans to site this on a balance sheet. However, if accounting standards boards were to implement a standard for assessing brand value, it would be binding, which means organisations such as Yahoo would have to comply, and that’s fine with Mr Goldman—assuming it was objective, quantifiable and comparable across industries. “If there was a hard-numbers approach to measuring brand value, I would pursue it,” he says. “If I could show an increased asset base, and therefore an increased equity base, that would add real economic value for the company.”
“Without general practice to follow, the idea of tying value to the brand stymies most accounting groups,” he says. When companies try to assign value to concepts such as brand and customer engagement, it tends to be siloed in the marketing department. Mr Goldman works closely with his marketing team and will assess the return on investment from advertising and sponsorship projects, but does not tie this back to the company’s net worth.
Aligning functions
Tracking brand metrics can help both finance and marketing to stay abreast of market values and thus more accurately predict their future revenue and profit. But even here qualitative measures predominate, says Jack Hollis, Group VP of marketing for Toyota Motor Sales in the US. Mr Hollis meets monthly with CFO Tracey Doi to review his marketing budgets and determine how investments are enhancing the Toyota brand. Mr Hollis’s group defines return on investment (ROI) in terms of seven key metrics, including brand awareness, intention to purchase and perception of safety and quality, all of which he tracks using data from dealer reports, customer surveys, manufacturers and third-party industry guides. “They are all guest-centric metrics that we can tie into brand value,” he says.
Such brand value metrics give Mr Hollis and Ms Doi valuable insight into consumer purchasing decisions and how to make the most of brand investments, Mr Hollis explains. For example, three years ago brand metrics showed a diminished response to the company’s tagline “Moving Forward”. So they recrafted the branding strategy with a new “Let’s Go Places” campaign, and since then the metrics show that Toyota has returned to frst place in several metrics, including sales to key demographic groups. “By tracking those metrics we were able to focus our spending on building brand health,” he says.
Purchasing intentions and the willingness to pay a premium, while probabilistic, offer insights that can be used to improve forecasts of business revenue and profit. A closer collaboration between marketing and finance will be necessary to deliver real returns. Mr Hollis asserts: “Having a strong relationship with finance allows us to take more risks, and to allocate money to support the brand where we see the greatest opportunity for ROI.”
What is finance’s role in measuring and monitoring the new value drivers in today’s digital economy? Read The Digital Finance Imperative, a new report from CIMA and AICPA, sponsored by Oracle, to find out.
