A key question for many business leaders today is, “How do I manage to keep my existing clients while attracting new customers?” Building and sustaining a unique corporate brand is one of the tools that will allow you to do that.
Tim Ambler, retired from the London Business School, defines brand equity as a marketing asset that resides ‘between the ears’ of consumers, trade customers, staff and other stakeholders, which stimulates long-term demand, cash flow and value.
It’s clear that well-constructed brands are valuable, but are they real assets?
In other words, can the costs associated with researching, designing, building and communicating a corporate brand be recorded as a capital asset on your company’s balance sheet?
International Accounting Standards Opened Doors to Capitalizing Brands
Regrettably, if you were to ask your local accountant or traditional CFO they will likely say no. But, the good news is, innovations in accounting are opening doors for leaders to have their cake and eat it too.
In 2011 Canada adopted International Accounting Standards (IAS & IFRS), and the rules of the game changed. That decision opened many new doors in the treatment of intangible assets.
So, the short answer is, yes.
If (and it’s a big IF) your brand is handled properly from a management and an accounting perspective, IAS will allow a company to capitalize their brand asset, enhancing their competitive advantages while strengthening their balance sheet in the process. Although a brand is essentially a set of commercially relevant perceptions that reside elsewhere.
Yet, legally, a brand is a resource owned by the company from which it expects future benefits.
That’s the definition of an asset under IAS.
But, of course, brands are not traditional assets, something that you reach out and touch, they are intangible assets. The IAS definition is: An identifiable non-monetary asset without physical substance.
Proper documentation strengthens the company’s core financial metrics.
However, don’t be fooled by the wide breadth of these IAS asset definitions, the secret of capitalizing an intangible asset lies in meeting the ‘critical attributes’ from a handling perspective: Thus, the three critical attributes of an intangible asset are (IAS 38.8):
- The asset must meet the GAAP standards of identifiability;
- The company must demonstrate its control – the power to obtain benefits from the asset (ref: IAS 38 – IN5, IN6 & IN7)
- There must be an expectation of future economic benefits (such as revenues or reduced costs in future).
One of the great misunderstandings for business leaders today is the distance that exists between normal accountants (the GPS of the accounting world) and intangible asset specialists (the brain surgeons). Intangibles are now driving the majority of value in companies and, quite frankly, there are very few accountants who are expert in their identification and treatment.
Ultimately, what is a brand?
A brand creates and sustains an emotional bond between the company and key stakeholders; a name, term, design, symbol, and/or other features distinguish it from its rivals. In fact, it’s a defensible piece of legal property that delivers real value to a company.
Asset Type > Asset Class > Asset Portfolio
In the newly emerging taxonomy of intangible assets (an initiative of London-based Rethinking Capital), brand is an asset ‘type’ under the consumer-based relational capital ‘asset class’, which itself is part of the Good Will relational ‘asset portfolio’. So, familiarity with the taxonomy is vital to proper identification, the first step recording the value of brand as a capital asset.
Demonstrating control over the brand and future benefit calculations involve both legal and sophisticated market analytics. Typically measurement tools would involve these metrics:
- Legal review and risk analysis
- Market review and risk analysis
- Competitor review and risk analysis
- Brand image review
- Brand business review
Brand development costs should be identified, coded into the bookkeeping system and documented officially. These costs are then capable of being amalgamated together and recorded under the specific asset categories on the balance sheet.
Another critical factor of intangible assets resides in reporting standards. Brands are different, they are intangible assets with indefinite life, and, as such, should not automatically be amortized.
Most brands deliver sustained value to the company and therefore should be recorded on the balance sheet at historical cost, as a capital asset, and be subjected to annual impairment testing.
The bottom line: brands are valuable resources to any business. Proper documentation of the value delivered, coupled with comprehensive documentation and expert handling can build not only a valuable management grade asset but also a real asset that strengthens the company’s core financial metrics.
Sharon A.M. MacLean, Social Marketing Strategist/Experienced Magazine Publisher*Coach*Best Selling Author of Build to Grow.
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