There is no debate about the value of brands and other intangible assets. Brands are generally thought to account for more than one-third of the value of businesses listed on the Standard and Poor’s 500 Index. Contrary to some reports, brand value can be measured in economic terms, and the economic value of brands continues to increase over time. Statista reports that the value of the world’s one hundred most valuable brands increased from five trillion dollars in 2020 to $ 8.7 trillion in 2022. Successful brands have economic value because they influence consumer choice and the size of the price premium consumers are willing to pay. This market power has other benefits: it helps attract talented employees who take pride in offering a valuable product or service to consumers and it can lower the firm’s cost of capital.
Outdated Accounting Standards
Given the importance of brands and branding, a frequent question that arises is why senior management does not pay more attention to the health of brands and why senior managers are not more commonly incentivized to build brands. One reason rests on antiquated accounting standards in the United States. Brands and their value rarely appear on the firm’s balance sheet. The exceptions are brands that were created outside of the firm and were subsequently acquired. The value of brands created internally is not reported at all. Even those acquired brands that do appear on the balance sheet must appear at the value at which they were acquired. These practices lead to what has been called the “moribund effect,” an accounting phenomenon by which the value of a brand that is acquired, measured, and added to the balance sheet by a company remains unchanged no matter how well the brand might perform for that company over time. In fact, the value can change, but only in a negative direction if the firm decides to declare an “impairment,” a reduction in the value of a brand, such as Procter and Gamble did with its Gillette brand in late 2023. Thus, brands, even if they do appear on the balance sheet, can only decline in value; they can never increase in value (absent a sale) under current U. S. accounting standards.
It is difficult to hold management and the board of directors accountable for an asset that cannot increase in value. But things are changing. A number of third-party firms are now in the business of valuing brands because investors find such information useful when making their own investment decisions. The new European Sustainability Reporting Standards include a requirement for reporting on the management of brands and the International Standards Organization (ISO) now has standards for managing and reporting on the management and valuation of brands.
There are real issues associated with putting brands on the balance sheet, which is why accounting standards in the U.S. do not require such reporting. For example, if brands are valued in terms of discounted future cash flows, which is arguably the most defensible method of valuation, the value is influenced by such factors as interest rates over which the firm and its management have no control. However, such problems with the reporting of the value of brands on the balance sheet do not preclude other types of reporting. The Marketing Accountability Standards Board (MASB) has long advocated some form of reporting on brand management and changes in brand value short of placing brands on the balance sheet, not unlike what some firms now do with R&D investments.
The Dawn Of New Accountability
The world is moving toward greater accountability for managing brands and other intangible assets. New, emerging standards will eventually force reporting. Senior management would do well to be proactive in encouraging the development of reporting standards in the firms they manage. The Board of Directors has a fiduciary obligation to do so. Investors will increasingly demand such reporting, and as reporting becomes more routine, it will impact the cost of capital of firms that do not report. Such reporting will make senior managers more accountable, especially if bonuses are made contingent on the successful management of brands. Of course, some managers will not do well when held accountable, but this is another way to ensure managers perform. It may also come to highlight sets of management skills that are undervalued under current practices – like marketing.
Brands and branding are here for the long term. It is time for management accountability to catch up.
Contributed to Branding Strategy Insider by: Dr. David Stewart, Emeritus Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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