MARKETING FOCUS: Brands between the balance sheets - Brands are valuable assets but can be ignored in company accounts. David Haigh looks at new efforts to recognise brands’ true worth

The battle between marketing and finance departments has been raging for years, with each side struggling to understand and adapt to each other’s very different ways of working. Gradually, finance directors are resigning themselves to the necessity of marketing, but only after great efforts by marketers to demonstrate the effectiveness of their expenditure.

The battle between marketing and finance departments has been

raging for years, with each side struggling to understand and adapt to

each other’s very different ways of working. Gradually, finance

directors are resigning themselves to the necessity of marketing, but

only after great efforts by marketers to demonstrate the effectiveness

of their expenditure.

To make matters worse - or maybe better - this notoriously fractious

relationship is about to enter a critical new stage. From December the

Accountancy Standards Board’s (ASB) ’Financial Reporting Standards 10’

and ’11’ will begin to make a real difference to how brands are valued

by their parent companies. It marks the end of a long-running conflict

in the accountancy profession over how best to measure the value of


Now that the money men have gritted their teeth and agreed on the

standards, marketers can start turning the new rules to their


’FRS 10’ was published in December 1997 and is effective for accounting

periods ending on or after December 23 this year. Its objective was to

ensure that intangible assets - including brands - are charged to a

company’s profit and loss account.

Many companies have held back from implementing ’FRS 10’ until the ASB’s

latest and more detailed standard on brand valuation - ’FRS 11’ - was

published. This happened two weeks ago and there will now be six months

of intense activity in finance departments to meet the deadline.

Traditionally, accountants have simply written-off acquired ’goodwill’

and intangible assets and have refused to recognise brands as balance

sheet assets. One merchant banker dismisses the whole idea of brand

valuation by saying: ’You can make up any values you like and put them

on the balance sheet, but no one in the City is going to take the

resulting balance sheet seriously.’

The vast majority of UK companies have followed this approach. The

result has been undervalued balance sheets which flatter the performance

of management.

The treatment of intangible assets on balance sheets was either muddled

or simply ignored, so the hidden value of brands was not always


Hidden persuaders

Some marketing champions have tried to persuade the wider business

community about the value of brands. One is former Unilever chairman Sir

Michael Perry, who says: ’The major assets of a consumer business,

overwhelmingly, are its brands. They are of incalculable value,

representing both its heritage and its future. To succeed as a consumer

products business there is no alternative but to invent, nurture and

invest in brands.’

It was RHM that really made people take notice of brand valuation in

1988, while under threat of takeover by Goodman Fielder Wattie. RHM took

the law into its own hands and simply revalued its brand portfolio,

putting them onto the balance sheet. Its defence said: ’RHM owns a

number of strong brands which are valuable in their own right, but which

the stock market tends to consistently undervalue. They are not included

in the balance sheet, but they have helped RHM build profits in the past

and provide a sound base for future growth.’ RHM beat off GFW, but was

later taken over by Tomkins at a much higher price.

Other events in the 80s - such as when Philip Morris paid dollars 12.9bn

(pounds 8bn) for Kraft at four times its book value and Nestle paid

dollars 4.5bn (pounds 2.8bn), five times the book value when it bought

Rowntree - have highlighted the value of brands, and now even the most

conservative accountants have to admit their worth.

When Orange floated in 1996, it made great play of the ability of its

brand to generate customer loyalty. One analyst put a value of pounds

200m on the brand alone despite its relative novelty.

Even the government has cottoned on. Recently culture minister Chris

Smith asked for a full brand valuation of the BBC before granting

permission for the licensing of the BBC brand to a new commercial


Valuable assets

Those accountants that still doubt simply don’t believe brand values can

be reliably and consistently measured and they don’t know how long they

will remain valuable. They prefer to leave well alone.

This latest accounting development may seem of little relevance to

marketers but the reality is that the new accounting standards have

become a powerful catalyst for change on two fronts.

City analysts have woken up to the value of marketing generally and of

brands in particular. From now on they will be demanding much greater

disclosure from marketing people about their brands. In a recent City

report on brand financing, 80% of analysts asked for more information on

marketing and advertising investments by the companies they followed,

with 66% asking for more information on brand values.

Brand values played a big part in the takeover of Rolls-Royce. The

forecast value of the UK’s most famous car brand to either VW or BMW was

the driver of a bidding war for control of the company.

The areas where it seems clear that far more information will be

provided in future includes: segmentation of results by brand, region

and consumer group; qualitative and quantitative analysis of marketing

investment; revaluation of brands and long- as well as short-term

forecasts of performance.

ICI, for example, uses brand valuation to determine royalty rates for

licensing its brands both to group companies and to joint ventures


There is increasing pressure for companies to show five- or even

ten-year forecasts in their reports to analysts. Price Waterhouse has

led the charge for what it describes as ’Value Reporting’, which would

incorporate historic and prospective information of both a quantitative

and qualitative nature.

Performance indicators

The quid pro quo of the move toward more rigorous brand valuation

techniques is much more intense accountability measures for marketers.

There will be much greater scrutiny of performance and this is likely to

act as a catalyst for change within companies. Many are already

significantly upgrading the way the marketing department manages itself

financially and reports internally. It is now the rule rather than the

exception for financial managers to be intimately involved in the

measurement and evaluation of marketing. The fact that there are already

over 5000 UK accountants who actually describe themselves as ’marketing

accountants’ speaks for itself.

This trend will rapidly accelerate.

Under analysis

Accountants tend to be data-driven, to be consistent in their analysis

and to track performance on a regular basis. On the one hand, this can

be intrusive and mechanistic for many traditional marketers. On the

other hand, it means they can expect to see much improved IT systems,

quantitative market research and analytical reports at their


Those who have been crying out for customer, channel and brand profit

and value measurement will suddenly find that they have them - courtesy

of a better-informed finance function. With such systems and analysis in

place, accountants will feel more comfortable about releasing budgets

for investment in brands - but only if the numbers can be shown to stack


Even in relatively sophisticated companies, marketing and finance

departments have historically communicated poorly, a fact which has

frequently led to brand managers carrying little financial

responsibility for their brands.

This will change. Marketers will need to raise their game, in terms of

analysis, accountability and results. If they are not already doing so,

they are simply going to have to embrace the valuation and measurement

techniques espoused by the City and their finance directors.

The changes need not make marketers worry that accountants will be

seizing power at their expense. Accountants will find their work more

stimulating and productive. Marketers will be able to focus better and

with more support on the things which they do best. Chief executives

will have a more integrated team, producing better results which will

keep the City happy. That could lead to a virtuous circle.

The presiding aim of both finance director and marketing director should

be the need for more effective financial understanding of and interest

in marketing issues. As Voltaire suggested, victory will go to the best

shots rather than the heavy battalions. But to be the best shots,

marketers need to be able to see the targets with sights on which they

can rely. It is the financial function which will help define the

targets and calibrate the sights.

Who knows, marketers may even start to compliment the foresight of the

finance function, while finance people may start to understand and

respect the contribution of marketing to their company’s success. Maybe

that’s too much to ask, but there’s always hope.

David Haigh is managing director of Brand Finance, which publishes an

information booklet on FRS10 and 11. For a copy call Tracey McCulloch on

0181 943 0060.


1 Budget allocation

By connecting future business performance with current marketing

thinking, brand valuation provides a bridge between marketing and

finance people, allowing them to talk rationally about budget

allocations and predict where the greatest returns are likely to be.

It can also be useful in managing portfolios of brands, and in

allocating advertising budgets between brands, new launches, setting

discount policies or overseas extensions. This technique is employed by

Fazer, one of Scandinavia’s largest confectionery companies, with a

domestic and international portfolio.

2 New-product development Brand valuation techniques can be used to

model alternative new-business strategies. Which is the best market,

brand extension, consumer segment or npd strategy to maximise long-term

brand value?

For example, the marketing director of a UK financial services company

whose corporate name is also a significant consumer brand, used the

results of a brand valuation exercise to identify the potential increase

or decrease in brand value that would result from stretching the brand

into various new product areas.

3 Internal marketing management

A number of large, blue-chip companies now calculate brand earning

streams and brand valuations as a reference point for use by all

concerned in brand management (see Diageo case study).

Brand valuation reporting gives the marketing director an opportunity to

assess the success of brand strategies. It also provides an opportunity

to look at the success of particular management teams. For example, one

international cigarette company has introduced brand valuation manuals

for its brand managers worldwide to monitor values internally, and to

monitor the growth or decline of brand values in regular reports.

Cadbury uses brand valuation in its balance sheet and for the internal

management of its brand portfolio

4 Assessing agency performance Just as a number of marketing directors

believe that part of their rewards should be linked to long-term brand

values, some clients believe that agencies should be rewarded according

to the value they add to the brands they serve, rather than on the

number of awards they win or the amounts they spend in the media.

For those who view the raison d’etre of advertising to be the creation

of brands for clients, there exists a desire for this contribution to be



Until its recent merger with Guinness to form Diageo, Grand Met had a

portfolio of brands including names as prominent as Smirnoff, Baileys,

Haagen-Dazs, Green Giant and Burger King.

In 1988 Grand Met shocked the financial world by including its acquired

brands as intangible assets on its balance sheet. Being so rich in name

brands, it was little surprise that senior management appreciated their

importance to the long-term health of the organisation and wished to

reflect this in the company accounts. The 1988 balance sheet included

brands with a cost of pounds 608m.

To the board of Grand Met the fact that a series of expensive and

high-profile acquisitions might not have been included in the accounts

seemed an absurd contradiction and would have left the company

perilously undervalued.

Accounting anomaly

An anomaly remained. Only acquired brands were included on the balance

sheet despite the obvious value to Grand Met of their internally

generated brands.

Similarly, early valuations were based on historical earnings multiples,

a method not currently seen as accurately reflecting the true worth of a


Grand Met’s response to this problem - and evidence of a real bridge

being built between marketing and finance functions - was the

introduction of its ’brand equity monitor’.

The purpose of this was not to place a historical value on a brand, but

to give management an idea of the performance of brands. The factors

measured could not be calculated in purely profit and loss terms and the

monitor included both economic, consumer and perceptual measures of

performance, which together formed a subtle and responsive mechanism for

tracking both brand health, and if necessary, financial brand value.

Equity monitors

The process has been extended from its early beginnings and Diageo now

monitors a number of key financial and marketing indicators to establish

the level of brand equity.

These indicators focus management’s attention on gaining customer

awareness, loyalty, market share and the brand’s ability to charge a

price premium. It is this premium which communicates the value of a

brand to the company’s stakeholders.

There are a number of checks used by Diageo staff to assess the trends

in brand equity. A sample of these measures includes awareness,

advertising spend, market penetration and share of display.

Management is able to gauge the relative health of brands from a flow of

consistent and reliable data.

The fact that the vast majority of this data will never be included in

the company accounts is irrelevant; its purpose is to provide a degree

of strategic and operational control over the group’s most valuable


However, the catalyst for these developments was the need to adequately

reflect, purely from a financial reporting perspective, the value of



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