Brands in the balance sheet
Why the Microsoft brand is not in its balance sheet, yet the LinkedIn brand will be.
More and more I’m asked about whether brands can be, or are, in the balance sheet – a funny question. There are a few things to explain here, and we’ll start with a contradiction, that is: future and past mixed together in one – potentially.
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There are many questions to consider, let me give you an array of these:
Can we place our brand – our most valuable asset – in the balance sheet?
We have a brand in the balance sheet – what happens if its value changes?
Can you elaborate on the confusion of the term ‘brand equity’ between the marketing/branding and financial world?
It’s fascinating to me to see that interest on this topic constantly increases, whereas understanding is lagging behind. To me, there’s a couple of things to elaborate on to provide you with the easiest overview on the subject.
LinkedIn brand on Microsoft’s balance sheet
Brands (trademarks) were not included in any balance sheets until 2005. The reason being that it wasn’t allowed by the international accounting standards (IFRS) to do so. The reasoning was that brands wouldn’t meet the criteria to be regarded as an intangible asset according to the set definition. However, this changed on 1st Jan, 2005. IFRS 3 came out at the time, and it requires companies to post brands in the balance sheet when acquired from external parties. As it’s still not allowed to post in-house created brands in the balance sheet, we’re now in a situation where acquired brands are in the balance sheet, and in-house created brands are not. Simply put in a real life example: Microsoft acquired LinkedIn earlier this year. On Microsoft’s balance sheet we won’t see any brand value for Microsoft – as it was created in-house. However, the acquisition of LinkedIn means that the brand value of LinkedIn will show on the Microsoft’s balance sheet. Roughly estimated, the brand value of LinkedIn amounts to around USD$1-1.5bn, hence we’re not talking small change here.
So what happens when one has acquired a brand – and pasted it in its balance sheet – and the brand value goes up and down over time?
According to the IFRS standards, a company has to test whether the value of its assets has changed every year, this process is called impairment. Interestingly enough, the value of brands is very much related to expectations about the future. If they change positively or negatively, they can impact the net present value of the asset hugely.
Again in financial terms – here are two situations:
– The value has risen: the posted value in the balance sheet will remain unchanged
– The value has decreased: the company will have to write off the loss in its results. Quite often we see that this is a cause for surprises in the financial reporting of companies, something that’s not appreciated by the stock markets
For non-financial people this is the second anomaly in how brands are being dealt with financially. First, there is the non-acknowledgement of in-house created brands, and second, when speaking of acquired brands, only decreases in value are taken into account!
Is there an upside to all of this?
Absolutely! I see that this is a long journey for the financial world to its increase recognition of brands. It’s started with acquired brands only, and over time they’ll find ways to make more comprehensive systems to recognise in-house systems as well. Equally, it has attracted the CFO’s awareness to the value of the organisations’ most valuable intangible assets, whereas before they were much less recognised.
Establishing the link between brand value and shareholder – the holy grail
Another outright example of this movement is recent news from Brand Finance. They’ve announced that Solactive AG are setting up an index-fund, solely created in light of the link between brand value and shareholder value. According to a Brand Finance study, the average return between 2007 and 2015 across the S&P 500 was 49%. However, if Brand Finance’s data was used to create index funds each year, investors could have generated returns of 97%.
For me, it's fascinating how the financial and marketing world are moving closer to each other on the branding domain. What I can see though is that it's a long journey and there's a clear need for education on both sides whilst we're on the journey, as there are inconsistencies that make it a bit complicated along the way.
Who owns the brand equity domain now?
Here there’s no confusion, this is in the marketing and/or branding domain. For marketers though, it’s important to understand how the financial domain is dealing with brand value, as this might affect decisions on branding as well. I see a lot of confusion around the term ‘brand equity’. For marketers, this is the set of drivers that attract customers and audiences by differentiating from other brands. For financial teams though, equity refers to capital gained in a company, which is totally different thing.
More interaction, discussion and education is needed to bridge this understanding gap in the future. I think most of the driving has to be initiated by marketers, as they’re driving brands, and need to pave the way for more sophisticated brand management. And in a world where the speak in board rooms is mainly financial, the justification for all actions needs to be substantiated in this language.
For me, it’s fascinating how the financial and marketing world are moving closer to each other on the branding domain. What I can see though is that it’s a long journey and there’s a clear need for education on both sides whilst we’re on the journey, as there are inconsistencies that make it a bit complicated along the way.
I’m passionate about the subject, I think that’s clear from the outline above. Should you want to discuss or elaborate, just let me know as I’m always happy to chat and get lost in a conversation.
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