Accountants are paying attention to brands - BD November 2000

At the start of this year financial directors were drawn closer to their marketing colleagues with the advent of accounting standards that deal with intangible assets. To many financial managers, brands and marketing used to be areas of irritating mystery that swallowed large chunks of the company’s budget the spending of which was rarely explained in any adequate manner. These standards (namely AC 129 and AC 131) for the first time require auditors to recognise acquired brands (and other intangibles including goodwill) as assets and place them on the balance sheet.

In other countries where these standards have been adopted, the UK for example, the elevation of the brand to asset status has had a marked effect on the often-strained relationship between financial managers and their marketing counterparts. Evidence of this was found in a survey conducted in 1999 by BrandMetrics which established that marketers were on the boards of only 19% of Top 100 South African companies. This is similar to the findings of a study conducted in the UK a few years ago. Clearly marketing has not been viewed as sufficiently important to warrant board representation.

The new standards were developed by the London based International Accounting Standards Committee (IASC) over an eight year period that started in the late 1980s. The mobilising force behind this was action taken by financiers trying to overcome historic accounting conventions that had them wiping out shareholder funds by deducting acquired goodwill. The solution was to treat the brands they bought in takeovers as intangible assets, have them valued and placed on the balance sheet. Thus the asset value of the company was increased and the reserves held intact.

The new standards have dealt only in part with the problem of brands as assets, but the focus of attention on brand accounting has had an important affect on the status of marketing in many companies.

This was a finding in a study just completed by Wits B. Com. Honours student, Jane Shaw. She set out to study the relationship between financial and marketing managers in South Africa and relate this to the advent of the new accounting standards. She hypothesised that recognising brands as balance sheet assets would strengthen historically shaky ties between the two disciplines.

This has proven to be the case. Her sample was a significant number of financial managers/directors drawn from top South African brand owning companies. Her respondents were aware of the new standards and were in general support of the idea of acquired brands being recognised as assets. In line with the standards themselves they still harbour reservations about brands that a company has developed itself. They stick to the conventional arguments that valuation methodologies are subjective and that it is still too hard to separate brands from the rest of the business. This is of course simply parroting the conventional wisdom because the standards themselves acknowledge the suitability of certain approaches for placing values on intangible assets bought in business combinations, and some of these methodologies are able to isolate brands from other profit drivers.

Nonetheless, Shaw’s respondents were supportive of the idea of acquired brands on the balance sheet and gave the reason that this conformed to their own goal of adding shareholder value. This logic extends to the relationship finance people have with their marketing associates. Traditionally sceptical and dismissive and viewing the marketing budget as a rich source of cost saving, financial management, according to Shaw, now realise that marketing builds brands and brands add shareholder value. This, she concludes, places marketing in a new and more important light.

Bearing in mind the study mentioned above regarding the incidence of marketers on South African boards, this is not before time. But marketers should hold their celebrations. Shaw’s research makes it quite clear that this is just the start of what appears to be a trend. Traditional reserve, prudence and adherence to historic accounting principles will ensure that the march forward is slow. Until the historic cost basis of accounting gives way to something that is forward looking and based on value, the pressure to value brands for their balance sheet worth, will remain mild and restricted to those companies whose financial management is able to see beyond present conformity.