Brands Flashcards
What did IAS 38 say about internally generated brands?
P24 an intangible asset shall be measured initially at cost
P63 internally generated brands… shall not be recognised as intangible assets
because
P64 expenditure on internally generated brands … cannot be distinguish from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets
What did IFRS 3 say about internally generated brands?
In this standard (IFRS 3) it is deemed acceptable for intangible assets (embedded in the goodwill acquired), to be measured, not by the cost paid, but their estimated fair value.
So there is no explanation why a brand that has been internally generated cannot also be measured by the fair value.
What is the problem with internally generated brand
According to IAS 38 (21), an intangible asset shall be recognised if:
a) The entity can reasonably expect future economic benefits from the asset, and
b) The cost of the asset can be measured reliably.
Brands have no form that can be measured. We can argue that the cost of advertising can be one but it is hard to aggregate all of the costs into one figure especially if the brand has existed for over 100 years.
Moreover, advertising is just one component of what makes a brand.
Therefore cost is not a viable opton.
Arguments against IGB
Some companies argue that brands have an indefinite life.
If this is the case, it is not subject to amortisation, but at its cost and tested each year for impairment. We test for impairment to see if the carrying amount is more than the recoverable amount. However, good marketing ensure that they gain in value.
IAS 38 says that intangible assets should be amortised over their life, which should not exceed over 20 years. However, most successful brands have a life more than 20 years, some even exist for 100 years, assigning a finite life for amortisation purposes may not accurately reflect their true economic value.
Benefits of including IGB
- increases shareholders fund
- thus reducing gearing (Debt/Equity)
- which reduces investorss and banks perception of the risk of the company
- increasing the company’s ability to borrow
- Including IGB communicates their value to investors which is essential for making informed decisions
- allows better comparisons between companies operating in similar markets
Problem with costs measurements for IGB
Cost is often considerably less than the market value
Separability of Brands
Intangible assets is an identifiable (therefore separable) non-monetary asset without physical substance.
When a business is acquired, distinguishing between brands and other forms of goodwill is often a subjective process. Additionally, in the acquisition of a company, multiple brand names may be obtained, and determining the individual worth of each brand can be highly challenging.
Purchase vs IGB
the different accounting treatment arises because accountants are prepared to include an item in assets when purchase price is known (purchased brands) but are reluctant to include it as asset when it has been internally generated (market value is uncertain)
Maintenance/substitution argument in IGB
The maintenance argument refers to the ongoing investments to sustain or enhance a brand. Failure to do so may result in a decline in brand value over time.
On the other hand, the substitute refers to the potential costs and risks associated with replacing an existing brand with a new one. Established brands often possess accumulated goodwill and customer loyalty, making substitution a challenging and expensive process.
ED 50 (1995)
The idea of an active secondary market for intangible assets revolves around assets that are identical, divisible, and undergo frequent transactions, with willing buyers and sellers and publicly available prices.
However, internally generated brands, being unique and not publicly traded, present valuation challenges. This is further explained by the difficulty in recognizing internally generated brands due to the challenge of identifying specific future economic benefits associated with them.
What did RHM (1980) do?
They created their own model to justify with their internally generated brands to come up with a value to capitalise it.
Worked out
1. The assessment of their brand’s current strength (ability to generate future cash flows)
2. Determination of Earnings Multiple
3. Application of the Earnings Multiple to Brand Profitability
