This article was originally published in the Brand Finance GIFT™ 2021 report.
This year, the Italian government introduced a new measure: The “Decreto Agosto” - August Decree. This now authorises Italian companies for the first time to put their homegrown brands on the balance sheet. This will strengthen their balance sheets and revive the nation’s economy following the devastating COVID-19 pandemic.
Decreto Agosto is revolutionasing accounting and financial reporting
This new measure could revolutionise accounting and financial reporting for years to come, improve transparency for investors, make it easier to compare companies pursuing organic vs inorganic growth, and assist boards in understanding and financially supporting their brands. Companies which disclose brand value under the August Decree could benefit from tax breaks, improved bank ratings, lower cost of capital, and reduced risk of takeover. This exciting development in the world of intangible asset valuation offers a trial run which could influence IFRS in the future.
We have been measuring the phenomenon of undisclosed intangibles on stock markets every year since 2002 through our Global Intangible Finance Tracker (GIFT). Under the IFRS or US GAAP, companies are not allowed to declare most of the intangible assets they generate internally. We have been fighting for a more innovative approach to the regular evaluation of intangible assets, particularly brands, and their inclusion in the balance sheet for years.
If we think that the average undisclosed intangible value of listed companies in Italy was 12% of the market value (as determined by investors) in 2020 and 14.5% in 2021, then non-listed companies that have taken advantage of the opportunity would have substantially strengthened their company’s balance sheets.
We went a step further and also estimated the overall value per company size that could be generated by brand valuation. Should trademark valuation have been adopted by 100% of eligible Italian companies, it would have increased the value of balance sheets by a total of €200 billion. To put this in context, the value of the top 50 most valuable Italian brands was around €125 billion, according to the Brand Finance Italy 50 2021 ranking.
Brand Value of Italian companies
Applied to the Italian market composition, 90% of Italian companies, which employ up to 9 people, would achieve an average brand value added by the scheme of just under €15,000, which is equivalent to a tax benefit of approximately €4,000 over 18 years of amortization with a payment of €450 as a substitute tax at 3%. For companies with 50-250 employees, the average brand value would be around €2.5 million, which would create a tax benefit of around €700,000 against a payment of only €75,000.
Despite the many benefits to the scheme if correctly executed, there is a danger that valuations conducted by people who are not professionally qualified to value brands could result in challenges, chaos, and legal actions.
Brand valuation is an exercise that is more complex than the valuation of other assets. It is precisely because of this that the ISO 10668 standard for monetary brand valuation has existed for several years, which has been supplemented by the ISO 20671 standard for determining the strength of the brands.