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Experts Demand End to Illogical Financial Reporting Rules that Exclude $35tn of Intangible Value

27 June 2017
This article is more than 3 years old.

According to the Brand Finance Global Intangible Finance Tracker (GIFT™), the disclosure of intangible assets remains disappointingly low, with US$35 trillion, or almost three quarters of global intangible value, not reflected in balance sheets in 2016.

See the full Brand Finance GIFT™ 2017 report here

Insufficient reporting of intangible assets leads to a host of problems for analysts, investors, boards, and stakeholders. With little information on particular assets, analysts’ assessments are not as accurate as they could be, forcing investors, in effect, to act with one eye closed. This, in turn, has negative effects on share price volatility, affecting the stability and sustainability of finance. Finally, lack of granular information about the true value of assets leaves boards and shareholders prone to agree to hostile takeovers or to sell individual assets at less-than-competitive prices.

Intangible assets (such as brands, relationships, know-how) make up a greater proportion of the total value of many businesses than tangible assets (such as plant, machinery, and real estate). However, current financial reporting rules allow intangible asset disclosure only during M&A activity, resulting in no knowledge of the worth and business importance of intangibles unless they are subject to an acquisition.

In his exclusive opinion piece for the Brand Finance GIFT™ Report, Sir David Tweedie, Chairman, Board of Trustees, IVSC, commented: “If purchased brands can be put on the balance sheet, there is no logic in banning internally generated brands being shown as assets. Indeed, companies which fear predators and which possess highly visible, saleable home-grown brands may be tempted to consider whether such brands should be on the balance sheet.”

In an opinion piece also featured in the Brand Finance GIFT™ report, David Herbinet, Global Audit Leader at Mazars, a member of the Praxity alliance, commented: “It is hard in the modern age of accounting to ignore the reporting for brands and other intangibles simply because these issues fell into the ‘too difficult’ box. Applying traditional assumptions based on the accounting world of yesterday, where physical assets dominated, can surely no longer be justified.”

David Haigh, CEO of Brand Finance, commented: “The main objection to including internally generated intangible assets in balance sheets has been scepticism about the reliability of valuation standards and of intangible asset valuers. The rapid development of standards by the International Valuation Standards Council (IVSC) and the recently launched Certificate in Enterprise and Intangible Valuation (CEIV) have addressed these objections.”

In Brand Finance’s view, a commitment to undertake an annual revaluation of all company assets, including tangible assets, acquired intangibles, and intangibles generated internally, would be a boon for boards, accountants, investors, and analysts. The transparency and clarity this would afford, would enable boards to make more effective use of their assets, accountants to have a truer picture of asset values, and investors and analysts to more accurately price shares.

According to Brand Finance’s survey of financial analysts, conducted in 2016, the majority backs this demand for an annual revaluation of all intangible assets (73%), including the full disclosure not only of acquired intangibles (79%) but of all internally generated ones too (68%).

These results may be attributed to the fact that current regulations clearly do not allow for efficient reporting of intangibles. Although the increase of global M&A deal value in 2016 by 24% year on year to US$2.1 trillion should have allowed for significantly more intangible assets to be reported on balance sheets, the level of disclosure remained low. The proportion of disclosed intangibles to total enterprise value remained at only 6% and that of goodwill at 8%, marking no change since 2015. The proportion of undisclosed assets to total enterprise value, on the other hand, grew from 34% to 38% globally, by US$4.5 trillion in absolute terms, bringing the total unreported intangible value to US$35 trillion.

The problem is best highlighted by the stark disparity between the list of the world’s top 100 most intangible companies and an equivalent list ranked by disclosed as opposed to total intangible value. Apple (with intangibles worth US$455 billion), Amazon (US$410 billion), Alphabet (US$378 billion), and Facebook (US$344 billion) – all among the top ten of the world’s most intangible companies – do not even make the list of top 100 companies by disclosed intangible value.

David Haigh, CEO of Brand Finance, added: “Intangibles, which can be described as ‘Cinderella Assets’ – unjustifiably left out from balance sheets for too long, should finally be invited to take part in the financial reporting ball!”

About Brand Finance GIFT™

The Brand Finance Global Intangible Finance Tracker (GIFT™) is the world’s most extensive annual research exercise into intangible assets, covering over 57,000 companies (with a total value of US$92 trillion) across more than 170 jurisdictions.

In its analysis, the Brand Finance GIFT™ 2017 report provides detailed insight into intangible value reporting by company, sector, and country. Consult the report document for graphs, executive commentary, and opinion pieces by representatives of the leading organizations in the accounting profession.

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Konrad Jagodzinski
Konrad Jagodzinski
Communications Director
Brand Finance
Florina Cormack-Loyd
Florina Cormack-Loyd
Senior Communications Manager
Brand Finance

About Brand Finance

Brand Finance is the world’s leading brand valuation consultancy. Bridging the gap between marketing and finance, Brand Finance evaluates the strength of brands and quantifies their financial value to help organisations of all kinds make strategic decisions.

Headquartered in London, Brand Finance has offices in over 20 countries, offering services on all continents. Every year, Brand Finance conducts more than 5,000 brand valuations, supported by original market research, and publishes nearly 100 reports which rank brands across all sectors and countries.

Brand Finance is a regulated accountancy firm, leading the standardisation of the brand valuation industry. Brand Finance was the first to be certified by independent auditors as compliant with both ISO 10668 and ISO 20671, and has received the official endorsement of the Marketing Accountability Standards Board (MASB) in the United States.

Methodology

Definition of Brand

Brand is defined as a marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos, and designs, intended to identify goods, services, or entities, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits.

Brand Strength

Brand strength is the efficacy of a brand’s performance on intangible measures relative to its competitors. Brand Finance evaluates brand strength in a process compliant with ISO 20671, looking at Marketing Investment, Stakeholder Equity, and the impact of those on Business Performance. The data used is derived from Brand Finance’s proprietary market research programme and from publicly available sources.

Each brand is assigned a Brand Strength Index (BSI) score out of 100, which feeds into the brand value calculation. Based on the score, each brand is assigned a corresponding Brand Rating up to AAA+ in a format similar to a credit rating.

Brand Valuation Approach

Brand Finance calculates the values of brands in its rankings using the Royalty Relief approach – a brand valuation method compliant with the industry standards set in ISO 10668. It involves estimating the likely future revenues that are attributable to a brand by calculating a royalty rate that would be charged for its use, to arrive at a ‘brand value’ understood as a net economic benefit that a brand owner would achieve by licensing the brand in the open market.

The steps in this process are as follows:

1 Calculate brand strength using a balanced scorecard of metrics assessing Marketing Investment, Stakeholder Equity, and Business Performance. Brand strength is expressed as a Brand Strength Index (BSI) score on a scale of 0 to 100.

2 Determine royalty range for each industry, reflecting the importance of brand to purchasing decisions. In luxury, the maximum percentage is high, while in extractive industry, where goods are often commoditised, it is lower. This is done by reviewing comparable licensing agreements sourced from Brand Finance’s extensive database.

3 Calculate royalty rate. The BSI score is applied to the royalty range to arrive at a royalty rate. For example, if the royalty range in a sector is 0-5% and a brand has a BSI score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4%.

4 Determine brand-specific revenues by estimating a proportion of parent company revenues attributable to a brand.

5 Determine forecast revenues using a function of historic revenues, equity analyst forecasts, and economic growth rates.

6 Apply the royalty rate to the forecast revenues to derive brand revenues.

7 Discount post-tax brand revenues to a net present value which equals the brand value.

Disclaimer

Brand Finance has produced this study with an independent and unbiased analysis. The values derived and opinions presented in this study are based on publicly available information and certain assumptions that Brand Finance used where such data was deficient or unclear. Brand Finance accepts no responsibility and will not be liable in the event that the publicly available information relied upon is subsequently found to be inaccurate. The opinions and financial analysis expressed in the study are not to be construed as providing investment or business advice. Brand Finance does not intend the study to be relied upon for any reason and excludes all liability to any body, government, or organisation.

The data presented in this study form part of Brand Finance's proprietary database, are provided for the benefit of the media, and are not to be used in part or in full for any commercial or technical purpose without written permission from Brand Finance.

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