Glossary of Terms

The help clients, marketers and brand owners understand brand valuation, we have produce a series of short definitions and descriptions of key brand and financial related terms used throughout our website and research.

  • Brand

    There are many definitions of brand, often narrow in scope. To allow us to consider all the touchpoints of the asset, Brand Finance defines a brand as:

    A bundle of trademarks and associated IP(1) which can be used to take advantage of the perceptions(2) of all stakeholders(3) to provide a variety of economic benefits(4) to the entity(5).

    This is our preferred definition because it appreciates the breadth of the effects a brand can bring, rather than just affecting the price premium of a product. Identifying each element:

    1. This is is the accounting definition of a brand when conducting a monetary brand valuation.
    2. The effects brands have are not always directly aligned to the fact but instead to what people believe to be the case.
    3. Brands affect more than customers or consumers. Staff, financiers or external stakeholders are some of the most obvious examples that are also affected by the brand.
    4. Higher staff retention or lower recruitment costs are two benefits beyond simply a price or volume premium that a brand can provide.
    5. Brands apply to more than just companies. Not-for-profits, sports teams and locations are all examples of brands assisting other types of entities.

     

  • Brand Audits

    A brand audit is a compliance assessment of the commercial and visual aspects of a brand and an interpretation of its impact on current and future financial performance.

    A brand audit will help you to:

    • Understand the condition of your brand portfolio
    • Relate the visual and financial performance of your brand
    • Improve your brand management control
    • Demonstrate accountability for managing your brand
    • Secure your brand's value
  • Brand Due Diligence

    A brand due diligence exercise is a thorough investigation into the brand, the brand managament, the market it operates in, any legal protections as well as the overall governance structure supporting the brand.

    This may also be referred to as a 'brand audit' and is most often conducted either when acquiring a new brand, or periodically as an internal check on the state of brand management, brand value and brand governance.

  • Brand Equity

    The term Brand Equity is widely used in the marketing and branding world to describe the relative stature of different brands and to facilitate dialogue around how a brand asset may be measured. As with the term brand, there are a number of alternatiev senses in which the word is commonly used.

    Feldwick (1996) presents three separate common practice usages of the term Brand Equity:

    1. The total value of a brand as a separable asset when it is sold or included on a balance sheet (Brand value)
    2. A measure of the strength of consumers' attachment to a brand (Brand Strength)
    3. A description of the association and beliefs the consumer has about the brand (Brand Description)

    Brand Finance uses the second definition in it's literature. In particular Brand Equity is used as an element of our Brand Strength Index and covers all stakeholders, not only consumers. It is used as a step in our brand valuation process.

  • Brand Licensing

    Brand licensing is an activity commonly associated with allowing external third parties use of a brand or trademark. Fee structures vary and may be fixed or variable depending on the specific circumstances.

    Brand licensing can also be done internally with a central Brand Company that owns the IP. This can be done to improve management, governance and respect for the brand as a strategic resource.

    Creating a system of central ownership and management for the purposes of managing and licensing brands and IP either internally or externally usually involves forethought and intelligent structuring of the model. The general steps for ensuring that this is done right are as follows:

    • Establishing the role of licensing
    • Develop the strategy for licensing growth
    • Build out the model for investment and governance
    • Determine the structure for licensing payments and royalty fees

    Check out our whitepaper on Key considerations for building our a new licensing program for more information about licensing and how Brand Finance can assist.

  • Brand Name

    Brand name is the element of a brand that could be registered as a "wordmark" and form part of the "bundle of trademarks" that constitue the legal protection for a brand.

    Brand name is a term often used when seeking a brand valuation or brand portfolio management services.

  • Brand Rating

    With reference to Brand Finance literature, the term "Brand Rating" is a summary opinion, similar to a credit rating, on a brand based on its strength as measured by Brand Finance's 'Brand Strength Index' (BSI).

    Brand Rating Brand Strength Description
    AAA 80-100 Extremely Strong
    AA 65-80 Very Strong
    A 50-65 Strong
    BBB-B 35-50 Average
    CCC-C 20-35 Weak
    DDD-D 0-20 Failing
  • Brand Strength

    Brand Strength is the efficacy of a brand’s performance on intangible measures, relative to its competitors.

    Conceptually, Brand Stength can be grouped into 3 broad categories of understanding:

    • observing the brands current performance
    • accessing the relevant beliefs, associations and attitudes of the consumers' mind
    • estimating the brand's future performance and profit streams

    This concept may be gauged in both qualitative or quantitative ways and will differ from agency to agency.

  • Brand Strength Index (BSI)

    Brand Finance quantifies the Brand Strength using a 'Brand Strength Index (BSI)' - which is a competitive benchmarking tool that identifies the strength of each brand in question. 

    This can be done as a stand alone exercise in a brand evaluation, or as part of the brand valuation methodology when placing a monetary value on the brand. The Brand Strength Index in this use case forms part of the Royalty Relief methodology. For more information check out the methodology page here.

    The Brand Strength Index is a framework that aims to consider the position of a potential licensee or acquirer of the brand. As such we split the Index into three sections:

    • Brand Investment - to ensure brand building exercises are being conducted for future success of the brand.
    • Brand Equity - to ensure the brand is currently perceieved well across a balanced scorecard of stakeholders.
    • Brand Performance - to ensure the brand is delivering the economic benefits that one would hope.

    Brands may score very highly on the Brand Strength Index while not necessarily being the largest brands by monetary value.

  • Brand Value

    Brand Value is the capital value of economic benefits brought to an entity through use of a brand. This is most commonly done as a net present value of the estimated additional future cash flows generated by the Brand for the organisation.

    The accepted standard on how to calculate brand value is ISO 10668:Brand Valuation, in which 3 broad approaches are accepted. The most commonly used of those is the Income approach, which has 6 accepted methodologies that use either future revenue or profit estimates to conduct the brand valuation.

    For more information on Brand Valuation, have a read of our whitepaper on Value-Based Brand Management - Conducting Brand Valuations

    For our rankings, like the Global 500, Brand Finance uses the Royalty Relief (also known as Relief from Royalty). For more information check out the methodology page here.

    Brand Value is also used by some interchangably with Brand Equity. Brand Finance has considers the two terms to be separate.

  • Brand Value Added

    Brand Value Added (BVA®) is Brand Finance's proprietary method of determining the proportion of the residual economic profit attributable to the brand. This analysis is based on a comprehensive appraisal of market research available with in the business unit.

  • BrandBeta

    BrandBeta® is Brand Finance's proprietary method for adjusting a weighted average cost of capital (WACC) to arrive at a specific discount rate for each brand (based on its Brand Rating).

    Companies with stronger brands are more resilient and less volatile than those with weaker brands.

  • Branded Business

    Some people are of the view that ‘brand’ refers to the whole branded enterprise. We call this the Branded Business. This may not be a formal company but instead a cash gerating unit operating under a singe brand. A company with a large number of brands in it's portfolio such as Unilever may have many branded businesses within its overall enterprise. Other companies operating only one brand the total enterprise value will be equivaltent to the branded business value.

    The brand value and any other intangible assets will then exist within the overall branded business value just as any tangible asset might. Intangible assets may not always appear on the balance sheet of the branded business.

  • Capital Asset Pricing Model (CAPM)

    A financial model in which the cost of capital for any stock or portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the stock or portfolio.

    Brand Finance uses CAPM in the calculation of the discount rate used in our valuations.

  • Cash Flow

    Cash that is generated over a period of time by an asset, group of assets, or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows. When the term is used, it should be supplemented by a qualifier (for example, "discretionary" or "operating") and a specific definition in the given valuation context.

  • Discounted cash flow (DCF)

    A method of evaluating an asset value by estimating future cash flows and taking into consideration the time value of money and risk attributed to the future cash flows.

  • Effective Date

    Also known as Valuation Date or Appraisal Date

    The specific point in time as of which the valuator's opinion of value applies.

  • Enterprise value

    The combined market value of the equity and debt of a business less cash and cash equivalents.

    Enterprise value can be seen as the total value that a business would be worth if it was in a position of zero debt. In most instances it is a more appropriate measure of value than market capitalisation, because it does not take into account who owns the company, but simply by how it is run. The exception to this rule is the financial service sectors (whose business is lending and receiving money, so the calculation to add on debt does not work and leads to spurious figures). 

    Brand Finance use enterprise value as a benchmark for our brand valuations, since brand is one of the many assets that make up the business. If you add up all the assets in a business (both tangible, like buildings and machines, and intangible, like patents, airport landing slots, a trained-up workforce, and also Goodwill) this gives you the enterprise value. Brand value is one piece in this puzzle (a bigger or smaller piece in different industries).

  • Fair Value (Fair Price)

    Fair Value (also called Fair price in countries like Canada) is a finance/economic concept defined as a unbiased and rational estimate of the potential market of an asset (or service) taking into account certain factors.

    Fair Value factors include risk, replacement costs, production costs (including cost of capital).

    In Accounting terms, Fair Value Accounting is used to estimate the market value of an asset for which a market price cannot be determined for one reason or another. Fair value is not used for assets carried at historical costs.

  • Goodwill

    Goodwill recognised in a business combination is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. The future economic benefit may result from synergy between the identifiable assets acquired or from assets that, individually, do not qualify for recognition in the financial statements.

    Goodwill is an intangible asset and its value is the balancing figure between total consideration paid in a business combination and the total of all other identified assets.

    Goodwill is generally treated as having an indefinite useful life so not amortised in company accounts but instead requires annual impairment reviews.

    Prior to the introduction of IFRS 3: Business Combinations, Goodwill was used to refer to all Intangible assets.

  • Goodwill Impairment Reviews

    Goodwill is an intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified. In the current economic climate the potential impairment of goodwill and other assets is becoming an increasingly important issue for many companies. It is common practice for companies to commission formal opinions from independent valuation firms every two to three years and conduct Directors' valuations in the years in between but, as economic prospects deteriorate, there is increasing pressure from auditors for formal independent opinions to be provided.

    Taking this into consideration, Brand Finance offers a 3 tier consultancy service for both initial recognition of assets post-purchase (IFRS 3) and subsequent impairment reviews (IAS 36) in order to provide clients with maximum flexibility and choice:

    1) Formal Brand Finance opinion
    - valuation model creation, preparation of report in accordance with international valuation standards containing valuation opinion, supporting background information and schedules.

    2) Directors' opinion + Brand Finance analysis
    - valuation model creation, brief report highlighting key findings and assumptions, no formal valuation or impairment opinion (indicative only). Directors to form their own view.

    3) Directors' opinion + Brand Finance guidance
    - Directors conduct all analysis and create valuation models. Brand Finance provides templates for model creation, guidance throughout the process and a final review.

    Please contact us at enquiries@brandfinance.com if this is of relevance to you and your business.

  • IAS 36 - Impairment of Assets

    Impairment of Assets

    The objective of IAS 36 is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.

    IAS 36 applies to (among other assets):

    Land, buildings, machinery and equipment, investment property carried at cost, Intangible Assets, goodwill, investments in subsidiaries, associates, and joint ventures, assets carried at revalued amounts under IAS 16 and IAS 38

    IAS 36 does not apply to:

    Inventories (IAS 2), assets arising from construction contracts (IAS 11), deferred tax assets (IAS 12), assets arising from employee benefits (IAS 19), financial assets (IAS 39), investment property carried at fair value (IAS 40), certain agricultural assets carried at fair value (IAS 41), insurance contract assets (IFRS 4), assets held for sale (IFRS 5)

    Key Steps

    • Identifying an Asset That May Be Impaired
    • Indications of Impairment
    • Determining Recoverable Amount
    • Fair Value Less Costs to Sell
    • Value in Use
    • Discount Rate (more information on Discount Rate)
    • Recognition of an Impairment Loss
    • Cash-Generating Units
    • Impairment of Goodwill
    • Disclosure
  • IAS 38 - Intangible Assets

    Please note this is a summary of IAS 38, for more detailed information please contact Brand Finance, or visit www.iasb.org

    The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IAS. The Standard requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets.

    IAS 38 applies to all intangible assets other than:

    • Financial assets
    • Mineral rights and exploration and development costs incurred by mining and oil and gas companies
    • Intangible assets arising from insurance contracts issued by insurance companies
    • Intangible assets covered by another IAS, such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS 3
  • IFRS3 - Business Combinations

    IFRS3 Background:

    IFRS 3 (2008) replaced IFRS 3 (2004) effective for business combinations on or after 1 July 2009. Earlier application is permitted, but not for periods beginning before 1 July 2007.
    IFRS3 (2008) resulted from a joint project with the US Financial Accounting Standards Board. FASB issued a similar standard in December 2007 (SFAS 141(R)). The revisions will result in a high degree of convergence between IFRSs and US GAAP in these areas, although some potentially significant differences remain. Among the differences: the FASB standard requires (rather than permits) the full goodwill method. There are also differences in scope, the definition of control, and how fair values, contingencies, and employee benefit obligations are measured, as well as several disclosure differences.

    Scope of IFRS3

    Acquirer must be identified. Under IFRS 3, an acquirer must be identified for all business combinations.

    Scope changes from IFRS 3(2004). IFRS 3(2008) applies to combinations of mutual entities and combinations without consideration (dual listed shares). These are excluded from IFRS 3(2004).

    Scope exclusions. IFRS 3 does not apply to the formation of a joint venture, combinations of entities or businesses under common control. The IASB added to its agenda a separate agenda project on Common Control Transactions in December 2007. Also, IFRS 3 does not apply to the acquisition of an asset or a group of assets that do not constitute a business.

    Key areas of IFRS3

    Method of Accounting for Business Combinations

    • Acquisition method
    • Measurement of acquired assets and liabilities
    • Measurement of NCI (Non Controlling Interest)
    • Acquired intangible assets

    Goodwill

    Business Combination Achieved in Stages (Step Acquisitions)

    Provisional Accounting

    Cost of an Acquisition

    • Measurement
    • Acquisition costs
    • Contingent consideration

    Pre-existing Relationships and Reacquired Rights

    Parent's Disposal of Investment or Acquisition of Additional Investment in Subsidiary

    • Partial disposal of an investment in a subsidiary while control is retained
    • Partial disposal of an investment in a subsidiary that results in loss of control
    • Acquiring additional shares in the subsidiary after control was obtained

    Disclosure

    • Disclosure of information about current business combinations
    • Disclosure of information about adjustments of past business combinations

    Transition Requirements

  • IFRS3 - Impact on Business

    The introduction of IFRS represents a major shift in the way that companies undertake their financial reporting.

    Although differences remain, the new standards in this area achieve a high degree of convergence with US GAAP. FAS 141 "Business Combinations" and FAS 142 "Goodwill and Other Intangible Assets" in the US have already had important implications for brand owners and the way trademarks are valued and accounted for.

    For the first time, trademarks and other acquired intangibles had to be separately recognised on the balance sheet following an acquisition.

    IFRS 3 also requires identifiable assets to be recognised on the balance sheet of the acquiring entity, provided that certain conditions are met. This is a significant change from most existing (non-US) national accounting standards.

    These and other significant new disclosures in respect of the cost of acquisition and the main classes of assets and liabilities will mean greater transparency and will require a much more detailed due diligence process.

    Following recognition, the requirements of the new standards are more onerous than before. Goodwill and intangibles assets with indefinite useful economic lives will need to be tested at least annually for impairment. Assets with finite useful lives are required to be restated where there is evidence of impairment to the particular asset.

    It seems likely that many companies will require independent specialist valuation assistance in order to withstand the market scrutiny that greater transparency will bring and to satisfy the need for objectivity and auditor independence.

    IFRS 3 Overview

    Method
    The purchase method of accounting (or acquisition accounting) must be used.

    Assets and liabilities acquired
    Recognition of more intangible assets and contingent liabilities at fair value at acquisition date.

    Goodwill
    Not amortised but tested for impairment at least annually.

    Negative goodwill
    Recognised in the profit and loss account immediately.

    Impairment testing
    Detailed disclosures about transactions, useful economic life and impairment testing are required.

  • IFRS3 - Implications for Intellectual Property (IP) Managers

    Greater transparency, rigorous impairment testing and additional disclosure will result in more scrutiny by the market and will have a significant impact on the way companies plan their acquisitions.

    Intellectual property (IP) managers must ensure that they have the necessary skills to satisfy the new requirements and to withstand market scrutiny.

    More regular impairment testing is likely to result in a greater volatility in financial results. Analysts will need to be convinced that a company's impairment review process is robust.

    In the case of brand and other intangible asset valuation, where a high degree of subjectivity can exist, it will be important to demonstrate that best practice techniques are being applied.

    The use of independent experts may help convince analysts that the impairment testing process is not overtly subjective.

    In terms of planning prior to acquisition, a detailed analysis of all potential assets and liabilities is recommended to assess the impact on the consolidated group balance sheet and P&L post-acquisition.

    For further information on goodwill impairment reviews or Purchase Price Allocations; please contact Brand Finance.

  • IFRS3 - Implications for Intellectual Property (IP) Owners

    On 31 March 2004 the International Accounting Standards Board (IASB) issued IFRS 3 "Business Combinations" (replacing IAS 22 "Business Combinations"). Accompanying revisions were also made to IAS 36 "Impairment of Assets" and IAS 38 "Intangible Assets". Although differences remain, the new standards in this area achieve a high degree of convergence with US GAAP. FAS 141 "Business Combinations" and FAS 142 "Goodwill and Other Intangible Assets" in the US have already had important implications for brand owners and the way trademarks are valued and accounted for. For the first time, trademarks and other acquired intangibles had to be separately recognised on the balance sheet.

    IFRS 3 also requires identifiable assets to be recognised on the balance sheet of the acquiring entity, provided that certain conditions are met. This is a significant change from most existing (non-US) national accounting standards. These and other significant new disclosures in respect of the cost of acquisition and the main classes of assets and liabilities will mean greater transparency and will require a much more detailed due diligence process.

    Following recognition, the requirements of the new standards are more onerous than before. Goodwill and intangible assets with indefinite useful economic lives will need to be tested at least annually for impairment.

    It seems likely that many companies will require independent specialist valuation assistance in order to withstand the market scrutiny that greater transparency will bring and to satisfy the need for objectivity and auditor independence.

    In the countries where the new IAS are being adopted, IFRS 3 is effective immediately and should be applied by quoted companies prospectively to business combinations entered into on or after 31 March 2004. The new requirements to be applied in accounting for existing goodwill and negative goodwill are effective from the beginning of the first reporting period beginning on or after 31 March 2004.

    The policy with regard to unquoted companies varies by country. In the UK for example, adoption of IAS is voluntary, whereas in several European countries such as France and Spain, unlisted companies will not be allowed to adopt IAS. Where allowed, voluntary adoption of IAS by unquoted subsidiaries of a quoted company would certainly simplify consolidation and also prevent having to implement piecemeal changes as national standards boards make changes to their own standards to come into line with IAS (as is the intention in the UK for example).

  • IFRS3 - Requirements for Brand Valuations

    Allocating the cost of a business combination.
    At the date of acquisition, the acquirer must measure the cost of the business combination by recognising the acquiree's identifiable assets, liabilities and contingent liabilities (including any proportion attributable to minority interests) at their fair value. Any difference between the total of net assets acquired and cost of acquisition is treated as goodwill or negative goodwill.

    Intangible assets

    All identifiable intangible assets of the acquired business must be recorded at their fair values.

    To be recognised as an intangible asset, it must meet the following criteria:

    • Separately identifiable (an asset is identifiable when it either arises from contractual or other legal rights or is separable. An asset is separable if it could be sold, on its own or with other assets)
    • Controlled by the entity
    • A source of future economic benefits
    • It can be reliably measured in terms of its fair value

    IFRS 3 includes a list of assets that are expected to be separately recognised from goodwill. In many instances the valuation of such assets is a complex undertaking and companies may prefer to outsource this activity to independent specialists.

    Goodwill

    After initial recognition of goodwill, IFRS 3 requires that goodwill be recorded at cost less accumulated impairment charges. Whereas previously under IAS 22 goodwill was amortised over its useful economic life (presumed not to exceed 20 years), it is now subject to impairment testing at least once a year. Amortisation is not permitted.

    Impairment of Assets

    A revised IAS 36 "Impairment of Assets" was issued at the same time as IFRS 3. Previously an impairment test was only required if a triggering event indicated that impairment might have occurred. Under the new rules, an annual impairment test is required for certain assets, namely:

    • Goodwill - tested annually and at any other time when an indicator of impairment exists
    • Intangible assets with an indefinite useful economic life and intangible assets not yet available for use

    The recoverable amount of these assets must be measured annually (regardless of the existence or otherwise of an indicator of impairment) and at any other time when an indicator of impairment exists.

    Brands are one type of intangible asset, which are frequently claimed to have indefinite useful economic lives. Where acquired brands are recognised on the balance sheet post-acquisition it will be important to establish a robust and supportable valuation model using best practice valuation techniques that can be consistently applied at each annual impairment review.

    The revised IAS 36 also introduces new disclosure requirements, the principle one being the disclosure of the key assumptions used in the calculation.

    Increased disclosure is required where a reasonably possible change in a key assumption would result in actual impairment.

    The requirement for separate balance sheet recognition of intangible assets, together with impairment testing of those assets and also goodwill, is expected to result in a significant increase in the involvement of independent specialist valuers to assist with actual valuation and also on appropriate disclosure.

  • Impairment Review

    In the current economic climate the potential impairment of assets is becoming an increasingly important issue for many companies. It is common practice for companies to commission formal opinions from independent valuation firms every two to three years and conduct Directors' valuations in the years in between but, as economic prospects deteriorate, there is increasing pressure from auditors for formal independent opinions to be provided.

    Taking this into consideration, Brand Finance offers a 3 tier consultancy service for both initial recognition of assets post-purchase (IFRS 3) and subsequent impairment reviews (IAS 36) in order to provide clients with maximum flexibility and choice:

    1) Formal Brand Finance opinion
    - valuation model creation, preparation of report in accordance with international valuation standards containing valuation opinion, supporting background information and schedules.

    2) Directors' opinion + Brand Finance analysis
    - valuation model creation, brief report highlighting key findings and assumptions, no formal valuation or impairment opinion (indicative only). Directors to form their own view.

    3) Directors' opinion + Brand Finance guidance
    - Directors conduct all analysis and create valuation models. Brand Finance provides templates for model creation, guidance throughout the process and a final review.

    Please contact us at enquiries@brandfinance.com if this is of relevance to you and your business.

  • Intangible Asset

    There are different definitions of 'intangible assets'. In the most basic terms, it is an asset that is not physical in nature. The examples below, grouped into three categories, typically fall within the definition of intangible assets.

    Rights:
    Leases; distribution agreements; employment contracts; covenants; financing arrangements; supply contracts; licenses; certifications; franchises.

    Relationships:
    Trained and assembled workforce; customer and distribution relationships.

    Intellectual Property:
    Trademarks; patents; copyrights; proprietary technology (e.g. formulas; recipes; specifications; formulations; training programs; marketing strategies; artistic techniques; customer lists; demographic studies; product test results; business knowledge - processes; lead times; cost and pricing data; trade secrets and know-how).

    International accounting standards (IAS) adopt an alternative method of classification, namely:

    • Artistic-related intangible assets
    • Marketing-related intangible assets
    • Technology-based intangible assets
    • Customer-related intangible assets
    • Contract-based intangible assets

    In accounting terms, an asset is defined as a resource that is controlled by the entity in question and which is expected to provide future economic benefits to it. The International Accounting Standards Board definition of an intangible asset requires it to be:

    A) Non-monetary
    B) Without physical substance
    C) 'Identifiable'

    In order to be 'identifiable' it must either be separable (capable of being separated from the entity and sold, transferred or licensed) or it must arise from contractual or legal rights (irrespective of whether those rights are themselves 'separable').

    It is important to recognise the distinction between internally-generated and acquired intangible assets. IAS only allow acquired intangible assets to be recognised on the balance sheet provided that they meet the above mentioned criteria. I.e; the internally generated intangibles of a company cannot be explicitly stated on its balance sheet.

    This results in what is sometimes described as 'internally generated goodwill'. This is the difference between the fair market value of a business and the value of its identifiable balance sheet net assets. The treatment of this goodwill only changes if the company is acquired, converting the goodwill from internally-generated to acquired.

    Intangible assets that may be recognised on a balance sheet under IAS are typically only a fraction of the total intangible asset value of a business, with the remaining value continuing to be classified as 'goodwill'. Brands, if acquired, can be identified under these rules and added to the balance sheet. This results in the unusual situation where internally-generated brands of the acquiree may be recognised on the acquirer's balance sheet but the acquirer's own internally-generated brands may not. For this reason, Brand Finance thinks there is a strong case for the inclusion of internally generated brands on the balance sheet.

    Brands fulfil the definition of intangible assets above, in that they are controlled by management, provide future economic benefits and are identifiable and therefore can be sold, transferred or licensed as appropriate. We are increasingly seeing companies taking advantage of this transferability by moving brands (including trademarks and other associated intellectual property, such as design rights and other marketing collateral) to special purpose vehicles, such as brand holding companies, for the purpose of raising finance and tax planning.

  • Intangible Asset Accounting

    There are several regional and international accounting standards for the accounting of Intangible Assets; including IFRS3, IAS 36 and IAS 38. To understand the standards please read through our brand related accounting standards.

    Brand Finance specialises in the valuation of Intangible Assets, we have listed below a number of recognised Intangible Asset valuation methods. For these purposes we will refer to brand valuation for the remainder of this section. However, the techniques described may equally be applied to the valuation of many other forms of intangible asset.

    Cost based Brand Valuation

    'Creation costs' may be estimated by looking back to brand launch and restating actual expenditure in current cost terms. This approach may provide a meaningful number for a new brand, where the time period is short and the costs are readily available. However, even when costs can be collected consistently the answer does not represent the current value of the brand.

    'Re-creation costs' may be also estimated. The obvious difficulty is that there is no such thing as an identical brand so it may be hard to calculate a relevant re-creation number. Brands are valuable because they are unique. By their very nature they are not comparable or replicable.

    For these reasons cost based valuations are usually only commissioned as a sense check.

    Market based Brand Valuation

    This assumes that there are comparable market transactions (specific brand sales), comparable company transactions (the sale of specific branded companies) or stock market quotations (providing valuation ratios against which a comparable branded entity can be valued). A valuation may be based on the disposal of comparable individual brands, specific branded divisions or whole companies where adequate information is made publicly available.

    In practice, there are few directly comparable transactions. Even where there are sales of specific brands or branded businesses, details are generally not widely available, and it is hard to make comparisons.

    In addition, the notion of comparability assumes that brands are identical, which is never the case. Market based valuations also tend to be used only as a sense check.

    Income based Brand Valuation

    There are two alternative approaches:

    1. Royalty Relief (Relief from Royalty), is the method Brand Finance favours - more information can be found on the Royalty Relief section.

    2. Economic Use

    This considers the economic value of a brand in current use to current owner. In other words, it considers the return that the owner actually achieves by owning the brand - now and in the future.

    Economic use valuations assume that brands provide their owners with security of demand. In the short run a manufacturer without a brand might enjoy the same sales, the same economies of scale, even the same premium prices as the manufacturer with a brand. However, the non-branded manufacturer could not rely on the same security of knowing that the brand's customers this year are likely to be customers of the brand next year, and for many years after that.

    This approach also depends on the accuracy of future sales and earnings projections. It uses the future earnings attributable to a brand after making a fair charge for the tangible assets employed. A charge is also made for tax at a notional rate. The resulting brand earnings are discounted back to a Net Present Value (NPV) representing the current value of the brand.

    Typically such brand valuations are based on 3-5 year earnings forecasts. In addition, an annuity is calculated on the final year's earnings on the assumption that the brand continues beyond the forecast period, effectively into perpetuity. As brand rights can be owned in perpetuity and many brands have been around for over 50 years, this is not an unreasonable assumption.

    Steps in an Economic Use valuation:

    • Modelling the market (to identify market demand and the position of individual brands in the context of all other market competitors. Usually the valuation model is segmented to reflect the relevant competitive framework within which the brand operates).
    • Forecasting economic value added of the branded business (to identify total branded business earnings).
    • Estimating Brand Value Added BVA® using business drivers research (to determine what proportion of total branded business earnings may be attributed specifically to the brand).

    Benchmarking brand risk rates - Brandßeta® analysis (to assess the security of the brand franchise with both trade customers and end-consumers and therefore the security of future brand earnings). The resulting discount rate is used in the Discounted Cash Flow DCF calculation.

  • Intangible Assets

    See Intangible Asset Definition for more a detailed description.

    Non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges and have value for the owner.

  • ISO 10668

    The International Standard ISO 10668 specifies requirements for procedures and methods of monetary brand value measurementISO 10668 specifies a framework for brand valuation including objectives, bases of valuation, approaches to valuation, methods of valuation and sourcing of quality data and assumptions. It also specifies methods of reporting the results of such valuation.

    Intangible assets are recognised as highly valued properties. Arguably the most valuable but least understood intangible assets are brands. However, reliable values need to be placed on brands. The International Standard ISO 10668 provides a consistent, reliable approach to brand valuation including financial, behavioural and legal aspects.

    ISO (the International Organization for Standardization) is a worldwide federation of national standards bodies (ISO member bodies). The work of preparing International Standards is normally carried out through ISO technical committees. Each member body interested in a subject for which a technical committee has been established, has the right to be represented on that committee.

  • Mid Year Discounting

    Mid-Year Discounting - a convention used in the Discounted Future Earnings Method that reflects economic benefits being generated at midyear, approximating the effect of economic benefits being generated evenly throughout the year.

  • Net Present Value

    The present value of an asset's Net Cash Flows (minus any initial investment).

    Net present value is sometimes referred to has net present worth (NPW) and is considered a standard method used for capital budgeting, and more widely throughout economics.

    Net present value is also a good technique for avoiding the distortions caused by historical accounting conventions.

    The discounted cash flow is similar.

  • Present Value

    Present Value - the value, as of a specified date, of future Economic Benefits and/or proceeds from sale, calculated using an appropriate Discount Rate.

  • Report Date

    Report Date - the date conclusions are transmitted to the client.

  • Risk Premium

    Risk Premium - a rate of return added to a risk-free rate to reflect risk.

  • Royalty Relief

    The 'Royalty Relief' (also known as Relief from Royalty) method is based on the notion that a brand holding company owns the brand and licenses it to an operating company. The notional price paid by the operating company to the brand company is expressed as a royalty rate. The Net Present Value (NPV) of all forecast royalties represents the value of the brand to the business.

    The attraction of this method is that it is based on commercial practice in the real world. It involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting estimated future, post-tax royalties, to arrive at a NPV.

    Brand Finance plc uses the 'Royalty Relief' method for 2 reasons:

    1. It is favored by tax authorities and the courts because it calculates brand values by reference to documented, third-party transactions
    2. It can be done based on publicly available financial information.

    Steps in the Royalty Relief brand valuation process:

    • Obtain brand specific financial and revenue data.
    • Model the market to identify market demand and the position of individual brands in the context of market competitors.
    • Establish the notional royalty rate for each brand
    • Calculate the notional future royalty income stream for each brand.
    • Calculate discount rate specific to each brand, taking account of its size, international presence, reputation, and Brand Rating
    • Discount future royalty stream to a net present value (NPV)
  • Rule of Thumb

    Rule of Thumb - a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.

  • Selling Brands

    Brand Finance helps clients leverage value from their brands through acquisitions & selling brands (and/or brand disposals), brand licensing, structured finance and tax planning. We ensure that intangible assets are worked as hard as their tangible counterparts.

    Applications:

    Brand Sales - Selling a Brand
    Identification of potential purchasers and execution of sales process

    Brand Due Diligence for acquisitions, disposals and bid defence
    An independent opinion and quantification of Brand Strength and business value for appropriate audiences

    Pre-Disposal Brand Evaluation
    Determination of the value implications of alternative brand strategies

    Structuring brand ownership and management
    There is not a ‘one size fits all solution'. Flexibility is required to determine available options. For each option the brand performance, tax and cost implications must be evaluated

    Best practice in licensing agreements
    In the case of both internal and external brand licenses, it is important to clearly identify the rights and obligations of both parties. This results in fewer disputes and higher earnings

    Leveraging the brand through licensing
    Thorough evaluation of market research is carried out and the findings are integrated into valuation models in order to determine the likely revenue and risk implications

    Royalty rate determination
    Advice for both tax authorities and brand owners on the setting of appropriate royalty rates. The integration of royalty comparatives, financial analysis and the interpretation of customer research ensures robust, defensible royalty rates

    The Brand Finance approach:

    • In all of our transactional work we express a clearly supported opinion on the strength, value and potential of the brand.
    • Our due diligence incorporates market, customer and financial analysis which allows us to identify key commercial issues. An opinion is expressed on all such issues.
    • Our analysis is highly segmented as we recognise that the earnings capacity of a brand varies by region, channel, category and customer type.
  • Terminal Value

    Terminal Value (also known as residual value) - the value as of the end of the discrete projection period in a discounted future earnings method.

  • Transaction Method

    Transaction Method (also known as Merger and Acquisition Method) - a method within the market based approach whereby pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business.

  • Useful Economic Life (UEL)

    The period of time over which an asset may generate economic benefits.

    All brand valuations featured on Brandirectory are conducted under the assumption that brands have an indefinite useful economic life.

  • Valuation Date

    Also known as Effective Date or Appraisal Date

    The specific point in time as of which the valuator's opinion of value applies.

  • Weighted Average Cost of Capital (WACC)

    Within Brand Finance literature, WACC refers to an average representing the expected return on all of a company's securities. Each source of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then these required rates of return are weighted in proportion to the share each source of capital contributes to the company's capital structure.

    Brand Finance have developed a proprietary method for adjusting WACC, called BrandBeta (βrandβeta®).