Tony McAuley discusses the history of accounting for intangible values. He interviewed Michael Schurch, CFO of RHM (Rank Hovis McDougall) in 2003, about the company’s decision to add the value of brands to the balance sheet back in 1988. This created a bit of a stir at the time, and has influenced accounting for marketing going forward.
McAuley (2003) noted that “the company didn’t expect the attention it received…” The decision to add the brands was a “defensive mechanism in a takeover situation”. Asset-stripping was a big concern at the time and RHM’s managers were afraid that their company wasn’t fully valued. RHM had bet big on marketing and the advertising it created was highly memorable. It had helped launch the careers of directors Alan Parker and Ridley Scott and British people of a certain age will forever associate Dvorak’s New World Symphony with Hovis Bread. RHM’s advertising was a serious part of the company’s activities so why not show the assets build by the advertising on the balance sheet? Interbrand supplied a valuation, the reported value of RHM soared, the raiders were scared off and the rest is history.
Schurch explains that “Traditional finance directors would look to reduce costs all the time–‘we can always improve short-term profitability by turning off the support tap. But we assess it as an investment.” understanding the value of the brand “.. is about encouraging the right behaviour in the business”. (McAuley. 2003)
Not everyone buys the idea of putting brands onto the balance sheet, but the act of creating the valuations can be useful in themselves for internal investment decisions. Maybe the valuations are even useful when securing external financing — they show assets which can be borrowed against if the lender chooses to treat them as such. At its best brand valuations means that “..finance understands what we [marketing] are doing”. (McAuley, 2003) An important benefit at time of budget setting.
Read: Tom McAuley (2003) Brand Family Values, CFO Europe Magazine, December 31, http://ww2.cfo.com/accounting-tax/2003/12/brand-family-values/