In a 2003 piece Tony McAuley discussed the history of accounting for intangible values. He interviewed Michael Schurch, CFO of RHM (Rank Hovis McDougall). They discussed 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, specifically accounting for brands, going forward.
Brands As A Defensive Asset
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. RHM’s managers were afraid that their company wasn’t fully valued. The company’s massive marketing/advertising was a big bet of resources but didn’t show in the accounts. What is more the advertising was surely successful it was certainly highly memorable. It had helped launch the careers of directors Alan Parker and Ridley Scott. 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?
The company asked Interbrand who supplied a valuation. The reported value of RHM soared, the raiders were scared off and the rest is history. (Actually accounting regulators were not happy but that is another story).
Accounting For Brands: Does It Matter What You Do?
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. Even if they don’t reach the balance sheet they can have value. The act of creating the valuations can be useful in themselves for understanding internal investment decisions. Maybe the valuations are even useful when securing external financing. When a firm values the assets these 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). This is an important benefit at time of budget setting.
For more on brand valuation see here.
Read: Tom McAuley (2003) Brand Family Values, CFO Europe Magazine, December 31, http://ww2.cfo.com/accounting-tax/2003/12/brand-family-values/
