Accountants are familiar with the International Financial Reporting Standard (IFRS) 38 – Intangible Assets. IFRS 38 allows recognition of an intangible asset (brands included) only if “a) it is probable that the future economic benefits that are attributable to the asset will flow to the entity, and b) the cost of the asset can be measured reliably”. IFRS 3 that deals with Business Combinations defines how assets acquired should be valued and accounted for post-acquisition.
The International Organisation for Standardization has now issued a new standard ISO 10668:2010 that deals with monetary brand valuation. It applies to all brand valuations for all purposes and stipulates that brand valuations must cover the following three types of analysis before passing an opinion:
1. Legal analysis covering an assessment of the legal protection afforded to the brand in each geographical jurisdiction and product or service registration category.
2. Behavioural analysis accounting for the expected stakeholder behaviour in each of the geographical, product and customer segments in which the subject brand operates. This is done by understanding the market size and trends, contribution of brand to the purchase decision, attitude of all stakeholder groups to the brand, and all economic benefits conferred on the branded business by the brand. There is emphasis on researching the brand value drivers, including an evaluation of relevant stakeholders’ perceptions of the brand in comparison with competitor brands.
3. Financial analysis to assess the likely economic benefits using the following approaches:
a) Market approach
b) Cost approach
c) Income approach using one or more of the following methods:
- Royalty relief method
- Price premium and volume premium methods
- Income-split method
- Multi-period excess earnings method
- Incremental cash flow method
This standard may prove to be an immensely useful guide in a variety of strategic and commercial situations where a unified approach to this complex subject was long overdue.
