Despite the recognition that intellectual property (IP) such as brands, trademarks and patents are critical to the future performance of a business, their value has generally not been well expressed nor have they been well managed.
Interbrand Sampson CE Jeremy Sampson says brands make up about a third of companies' market capitalisation on average and that SA is behind the curve when it comes to valuing them.
"Investors and commentators still suggest that the share price is at a premium if it is higher than net asset value," he says. "But that doesn't take into account the huge amount of value that brands add to a business."
Brands such as Coca-Cola make up 60% of the company's market capitalisation and the most successful brands have outlasted CEOs and economic cycles.
"Brands are like supertankers," says Sampson. "Once they get momentum, they could go on for ever."
He says the average age of the world's top 10 most valuable brands is 84 years. In SA, the top valued brands are about 50 years old. Some - such as MTN and Vodacom - are only 11 years old; the stalwarts such as Old Mutual and Standard Bank are 130 years old.
Sampson says it is vital for companies to value their brands, to manage them better. "There's a tendency not to treasure it, if you can't measure it," says Sampson.
But until now, one of the biggest difficulties has been that the value of brands has been so difficult to calculate.
In the past, accountants simply listed brands as intangible assets in the financial statements. But when the technology sector crashed after the spectacular dot.com boom, investors wanted more transparency about how much value companies were assigning their IP, especially during mergers and acquisitions.
A new accounting standard, introduced this year called the International Financial Reporting Standard 3 (IFRS3), has changed the way brands are viewed by accountants when they are part of a merger or takeover. It requires accountants to recognise acquired brands on the balance sheet. "It suggests that the standard setters believe brands can de measured reliably," says BrandMetrics MD Roger Sinclair.
But another accounting standard that deals with intangible assets already exists - IFRS 38. It states that brands and intangible assets will not achieve asset recognition. "It results in an anomaly," says Sinclair.
For example, when Barclays Bank publishes its next financial results, the Absa brand will be shown in the balance sheet as an acquired asset. But the Barclays brand will not, because it is an internally generated brand.
The world's two main accounting bodies - the International Accounting Standards Board and the Federal Accounting Standards Board - are working together to try to find a solution to the problem.
Sinclair says new accounting standards, which aim to ensure that intangible assets are correctly reflected, have brought to the fore the shift in accounting philosophy from historic cost to fair value measurement.
But the problem of valuation remains.
Sinclair says that at present a number of approaches are used to value brands: market, cost and income.
Using the market, a valuer estimates the value of a brand by comparing it with others that are exchanged in an open market. The brand would not be exchanged under duress or distress, but in an open deal between willing buyers and sellers.
A cost approach would assume that the cost of establishing the brand could be evaluated - what it would cost to replace the asset.
"But neither of these is suitable for brands," says Sinclair. "There is no active market in brands and it is almost impossible to establish the cost of launching a new brand."
He says an additional problem is that as many as three in four new brand launches fail. Also, market research is not always reliable. "You need to be able to determine not only the absolute value of a brand, but its relative value," says Sinclair. "You need a large sample group to do this."
Instead, he suggests that new accounting standards will probably use an income approach to calculate the fair value of a brand asset.
This model would incorporate the economic life of the asset - the period of time over which the intangible asset can be expected to give the owner an economic return - as well as extraneous factors that may affect the brand such as inflation, economic outlook and competition.
It would also use a discount rate that takes into account how the brand is funded.
Spoor & Fisher partner Chris Bull says the assumptions made and information gathered in the valuation process do more to help a company manage the asset than the final results themselves.
Sampson says a 360° evaluation is needed. "It shouldn't be just financial or just marketing," he says. "Companies need to take in the future potential of the brand."
The additional disclosure required by IFRS3 means that the market can expect to receive in-depth information to assess the value of a company's brands. But a big gap still exists because no jurisdiction yet allows a company to place a value on its internally generated intangible assets.
