Brand accounting

Question 1

Brands definition

Answer 1

Intangible assets which is a resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise

Question 2

Brand accounting

Answer 2

Providing basis for the valuation of brands and their reflection in the financial statements of an enterprise

Question 3

Brands in statement of financial position

Answer 3

• Increases shareholders’ funds and thus reduce gearing. A reduction in gearing reduces investors’ and banks’ perception of the risk of the company and is likely to increase the company’s ability to borrow funds.
• Shows investors and management the value of the company’s brands, thus providing more information to those users of accounts and enabling them to make more rational decisions.

Question 4

A brand that has been purchased by a company can be included in SOFP

Answer 4

Under IAS 38 Intangible Assets, the brand is included at cost and amortized over useful life. The “allowed alternative treatment” enables the brand to be revalued and reductions in the brand’s valuation below its original cost are charged to the income statement.

Question 5

Is it possible to capitalize internally generated brands?

Answer 5

IAS 38 says that internally generated goodwill should not be recognized as an asset. However, the cost of developing a brand could be taken as a development expenditure, and this cost could be subsequently capitalized in SOFP & amortized in IS. So it is possible to capitalized internally generated brands.

Question 6

However, the cost of developing a successful brand…

Answer 6

is likely to be considerably less than its market value. If the brand was purchased, it will be shown in SOFP at market value.

Question 7

Treatment of purchased and internally generated brands…

Answer 7

is different and in most situations, internally generated brands will not be included in SOFP, whereas purchased brands would be included.

Question 8

It is possible to include an internally generated brand in SOFP at its current market value, provided…

Answer 8

it was initially included as development expenditure and the “allowed alternative treatment” (of IAS 38) of including the brand at its fair value was included for SOFP valuation. However IAS 38 does require fair value to be determined by reference to an active market.

Question 9

Separability of brands

Answer 9

When a business is acquired, it is likely to be difficult to distinguish between brands and other goodwill. The total amount of goodwill being the difference between the purchase consideration and the fair value of assets acquired can be determined. However, dividing this total goodwill between brands and other goodwill will be difficult and is likely to be subjective.

Question 10

Purchased brands vs. Home-grown brands

Answer 10

• In most situations, purchased brands will be included as an asset in SOFP, whereas home-grown brands will not.
• As both purchased and home-grown brands have value, this different accounting treatment is not consistent.
• However, this different acccounting treatement arises because accountants are prepared to include an item, in assets when its purchase price is known (purchased brands) but are reluctant to include it as an asset when it has been internally generated (home-grown brands).
• For investors, ideally they would like the value of both purchased and home-grown brands to be included in SOFP, but this creates the risk that directors may artificially inflate the value of home-grown brands and thus mislead investors.