On one side the enthusiasts of the marketing department, on the other the sceptical accountant. Neil Bendle considers the knotty problem of brand valuation
This article was first published in the January 2018 China edition of Accounting and Business magazine.
According to Forbes magazine, the value of the Apple brand is US$154bn, a figure that is considerably more than the sum of the worldwide revenues of the Big Four accountancy firms combined. Yet the Apple brand, despite propelling the company to the top of the list of the world’s most valuable companies, makes little impression on its financial statements.
Many marketers would like to change this, and other similar examples, but accountants are unpersuaded by the need for change. Brands undoubtedly have value – the latest annual report for multinational brewer Molson Coors, for example, mentions brands 317 times, and what would Unilever be without its well-known brands? But it is one thing to recognise the importance of brands and quite another to value them accurately.
It’s not just in the treatment of brands that marketers feel short-changed by financial accounting. The assets that marketers generate and deploy typically aren’t reported in financial statements. Marketers often invest in developing relationships with customers – banks, for example, shower students with gifts, expecting a long-term payoff – yet financial accounting typically treats such investments as an expense. How should the bank’s relationship with students be valued?
Treating marketing investments as expenses discourages long-term marketing strategies, rewarding instead the short-term gimmicks that give marketers a bad name. Furthermore, unrecorded marketing assets are often abused. Valuable customers are alienated by annoying trick fees. Businesses suffer economic losses as profitable customers vow never to use them again, while financial reports show short-term profits as the fees trickle in.
As a marketing professor and an accountant I see both sides of the problem. I emphasise to marketers that accountants aren’t refusing to value marketing assets out of spite. Concerns over the accuracy of marketing asset valuations are genuine. Brand valuation has spawned a host of consultancies, but disparate methodologies among these organisations mean there is no widespread agreement as to the value of a brand. Indeed, marketers themselves sometimes despair of accurately valuing marketing assets.
Marketing’s complaint undoubtedly has some validity. The best defence of the current approach of treating marketing investments as expenses can probably best be expressed in a repurposing of Winston Churchill’s assessment of democracy: the way that marketing assets are treated is the worst possible approach – apart from the alternatives.
Let’s consider a few facts. The growing difference between market and book value suggests that more of what makes a business valuable is being missed by financial reporting. Respected academics, such as Baruch Lev at New York University, argue that financial statements are increasingly irrelevant; read his book (co-written with Feng Gu) The End of Accounting and the Path Forward for Investors and Managers for the complete critique.
There are other inconsistencies, too. When companies are acquired, they may put purchased brands on the balance sheet. Kellogg Company, for example, reports the values of its Keebler green-jacketed elf mascots and its moustachioed Pringles man (both purchased brands), but not the internally generated brand associated with Frosties mascot Tony the Tiger.
This makes analytical techniques such as ratio analysis systemically biased, depending on whether assets were acquired or generated internally. This in turn leads to the ‘moribund effect’: purchased brands live on the balance sheet at historic costs. Yet it isn’t clear what useful information a brand’s value conveys when it was acquired years ago.
Accounting for marketing assets, indeed most intangibles, is a challenging exercise. As a profession, however, we can work together to make progress in financial accounting, and as individuals we can take steps today to ensure that marketing and accounting work better together (see box).
We can start by educating marketers and accountants about the problems each side faces. Marketers can get involved with the Marketing Accountability Standards Board, an organisation that brings together major companies, business schools and professional bodies to improve the measurement of marketing and to help marketers work effectively with finance professionals. Measurement is possible, as I explain in my book (co-written with Paul Farris, Phillip Pfeifer and David Reibstein) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance.
Accountants can benefit from understanding the value that marketing creates. Although measuring marketing is difficult, accountants should be aware that there are numerous metrics – and technology is making it easier. Marketing isn’t all creative genius and three-Martini lunches.
Marketers for their part often miss the difference between internal and external reporting. They often don’t realise that marketing assets can already be reported internally. Accountants abet this misunderstanding: why frighten marketers by mentioning GAAP when discussing internal reporting, given that external reporting rules shouldn’t drive internal reporting anyhow?
Some of marketing’s complaints can be assuaged through better internal reporting. Management accounting serves management needs, so tell your chief marketing officer that marketing assets can be formally tracked internally. Improved internal reporting methods may even create greater confidence around the valuation of marketing assets for external reporting.
Both marketing and accounting are critical to business success. By working together we can do better – to the benefit of everyone.
Neil Bendle FCCA is associate professor of marketing, Ivey Business School, Western University, Canada