While most marketers classify marketing as an investment, not a cost, it is not a view shared by all businesses. The accounting standards board is currently in the middle of a review that might see marketing recognised in this way, though. It is undertaking a process where one of the outcomes may be that brands are recognised as an asset on the balance sheet.
In the latest stage of this process, the staff of the International Accounting Standards Board (IASB) has undertaken a review of the feedback and evidence it has gathered so far. It finds there is plenty of evidence to suggest brands generate future value for businesses, but difficulty remains in capturing the value of the asset.
Under current accounting rules, marketing is generally recorded on the income statement as an operating expense, which is then subtracted from revenue to determine profit. This is in contrast to other costs, which are determined as capital expenditure (CapEx), meaning they are not expensed immediately.
Costs can be capitalised when they are recorded on the balance sheet as an asset. For example, the cost of new factories might be capitalised, in recognition of the long-term value they will bring over many years.
Brand on the balance sheet: Could changes to accounting rules strengthen marketing?
Marketers might view brand in a similar way, and, therefore, think that marketing spend ought to be capitalised in the same way. However, current international accounting standards mean that internally generated intangible assets – meaning those that do not physically exist – are not allowed to be capitalised in financial statements.
Last year, the IASB launched a comprehensive review into the treatment of intangible assets under the current standards (IFRS). The review will seek to assess whether the current standards are fit for modern business needs.
The process will take years and is not just concerned with brand; for example, computer software, intellectual property, and training programmes can all be considered intangible assets for a business. However, a possible outcome of this long process would be that brands begin to be recorded as assets, and, therefore, marketing becomes CapEx rather than a cost.
Next month, the IASB will decide the direction and scope for the project, having reviewed evidence and feedback from those who compile financial statements (accountants) and from users of financial statements (investors) to review the treatment of intangible assets.
Initial thoughts
The IASB’s staff laid out its initial thoughts on project direction in a document released at the end of last month. Its research contained recognition that brands are linked to the future success of businesses.
“A large number of academic papers identified in the academic literature review have shown that unrecognised internally generated intangible assets, such as brands, are linked to future benefits,” the staff paper said.
Another element raised in its research was from accountants themselves, who said that “recognising more assets on the balance sheet would improve access to finance, particularly for startups performing brand-building or early R&D activities”.
It also received feedback from a few buy-side analysts and individual investors, who said that including a recognition of intangible assets could create more recognition of value creation for companies.
But the staff paper identified potential additional “complexity” that recognising intangible assets on the balance sheet could cause. For brands in particular, it seems that identifying and measuring the asset would be the key challenge.
The staff of the IASB said one potential challenge that had cropped up was “how to distinguish expenditure to establish a brand from general expenditure to develop the business”. The definition of ‘brand’ is far from a universally agreed upon subject, even among marketers.
Moreover, actually putting a number on that is something that is also hotly debated. Consultancies like Brand Finance, Kantar’s BrandZ and Interbrand, all seek to put a numerical value on brands. However, their methodologies and accuracy have been much debated over the years. The consultancies have been criticised by some for the inconsistency of the valuations they produce, with the monetary value of brands often differing by as much as billions from one system to another.
While the IASB will not determine the scope and direction of its project into intangible assets until next month, it seems clear that the lack of consensus on how brands should be measured, and even what they are, would be the main barrier that any attempt to put them on the balance sheet would have to overcome.
