BE130 - Exploring Arguments for and Against Brand Accounting Today

This essay critically examines the arguments for and against brand accounting, particularly in light of IFRS 3 and IAS 38. It delves into the complexities of brand valuation, highlighting the challenges in accurately assessing brand value and the potential for subjective judgment. The discussion differentiates between purchased and home-grown brands, exploring the accounting treatment and rationale behind capitalizing purchased brands while generally excluding home-grown brands from the balance sheet. The essay also addresses the concept of brand impairment and the importance of impairment testing. Ultimately, the essay concludes that brand accounting remains a controversial topic, emphasizing the need for companies to understand the multifaceted nature of brand value and the various factors influencing its assessment. Desklib offers a wealth of resources, including past papers and solved assignments, to aid students in their studies.

Running head: CURRENT ISSUES IN FINANCIAL REPORTING
Current Issues in Financial Reporting
Name of the Student
Name of the University
Author’s Note

1CURRENT ISSUES IN FINANCIAL REPORTING
Critically discuss the arguments for and against brand accounting. In
particular, evaluate the issues of brand valuation, purchased vs. home-grown
brands, and the maintenance /substitution arguments.
Accounting for brands is considered as one of the major aspects in the
accounting and financial reporting of the companies as it is needed for the
companies to take into consideration certain aspects under the process of brand
accounting. In this context, it needs to be mentioned that before the introduction of
IFRS 3 and IAS 38, some of the companies used to capitalize their brands in the
company’s balance sheet and Rank Hovis McDougal (RHM) was the initiator of this
particular practice. This aspect indicates towards the fact that this particular practice
created pressure on the companies to take into consideration the values of their
brands along with the profit associated with it. In addition, it put an obligation on the
management of the companies to take into account the brand values as the inclusion
of brands in the balance sheet makes the companies stronger1. It can be considered
as a major benefit for brand accounting. At the same time, this particular practice
received many criticism where it was pointed out that the involvement of too many
risks and uncertainties can be seen in the brand accounting. It has also be
mentioned that the process of brand accounting is subject to many judgments which
increases the uncertainty in this process. Hence it can be seen that there are both
for and against arguments for brand accounting.
While discussing about the arguments for and against the brand accounting, it
is needed to mention about IAS 38. IAS 38 Intangible Assets summaries the
1 Kirk, Colleen P., Ipshita Ray, and Berry Wilson. "The impact of brand value on firm
valuation: The moderating influence of firm type." Journal of Brand
Management 20.6 (2013): 488-500.

2CURRENT ISSUES IN FINANCIAL REPORTING
accounting requirements for the intangible assets which can be considered as non-
monetary assets in the absence of physical substance and identifiable2. For this
reason, brand can be considered as the intangible asset of the companies. It is
needed for the business organizations to initially measure the intangible assets at
cost that meet the relevant recognition criteria of financial reporting; after that, their
subsequent measurement is done on the cost basis or utilizing the revaluation
model; and they are subject to amortization on systematic basic over their useful
lives. In this context, it needs to be mentioned that the brands of the companies
match all these description of intangible assets.
Before discussing the arguments for and against brand accounting, it is
needed to take into consideration the aspects of brand valuation and the problems
associated with it. It needs to be mentioned that the term brand can confuse the
accountants and users. In some context, brand value can be considered as the
financial value of the brand. In other contexts, brand value can be considered as
intangible measures contributing towards the brand’s financial value. These
attributes can be brand awareness, heritage, relevance and others as these all add
towards the financial value of the brands. One crucial part in the process of brand
valuation is the identification of what these values are that impacting the financial
value of the brands. Companies can organise a comprehensive list of their brand
values, it is easy to monitor and manage the brand values when they are shorter 3.
The next step in the process of brand valuation is the calculation of the importance of
2 Bounfour, Ahmed. The management of intangibles: The organisation's most
valuable assets. Routledge, 2015.
3 Mennicken, Andrea, and Michael Power. "Accounting and the plasticity of
valuation." Moments of valuation: Exploring sites of dissonance (2015): 205-228.

3CURRENT ISSUES IN FINANCIAL REPORTING
these factors in respect of the brand. For example, while awareness can be
considered as an essential measure for brand value, it would be waster in the
absence of consumer understanding about what the brand stands for. It can also be
seen that the companies use to carry out market research within the defined market
segment for the determination of brand values that are most significant among the
customers.
In this context, it needs to be mentioned that the valuation of brand is
considered as an essential aspect in the valuation of brands for the purpose of
corporate valuation. However, the presence of certain issue can be seen in the
process of brand valuation and it is that the companies have a tendency to assume
the fact that the brand impact is same across all category and the impact of brand is
given under that category. It needs to be mentioned that it is not the safe assumption
in the process of brand valuation due to the fact that variation can be seen in the
impact of brand. At the same time, it is assumed that brand impact is not a given4.
However, it needs to be mentioned that there is change in the brand impact due to
the change in category structure. Hence, the impact of the brand changes with the
change with the impact of brand category. Hence, it can be seen from the above
discussion that in spite of the presence of major importance, brand valuation has
certain major issues.
After the valuation of brands, it is needed to take into consideration the
aspects related to the impairment of brands. It needs to be mentioned that brand
impairment can be considered as a charge that the companies are needed to record
when the carrying value of the brand on the financial statements exceeds its fair
value. Under the current economic situation, potential impairment of the brands has
4 Paugam, Luc, et al. Brand valuation. Routledge, 2016.

4CURRENT ISSUES IN FINANCIAL REPORTING
become an extremely important issue for the business organizations5. According to
the principles of IFRS 3, brands are considered as one type of intangible asset and
they are frequently claimed to have identifiable and useful economic life. It is needed
for the companies to recognize the acquired brands on the balance sheet. In the
post-acquisition period, it is needed for the business organizations to develop robust
as well as supportable valuation model for the review of the annual impairment of the
brands of the companies. For this reason, it is needed for the companies to conduct
the impairment testing of the brands. Hence, it can be seen from the above
discussion that in case the business organizations include their brands in the
balance sheet, it is the responsibility on them to consider the impairment testing of
the brands6.
Under the aspects of brand accounting, it is needed to take into consideration
the aspects like purchased brands and home grown brands. In this context, it needs
to be mentioned that purchase brands can be considered as the difference between
the amounts paid for an enterprise as a going concern and the sum of its assets less
the total of its liabilities, each financial items that has been identified and valued.
Different situation can be observed in the case of home grown or internally
generated brands. It can be considered as the difference between the fair market
value of a business and the value of its identifiable net assets in the balance sheet. It
can be seen in the accounting practice that there is no rule to include the home
5 Amiraslani, Hami, George E. Iatridis, and Peter F. Pope. "Accounting for asset
impairment: a test for IFRS compliance across Europe." Centre for Financial
Analysis and Reporting Research (CeFARR) (2013).
6 Yallwe, Alem Hagos, and Antonino Buscemi. "An era of intangible assets." Journal
of Applied Finance and Banking4.5 (2014): 17.

5CURRENT ISSUES IN FINANCIAL REPORTING
grown brands in the balance sheet where the purchased brands are seen in the
asset side of the balance sheet; and there are certain reason for this7.
The concepts like historical cost convention and money measurement
concept, there is no need for the companies to include home grown brands in the
balance sheet. As per the historical cost convention, companies are needed to use
the acquisition cost or historic cost for recording the assets in the balance sheet. In
addition, as per the concept of money measurement, companies are needed to
include an asset in the balance sheet when its value can be measured reliability. As
per the IASB, business organizations are needed to recognize an asset in the
balance sheet when it is probable that the future economic benefit associated with it
will flow towards the company and the asset has a cost value that can be measured
reliably8.
The main reason for not including home grown brands in the balance sheet is
due to the fact that they do not satisfy the above-discussed condition due to the
impossibility to gain fair value or cost of them. At the same time, the values of the
home grown brands are subject to fluctuation in the presence of both internal as well
as external circumstances. At the same time, certain arguments can be seen for the
inclusion of home-grown brands in the balance sheet in the presence of certain
reasons. As per one of the reasons, it is needed for the companies to include home
grown brands in the balance sheet as it is one of the most important asses of the
companies and thus, it is the right of the key stakeholders to know about them. In
7 Winit, Warat, et al. "Global vs local brands: how home country bias and price
differences impact brand evaluations." International Marketing Review 31.2 (2014):
102-128.
8 Lev, Baruch. "Intangibles." (2018).

6CURRENT ISSUES IN FINANCIAL REPORTING
addition, home grown brands are crucial for the companies in the presence of the
fact that they guarantee the customers loyalty resulting in stable demand along with
the future cash flows9.
As per the accounting agreement of material, financial statements of the
companies include information of the financial assets and liabilities that can
positively influence the decision-making process of the key stakeholders. For this
reason, such valuable assets like home grown brands need to be included in the
balance sheet. At the same time, it needs to be mentioned that it is likely that the
nonappearance of home grown brands is one of the major reasons making the
management of the companies poorly informed. However, different aspect can be
seen in the case of purchased brands in the presence of the fact that satisfy the
conditions of IASB in order to be an asset. Business organisations can measure the
cost of the brand as the acquisition cost of the brands can easily be obtained. At the
same time, purchased brands provide the probability that there will be future
economic benefits from the asset in the favour of the companies10. In the presence of
all these reason, the managements of the company record purchased brands under
the balance sheet.
It can be seen from the above discussion that the presence of both for and
against arguments can be seen related to the brand accounting; and the discussion
indicates towards the fact that brand accounting is a controversial topic. In this
9 Lim, Steve C., Antonio J. Macias, and Thomas Moeller. "Intangible assets and
capital structure." (2018).
10 Hsu, Feng Jui, Tsai Yi Wang, and Mu Yen Chen. "The impact of brand value on
financial performance." Advances in Management and Applied Economics 3.6
(2013): 129.

7CURRENT ISSUES IN FINANCIAL REPORTING
aspect, it needs to be mentioned that it is needed for the business organizations to
understand the fact that there is not any single value of a brand as there are several
values in the presence of certain factors that need to be considered at the time of
brand valuation; they are liquidity value, book value of the company’s account, value
of merger and acquisition, value of sales of assets, value of profits and others. In this
particular stage, it needs to be mentioned that financial valuation of bonds allows for
the multidisciplinary meeting of all the department of the company like finance, audit,
production and others. In the long run, a capitalist viewpoint is introduced that
counterbalance the logic of annual valuation perspective. It can be considered as a
reminder of the fact that the wealth of the companies no longer comes from the
plant, equipment and lands, but it also comes from intangible assets like brands11.
At the same time, it can also be said that the debate and arguments related to
brand accounting is a pure accounting topic. However, there is not any scope to
ignore the fact that brand is an essential asset of the firms that largely help in the
decision-making process. One cannot ignore the reasons for not putting the home
grown brands in the balance sheet. At the same time, there is any place to ignore the
above discussed reasons to put home grown brands in the balance sheet. When
considering the uncertainty and subjective judgement related to the brand
accounting, that can be eradicated in the presence of proper accounting techniques.
However, there is not point to ignore the importance of brand accounting in financial
reporting due to the fact that they are the important assets of the companies12.
11 Rocha, Mike. "Financial applications for brand valuation." Report,
Interbrand (2014).
12 Vasileva, I. V., and T. N. Vasileva. "Brand valuation for book purposes according
to the international accounting standards." Modern Science 5-1 (2017): 107-111.

8CURRENT ISSUES IN FINANCIAL REPORTING

9CURRENT ISSUES IN FINANCIAL REPORTING
References
Amiraslani, Hami, George E. Iatridis, and Peter F. Pope. "Accounting for asset
impairment: a test for IFRS compliance across Europe." Centre for Financial
Analysis and Reporting Research (CeFARR) (2013).
Bounfour, Ahmed. The management of intangibles: The organisation's most valuable
assets. Routledge, 2015.
Hsu, Feng Jui, Tsai Yi Wang, and Mu Yen Chen. "The impact of brand value on
financial performance." Advances in Management and Applied Economics 3.6
(2013): 129.
Kirk, Colleen P., Ipshita Ray, and Berry Wilson. "The impact of brand value on firm
valuation: The moderating influence of firm type." Journal of Brand
Management 20.6 (2013): 488-500.
Lev, Baruch. "Intangibles." (2018).
Lim, Steve C., Antonio J. Macias, and Thomas Moeller. "Intangible assets and
capital structure." (2018).
Mennicken, Andrea, and Michael Power. "Accounting and the plasticity of
valuation." Moments of valuation: Exploring sites of dissonance (2015): 205-228.
Paugam, Luc, et al. Brand valuation. Routledge, 2016.
Rocha, Mike. "Financial applications for brand valuation." Report, Interbrand (2014).
Vasileva, I. V., and T. N. Vasileva. "Brand valuation for book purposes according to
the international accounting standards." Modern Science 5-1 (2017): 107-111.

10CURRENT ISSUES IN FINANCIAL REPORTING
Winit, Warat, et al. "Global vs local brands: how home country bias and price
differences impact brand evaluations." International Marketing Review 31.2 (2014):
102-128.
Yallwe, Alem Hagos, and Antonino Buscemi. "An era of intangible assets." Journal
of Applied Finance and Banking4.5 (2014): 17.