Research has shown that brands can make up as much as 60% of a company’s intangible assets. So it may come as a bit of a surprise that up until around 2005, the valuation of brands – whether they be the distinctive name or look and feel of products sold to consumers or the names and logos of companies themselves – is considered somewhat of a dark art. That all changed five years ago with the adoption of International Financial Reporting Standards (IFRS) by countries around the world as a standard accounting language. This is because it required companies to value brands that they own, and to disclose this in their annual financial statements.

Another sea of change is set to take place later this year, when the Geneva-based International Organization for Standardization is expected to publish a new ISO standard (ISO 10668) which will provide guidance on how companies measure the monetary value of their brands, says Alistair Monteith-Hodge, director at brand valuation company Brand Finance Hong Kong.

Under the new standard, the valuation process will be broken down into three components, says Monteith-Hodge. The first part is a legal analysis, which is an assessment of whether a company actually owns the brands that they believe they own. This is necessary because some companies may have not have protected their intellectual property sufficiently, leading to assets such patents and trademarks expiring without notice.

Next is a behavioural analysis which seeks to understands the drivers of a brand, its affiliation with customers, and its relative strength within the marketplace it is measured – in other words, the brand equity. Finally, the valuation moves onto the financial aspect, quantifying the brand in monetary terms and then adjusting for brand strength and equity, says Anthony Pettifer, a fellow director at Brand Finance Hong Kong. He adds that this final step recognises that the value of brands is not just about the brand equity, and that even if a brand had excellent attributes – in terms of awareness, knowledge, loyalty, preference, it would be worth less if it was situated in a low-margin industry or geography. The fix around this is to possibly move or expand the brand to a high-margin category or region, hopefully without over-stretching or diluting the value of the brand, in order to increase its value.

All this is being driven not only by just regulators, capital market commentators, and tax authorities, but also investment analysts – who benefit from more detailed explanations of how companies value their intangible assets. Monteith-Hodge also says that shareholders increasingly are becoming more aware that companies with strong brands are outperforming the stock market, and are curious about the rate of return achieved by companies who down these strong brands.

The implication is that the more information shareholders are given about corporate performance, including the monetary value locked in its brands, the more stable a company can expect its share price to be, he says. “If a company wants to be rewarded by the market, and have exceptional stock performance or a stable stock price, then it is probably a good idea to build a strong investor investment communications plan which presents to [shareholders] a clear rationale and strategy behind the brands, and examines their relative performance in terms of preference and market share,” Monteith-Hodge adds.

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