It’s Time for New Accounting Rules on Brand

The definition of brand is as diverse as the people who try to frame it. Amazon founder Jeff Bezos describes it as what people say about you when you’re not in the room. I like that because it’s memorable. My summation is a little shorter. Your brand is your bond.

 You can interpret that in at least two different ways. First, there’s the reputational aspect of branding, which is the most common context. Your brand is what you symbolize, whether you’re talking about customer experience, reputation, or identity. Second, it is what you promise, deliver – and to Mr. Bezos’ point, what you leave behind. The bondholders are the market for your product or service.

My only issue with these analogies is that they keep brand squarely in the intangible realm. They are soft and squishy – especially when it comes to valuation. The financial services industry doesn’t recognize them, nor would any sophisticated investor looking at financial statements. There’s too much subjectivity and lack of standardization.

Yet, when a buyer puts a good or service in their metaphorical shopping basket – whether in a bricks and mortar or e-commerce environment – it doesn’t just leap in there on its own. There’s consideration that leads to that transaction, stemming from the investment the company made in building it. As such, brand becomes a driver of cash flow. That gives it tangible value. Financial value.

Unfortunately, there has been no standardized way of accounting for brand equity on a current balance sheet. The closest we’ve been able to come is to assign a value as a component of goodwill, which is calculated only at time of sale and represents the difference between the value of net assets over their fair market value. The Financial Accounting Standards Board (FASB) does not currently recognize internally generated goodwill, despite the billions being spent globally on branding.

Yet, when a buyer puts a good or service in their metaphorical shopping basket – whether in a bricks and mortar or e-commerce environment – it doesn’t just leap in there on its own. There’s consideration that leads to that transaction, stemming from the investment the company made in building it. As such, brand becomes a driver of cash flow. That gives it tangible value. Financial value.

Unfortunately, there has been no standardized way of accounting for brand equity on a current balance sheet. The closest we’ve been able to come is to assign a value as a component of goodwill, which is calculated only at time of sale and represents the difference between the value of net assets over their fair market value. The Financial Accounting Standards Board (FASB) does not currently recognize internally generated goodwill, despite the billions being spent globally on branding.

So, in other words, the brand equity marketers are building has no agreed upon financial value. To further distort things, based on current FASB guidelines, only values of a previously acquired brand are reflected on the balance sheet. Investors and shareholders deserve better.

As academics Lindsey Trent and Jakki Mohr, Ph.D., point out in an article published in The CPA Journal, companies increasingly compete on intangible assets, and their investments in brands are a key part of this strategy. I agree. Organizations like the Marketing Accountability Standards Board and the Forbes Marketing Accountability Initiative also think so. A think tank comprised of thought leaders in business and education have successfully advocated for reforms, beginning with adoption of new brand valuation standards by the International Organization for Standardization (ISO).

It’s a significant advance and very much in line with the movement toward better, more accurate measurement of marketing’s contribution to the bottom line. Hopefully, we will see FASB follow their lead. The devil, as always, is in the details. We now have the tools and technologies to build cash flow attribution models. It’s time we used them.

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Michael Shepherd

Michael serves as Managing Partner of The Shepherd Group, a brand and communications firm with offices in Seattle and Newport Beach. A former journalist, he specializes in building narratives through discovery, design, and development of branded editorial and visual content.

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