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Reasons for excluding home grown brands from a balance sheet

| November 11, 2012 | 0 Comments

It is likely that assets are considered as crucially important aspects of an entity that stakeholders pay attention to when looking at a balance sheet. International Accounting Standard Board has defined asset as “resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity” (IASB 1989, para.49a). However, there are a number of items that satisfy this definition but cannot appear on a balance sheet. One of them is the internally generated brand – one type of intangible assets which has been a controversial topic in accounting context. This paper will particularly evaluate the reasons why this type of brand is excluded from a balance sheet and propose an argument for its conclusion.

Adherence to accounting conventions, such as historic cost convention and money measurement concept, home-grown brands should not be recorded in a balance sheet. According to Atrill and McLaney (2008), the historic cost convention means that the acquisition cost or historic cost should be used to record assets on the balance sheet. Furthermore, in accordance to money measurement concept, only if the value of assets can be measured with reliability, they can have a place on a balance sheet (Marriott et al., 2002). IASB has issued a standard reflecting these conventions: “an asset is recognised in the balance sheet when: it is probable that the future economic benefits will flow to the entity and the asset has cost or value that can be measured reliably” (IASB 1989, para.89). According to Weetman (2006), internally developed brands do not satisfy these recognition requirements. The main reason is that it is impossible to obtain the fair value or cost of them. Furthermore, values of these assets are subject to fluctuation due to both internal and external circumstances, for example, only because of a rumour about the quality of products, brand name reputation of the company could be considerably affected.

Experts in brand valuation might argue it is possible to obtain a reliable value of brand by a number of complex methods. However, Roslender and Hart (2006) insist that due to the problems in recognising the values at which brands could be included amongst assets of a business, the task of valuing brands has proved a “problematic exercise” (p. 230). Similarly, Collier and Agyei-Ampomah (2008) explain that it is infeasible to differentiate the cost of them between the expenditure of developing the businesses as a whole. Furthermore, Seetharaman et al. (2001) claim the differences between brands and other intangible assets such as goodwill or trademark are often confused. This problem leads to further difficulties when deciding how to value and include them in a balance sheet.

Nonetheless, there are a number of justifications for reporting internally generated brand on a balance sheet. One of the reasons is that it is probably one of the most important and valuable assets of an entity (Lunt, 2008), therefore it should be recorded to inform stakeholders. According to  Motameni and Shahrokhi (1998), brands are crucial for entities due to the fact that they guarantee customer loyalty which resulting in steady demands and future cash flows. In addition, with a successful brand, it could be easier for a company to attract the promotional investment overtime. For these reasons, the authors argue that brands are considered as the “primary capital” for many companies (p. 286). An example is the famous brand “Coca Cola”. Anil (2007) points out that its brand value was around $67.4 billion in 2004, equaling to approximately 63 percent of market capitalization of the whole company

(about $106.5 billion). According to accounting convention of material, financial statement should include information that can influence the decision-making (Needles et al., 2007). Such notable and valuable assets like brand, therefore, should be recorded. Moreover, Tollington  (2000) insists it is likely that the absence of home-grown intangible assets, such as internally created brands, is one of the reasons making the management be poorly informed.

Another reason is that accounting is often vulnerable to be accused of being inconsistent because accountants do not record internally-developed brands whilst recording purchased ones (Tollington, 1998). This problem could contribute to “an incomplete view of the balance sheet” (p. 181). He argues that the accounting transaction based recognition procedure of assets is “largely inappropriate” for recognising home-grown brands because basically, purchased brands and non-purchased brands are the same, they are capable of generating wealth for businesses (p. 181). This argument is further explained in his later article in 2000. Tollington (2000) also conducted a survey which includes interviewing 294 accountants across the UK. In this study, the questionnaire result reveals the accountants’ awareness of their failure to recognise and capitalise many home – grown intangible assets such as internally developed brands. The “inconsistency” of recording purchased brands whilst excluding non-purchased ones is also “readily acknowledged” by almost three fourths of interviewees agreeing that home-grown brands are “assets irrespective of whether they arose from a transaction or event” (p. 92). In addition, Leo (1999) points out that the International Accounting Standards Committee, in principle, concurs that there should be no difference between acquired intangible assets and internally created ones.

In conclusion, this essay has evaluated a number of reasons for excluding home grown brands from a balance sheet. The main cause is that they associate with a high level of uncertainty so it is not possible to measure their cost or value with reliability. Therefore, due to accounting conventions, they should not be recorded in a balance sheet. This essay has also provided a number of justifications for their inclusion. That is, because brand is one of the most important and valuable assets of a business, the act of reporting it would be useful to help stakeholders make informed decisions. Furthermore, its inclusion could prevent accounting procedure from being accused of inconsistency and ensure a more complete view on a balance sheet.



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Weetman, P. (2006), Financial and management accounting: an introduction, 4th, Essex: Financial Times Prentice Hall.

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