Accountants 1, Marketers 0

Here's a sobering thought. The accounting profession probably understands more about branding than most marketers - at least as far as a brand's actual value is concerned.

Here’s a sobering thought. The accounting profession probably understands more about branding than most marketers – at least as far as a brand’s actual value is concerned.

Oh sure, we know all about how to make nice identities, influence people to buy brands, get employees excited about their own brands, get companies to align their business practices around the brand promise and even track brand ‘equity’ with nifty qualitative/quantitative brand valuators. But when it comes to understanding and communicating the actual financial value of brands, we suck.

I suggest to my fellow marketers, right here and now, that if we are not able to speak to the numbers real fast, then we risk losing our rightful place as brand stewards to the bean counters.

Here’s why.

The accounting profession fully realizes that modern companies attribute a significant component of their value to intangibles, be it in the form of patents, licenses, contracts, brands or the like. More importantly, these intangible assets are far too complex and nuanced to be lumped under the traditional catch-all label ‘goodwill.’ As a result, we are seeing a series of international accounting standards indicating the accounting profession’s desire to bring certainty to the valuation and understanding of intangible assets.

The U.K. accounting profession started the ball rolling with Financial Reporting Standard (‘FRS’) 10. Now that the Americans are on the bandwagon with their Financial Accounting Standard (‘FAS’) 142, everyone else seems to be taking notice. The Canadians have dutifully brought in similar standards, found in Generally Accepted Accounting Principles (‘GAAP’) 3062. I understand that the EC is not far behind.

So what does this actually mean to marketers? Will GAAP 3062 force all companies to value their brands and account for brand-derived revenue on their income statements, putting the marketers in the driver’s seat of anything that may touch on the value of the brand?

If we don’t rise to this occasion, the marketers will not be the one driving the brand for much longer.

The problem is that these accounting standards all have two serious shortcomings. First, they only apply to brands acquired from another company, not in-house brands. But more importantly, the issue as to how to actually value the brands is unresolved.

To understand the concern, you need to understand net present value as it applies to a brand. Say someone offers to sell you a magic goose. To determine its value today, you’d look at how many eggs it might lay, the profit you would get from those eggs, the expected life of the goose, other things you could do with your money, and the risk that someday golden eggs would go out of style. Then you’d knock off a few points for the risk associated with each factor and offer a discounted value.

The challenge the accountants have is in agreeing how to quantify the various risks in a universally consistent way. There are plenty of ways to do it; they just can’t agree on which one to use. Given the sensitive nature of brand-related information, nobody is going to drop their trousers to the financial community unless they’re all agreed upon when, where, for how long, and just exactly what everyone else will be wearing underneath.

As marketers we may never get the accountants to agree amongst themselves. But that doesn’t mean that our companies should avoid doing internal valuations for our own purposes. In fact, that very exercise will give companies a whole new toolbox full of managerial decision-making instruments that will enable it to tweak top- and bottom-line performance.

The fact is, the financial community will make their own decisions on the value of our brands, relationship equity , customer growth, retention and similar intangibles. We can choose to quantify and communicate the underlying value of those intangibles or we can let the market make a potentially uninformed decision.

As marketers we now have an exciting window of opportunity to work with our internal bean counters in treating the GAAP 3062 process as an internal management exercise. This process can drastically improve our relationships with investors and internal stakeholders by quantifying where the real value of the business has been and will likely be in the near term.

If marketers don’t lead the charge on this, the bean counters eventually will. They’re already one step ahead.

Mark Szabo, BA, LLB, MBA, is a strategist with Parallel in Calgary, and is on a mission to get companies to value their brands properly. He can be reached at mark.szabo@parallel.ca.