Academic journal article Academy of Accounting and Financial Studies Journal

Brand Value and the Representational Faithfulness of Balance Sheets

Academic journal article Academy of Accounting and Financial Studies Journal

Brand Value and the Representational Faithfulness of Balance Sheets

Article excerpt


This study examines the impact of brand value on the representational faithfulness of balance sheets. The results of this research reveal that brand value is significant in explaining variations in the price to book value ratios over and above the explanatory power of variables that are typically thought to be related to price to book value differentials. These results suggest that assets of firms with significant brand value may be underreported on the firms' balance sheets. Accordingly, if the representational faithfulness of balance sheets is to be enhanced, accounting standards should consider including reliable measures of intangible assets (especially for high brand value firms) in balance sheets.


Little and Coffee (2000) found that the balance sheets of knowledge and service based companies are less representationally faithful than the balance sheets of more traditional firms because they systematically under-report assets. They suggest that one reason for this may be that the assets of knowledge and service based companies include more soft, intangible assets as opposed to the comparatively hard, tangible assets of more traditional business enterprises like heavy manufacturing and traditional wholesaling/retailing.

Knowledge and service based companies are not, however, the only kinds of companies that may have significant intangible assets. It is well established that brands like Nike, Coca-Cola, Disney and McDonald's are assets that have a separately identifiable economic value (Kallapur and Kwan, 2004; Kerin and Sethuraman, 1998). Fernandez (2002) reports the Marketing Science Institute definition of brand value as the "strong, sustainable, and differentiated advantage with respect to competitors that leads to a higher volume or a higher margin for the company compared with the situation it would have without the brand." Interbrand (2001) estimates that brand value accounts for a significant percentage of the market value of the top 100 global brand companies.

The Financial Accounting Standards Board recognizes the potential economic value of brands with respect to intangibles acquired as part of a business combination. FASB Statement No. 141: Business Combinations (FAS 141), requires the use of the purchase method of accounting for business combinations. Under this method, the acquiring company will be treated as though it purchased the target company's net assets at their fair market value on the date of acquisition. Net present value is deemed to be the best method for determining fair market value. The use of the purchase method requires that goodwill be recognized as an asset. Furthermore, other intangibles should be recognized as assets separate and apart from goodwill if these other intangibles either arise from contractual or legal rights or are capable of being transferred from the acquired entity. FAS 141 in paragraph 16A identifies brand as a general marketing term typically used to refer to a group of complementary assets such as the trademarks or service marks and their related trade names, formulas, recipes, and technological expertise which may or may not be patented. The statement does not preclude an entity from recognizing, as a single asset apart from goodwill, a group of complementary intangible assets commonly referred to as a brand if the assets that make up that group have similar useful lives.

Accordingly, brand value is not exclusive to knowledge and service based companies. For the last several years, Interbrand Corporation has estimated the value of the 100 top global brands and published the results in Business Week. The 2002 list includes knowledge based companies like Microsoft, IBM and Intel, as well as more traditional retail companies like Coca-Cola, Nike, and Gap and manufacturing companies like Ford, Honda, Toyota and GE. Interbrand estimates that each of the top 100 brands has a value in excess of $1 billion. …

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