It is not often that marketing professionals pay any attention to current accountancy practices, but occasionally we should. We know as both agencies and clients that marketing budgets are usually the first thing to go when there is any pressure on a company’s costs. And in B2B this is greater exacerbated because recognition of the importance of marketing is much lower generally than in consumer markets. Hence, B2B marketing budgets are correspondingly more vulnerable.
It has always been a mantra of savvy marketers that they should be able to speak the language of finance directors, and be in a better position to fight our corner when budget discussions start to veer towards how much to cut the marketing spend. However, we have usually failed in our task because most people who work in marketing are not interested in accountancy and most accountants do not see the value of marketing.
In essence, the problem is that financial reporting standards have in the past demanded that we account for the performance of our companies by measuring the things that are easily calculated and tangible. The assets of a company are assessed at the lower cost or net realisable value, but marketing value is often intangible. We often add value to a company through building its brand.
We know, of course, that visionaries have always understood that a company’s inherent value lay more in its intangible worth than its tangible assets. (As John Stuart of Quaker Oats so famously stated, If this business were to split up, I would be glad to take the brands, trademarks and goodwill and you could have all the bricks and mortar; and I would fare better than you.) The problem is that quoted companies, especially, are valued by the profits they generate and the change in the value of their assets year-on-year. Investment analysts look closely at how a company keeps control over its costs, and marketing expenditure is just another expense. They do not necessarily equate a company’s growth with its marketing spend. Little attention is paid to the reality that many a company’s ability to generate profits is inextricably bound up with their intangible rather than their tangible assets.
However, all this is changing. At last marketers have the potential to get finance on side. Now is the time to begin to speak the language of accountants. This change all stems from IFRS3 and IAS38: the international standards for business combinations and intangible assets. At present they are used where businesses merge or are taken over.
Before these changes took place, any premium a company paid for an acquisition was put down as goodwill and amortised. The purchaser was not required to specify exactly what was being paid for, and amortisation rates were arbitrary and varied. Under the new regime, businesses have to be far more precise and transparent when making an acquisition, specify the split of the intangible assets they have bought and how much each of them cost.
In the past, placing a value on the brand of your company or its products was frowned upon, whereas now it is mandatory where your business is being acquired or merged.
As marketers, we know how much brands are truly worth, but now we are obliged to measure them and demonstrate their value with a degree of science and logic so that they can be taken into account. What’s more (and this is even better news) we also need to show that each year their value has not been impaired. So finally we will be in a position to show that marketing spend is or can be linked to the value of an asset in the balance sheet. At last it looks as though marketing is not just an expense, but part of the construction and maintenance of a valuable asset.
Not all accountants are happy with this. As Allister Wilson, partner in Ernst & Young’s international financial reporting group, says, Some aspects of IFRS are causing concern. IFRS is moving very rapidly towards a fair value system and that raises all sorts of questions about reliability and stability. A large proportion of balance sheet assets and liabilities will be measured or determined on the basis of management models and management’s vision of the future. You could get widely differing results, depending on the assumptions.
Wilson has a valid point. Will we all be as rigorous in valuing our brands as we should be? It is surely up to us in marketing to produce the models and the data to prove the worth of the company’s brand, and we need to begin to put the processes and systems in place that will regularly and fairly measure the value of it.
Allister, however, is also pointing to a general trend in accounting reporting towards ‘fair value reporting’. If this is taken further in the reporting of intangibles, then triggers other than business combinations will require brand valuations. It may be that recognition of the intrinsic worth of a company’s intangible assets becomes mandatory. Though this might cause many headaches and create the potential for subjective rather than objective reporting, it will focus everyone from the board of directors to the financial analysts to take brand management seriously. This can only be good news for marketing, so my advice: start reading IFRS3 now (www.icaew.co.uk/ library/index), and try not to fall asleep.
